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> Conventional wisdom holds that passive trading is the rational investing strategy. That isn't conventional wisdom. It's not someone's opinion. It's statist

> Conventional wisdom holds that passive trading is the rational investing strategy. That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run. > has catalyzed a lean-in mindset around investing, particularly among Gen Z. And it will burn them, just like it burned penny stock traders in the 80s and Internet stock traders in the late 90s. The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. And if that happens en masse, it's not gonna be pretty.

andi999 6y ago
So Jane Street and James Simons do not exist?
- djoldman 6y ago
  I think it's pretty obvious that the parent is talking about the average investor.
  - ghaff 6y ago
    Yes but it's also a fair point that a lot of actively-managed mutual funds out there don't beat low-cost index funds.
  - baobabKoodaa 6y ago
    > I think it's pretty obvious that the parent is talking about the average investor. Really? Because this is what the (grand)parent said: "Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run." Clearly grandparent was not talking solely about the average investor.
- ghaff 6y ago
  It probably depends how active and how sophisticated. (And how lucky.) Certainly there are large sophisticated endowments and investment funds that don't simply stick everything in an index fund and call it a day. And many do get better than S&P 500 returns. After all, you need to decide what investments to buy and hold and, presumably, make adjustments over time even if turnover is relatively low.
- wnevets 6y ago
  There's always winners of the lottery but statically it wont be you.
- granshaw 6y ago
  Jane Street is primarily a market maker I believe, not something an individual or even a small institution can just go out and do
- 4TunateSon 6y ago
  Jane Street and RenTech are very different institutions compared to something like Vanguard or Fidelity. They aren't accessable to retail investors/traders, they have different goals, and methods.
  - baobabKoodaa 6y ago
    Nope, you're moving the goalposts now. The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim.
    - chronic2022 6y ago
      > The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim. Correct. Too many passive index fund investors on this thread refuse to acknowledge that many hedge funds/proprietary trading firms consistently beat the S&P over 20-30+ years. VTI and VOO are only 9% and 13% since inception in ~2001. Top quant firms like Citadel, Renaissance, Jane Street attain 20-40% annually after fees, over 20+ years. On average, hedge funds underperform. But a UHNW investor is not investing in average hedge funds. They’re investing time-tested S&P-outperforming hedge funds.
- nceqs3 6y ago
  1) Jane Street isn't that successful. 2) RenTech spends billions every year on compute, data and hiring the smartest people in the world. The average person could never compete with RenTech.
  - centimeter 6y ago
    > Jane Street isn't that successful. Their historical record is very good.
  - baobabKoodaa 6y ago
    > The average person could never compete with RenTech. Grandparent claimed that active investing is not good for _anybody_. A single example (like RenTech) is sufficient to disprove that claim. If you want to move the goalposts to "the average person", then it'll be an entirely different discussion.
bezout 6y ago
I’m not arguing the opposite, but I’m very interested in learning more about this. Can you suggest some references?
- kgwgk 6y ago
  The basic idea is that if you do better than the market - because you have more of the good stocks and less of the bad ones - there may be someone somewhere with the opposite positioning. In this simple model active investors in aggregate cannot do better than the index. Adding transaction costs, fees, etc. they'll do worse - as a group.
- maksimum 6y ago
  A reference (that lays out the statistical arguments) is "Common Sense on Mutual Funds" by John Bogle.
  - bezout 6y ago
    Thanks
bitexploder 6y ago
It will just make buy and hold that much more beneficial.
nicolas_t 6y ago
As someone who is doing buy and hold and not doing any day trading, how can I protect myself from the wild swings of the market caused by active traders gambling?
- zitterbewegung 6y ago
  Dollar cost averaging[1] which is basically you buy any security every x amount of days. This is usually how a 401k is setup where you buy a mutual fund every time you get a paycheck. [1] https://en.wikipedia.org/wiki/Dollar_cost_averaging https://en.wikipedia.org/wiki/Dollar_cost_averaging
  - emerongi 6y ago
    Worthwhile to read the full article, as well as the sources, and decide what is best for you. > The financial costs and benefits of DCA have also been examined in many studies using real market data, typically revealing that the strategy does not deliver on its promises and is not an ideal investment strategy. > Recent research has highlighted the behavioural economic aspects of DCA, which allows investors to make a trade-off between the regret caused by not making the most of a rising market and that caused by investing into a falling market, which are known to be asymmetric.
    - nly 6y ago
      It's not a 'strategy' really. Most regular Joe investors earn a salary every month, and keep spare money invested in the market. DCA isn't a choice in this case, it's the natural result.
      - emerongi 6y ago
        It is a strategy. If you sell your house and invest the proceeds into the stock market, DCA says you shouldn't just do one huge buy order, but you should spread your orders out over a longer timeline. It's two different strategies.
baobabKoodaa 6y ago
> That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run. This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.
- scarmig 6y ago
  2020, Renaissance funds' performance: Closed to outsiders: Medallion, +76% Open to outsiders: RIEF, -23% RIDA, -34%
  - jjoonathan 6y ago
    If I were investing someone else's money, I'd be happy to put a little in RIEF and RIDA in exchange for medallion shares.
  - nceqs3 6y ago
    You forgot to mention that the external funds have performed exceedly well (20+%/year) over the past 15 years even after a 44% performance fee. Also the external funds are different strategies than Medallion.
  - baobabKoodaa 6y ago
    > 2020, Renaissance funds' performance ... Since this is in reply to me, let me ask, what's the implication here? The tone of your post sounds like you disagree with me, but it's not clear what exactly you disagree with? Grandparent claimed that no-one can beat the market. I said that Renaissance Medallion Fund beats the market. Then you post a single-year performance of +76%, which is a really good performance for 2020. So... you agree with me?
    - scarmig 6y ago
      I don't disagree with you that individuals can outperform the market. I do think it's worth pointing out that that doesn't mean that the average retail investor will generally outperform the market, even if they're sophisticated enough to have even heard of Renaissance.
ericjang 6y ago
"statistically proven reality" is an oxymoron - past outperformance of passive funds (statistics) are no guarantee of future returns (reality). Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a biotech company or a specialized industry like semiconductors)
- yoz-y 6y ago
  Please correct me if I’m wrong. But I assume that earning while holding is based on an assumption that the overall productivity continues to rise, while active trading is more of a zero sum game. Any gains you earn is somebody’s loss. Now, the initial assumption could very well hit a wall.
  - baq 6y ago
    notice you're contradicting yourself: active traders don't only trade with other active traders, they also trade with those same passive funds that bet on continuous growth in fundamentals of companies and the hope that eventually that growth will be reflected in the stock price. then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. (reminder: etfs hold ~$5T worth of assets.)
    - freetime2 6y ago
      > Then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. One of the big selling points of passive, market weighted ETFs is their low turnover and high tax efficiency. Vanguard’s S&P 500 ETF (VOO) has an annual turnover of 4%, for example. That’s nothing compared to the turnover in an actively traded portfolio. Sure they do a lot of trading volume to account for inflows and outflows from the ETF. But one of the very nice properties of market weighting is that there is hardly any rebalancing needed as individual assets drift in price.
baq 6y ago
it used to be like this but now ETFs hold so much weight in the US market that you can easily front run additions/removals for relatively easy money.
thrav 6y ago
While you’re right about the majority, there are pockets of young people partaking in sophisticated strategies, and doing quite well. The people in the discord server that I belong to are all using stops to max their downside and get out quick if their instinct proves wrong. After several months on paternity leave, it became clear that greatest barriers to active trading are money and time, like most things. If you’re treating the market like it’s your job, day in and day out, you get a really good feel for the flows, and can move into positions that are turning north pretty easily. The fact that the Nasdaq was about to go on a tear was telegraphed for weeks. There are hundreds of opportunities to do this every day, so you just jump on the most painfully obvious ones, and avoid anything uncertain. If you have a real job, and can’t watch the market all day, every day, you don’t stand a chance. Without fail, the biggest losses in our group would come when someone tried to hop into a position while half watching the market, and then get sucked into their real work. Once you’ve got entry down, the hardest part is training yourself to exit at the right time.
- CarelessExpert 6y ago
  > there are pockets of young people partaking in sophisticated strategies, and doing quite well. If we could I'd make a 20 year wager that every one of those people will fail to beat the market in the long run. It's very easy to make money on "sophisticated strategies" during an historic 10 year bull run.
  - MattGaiser 6y ago
    https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
    - deleted 6y ago
      [deleted]
  - thrav 6y ago
    They’re making money up and down. For example, SPY is likely done climbing for a while. Maybe it will squeeze up to ~4160, but it’s either going to be flat or aggressively down in the coming days. Thursday/Friday was a very clear exit day. If it squeezes north and over extends further, it’s a very clear short. If it sits flat for a week until OPEX, it’ll be a clear buy for another leg up, then you reevaluate again. This is what I mean when I say treating it like it’s your job. Go back and look at the big downturn last year. To anyone who was paying attention, it looked like a car crash in slow motion. Only to those of us with other work to do, did it look like a flash crash out of nowhere. The writing is very clearly on the wall for all of this stuff, because the big players needs days to reposition, and will be moving billions of shares, and you can literally watch them do it. The reason active funds don’t do as well as the market is because they have to hedge. You’re always paying a premium to minimize losses when you’re hedging, and you can’t exit fast when your position is worth billions. It’s like turning a freighter, versus turning a speed boat.
genericone 6y ago
But passive investing is just that, passive, theres no market information, no price information that influences the shares and prices. How is passive investing sustainable? Doesn't this destroy finance in the long run? Prices being completely detached from a listed company's financial viability and business profitability... thats bad isnt it?
- deleted 6y ago
  [deleted]
- omgwtfbyobbq 6y ago
  Why do you think prices are completely detached from a company's financial viability and business profitability? If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.
  - paulgb 6y ago
    > If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.
    - omgwtfbyobbq 6y ago
      > If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances. Sure, but that's a big if. We're a long way from 100% anything. Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance. In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market. Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.
duxup 6y ago
How many folks are out there as active traders? I'm not sure how big en masse really is here.
deleted 6y ago
[deleted]
mucholove 6y ago
What it does do...for sure is make you go crazy. Traders are pretty wired. People building long term businesses (Like 10 year horizon plus) are on a different gravity.
madrox 6y ago
If there’s anything different about GenZ, it’s that they’re crowdsourcing their plays, making them behave more like a distributed mutual fund than a bunch of gamblers. Time will tell if that performs better.
- airstrike 6y ago
  Or they're just getting played by finance "influencers" who buy into trades first and make most of the profits
- gruez 6y ago
  spoiler: it won't. There's going to be outperformers, just like if you have 1000 people flipping coins, you're going to find a few with an uncanny ability to get consecutive tails/heads after several flips. That doesn't mean they're any good at it though.
  - voces 6y ago
    The average of the coin flip will be near 50% though. If you let a 1000 people give their opinion on if a stock is up or down in a month, you are likely to do better than random guessing (opinion is a weighted coin). For instance, taking the top 50 stock pickers from the finance section of newspapers will demonstrably lead to a decent, better than random guessing, portfolio. You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information (someone who knows that they will buy the next 5 Tesla cars, so they will contribute to the growth). If you have a 100 of those private information owners, and you aggregate it, you just encoded for brand loyalty. People betting on the GameStop play did so, in part because they were made aware that they were not the only one with nostalgia and hope for GameStop. They did this by pooling their private information. Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise). Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month. The market would become very predictable with that information. Crowdsourcing a subset, just lowers this predictability (but never down to the level of a coin-flip). This crowdsourcing for predictability is precisely the reason the bigger, profitable hedgefunds are crawling Reddit, viewing 16-year old Crypto coin pickers on Youtube, and analyzing retail trades on RobinHood.
pastrami_panda 6y ago
This is true historically. But at certain times it's a complete no-brainer to enter the market or not. For instance consider post Covid at around March/April 2020. Stocks have dropped 20-30%. It took Moderna 2-3 days to develop a vaccine, is a 20% drop in e.g. Apple justified, or is it simply free money?
- ghaff 6y ago
  Or were we on the verge of a complete global economic meltdown? I admit I transferred a fair bit into very safe investments at the time. As a result I didn't do as well as I could have (but well enough). But it was still a reasonable hedging strategy IMO.
- baobabKoodaa 6y ago
  > This is true historically. Nope, this is false. Please look up the historical performance of Renaissance Technologies Medallion Fund.
- deleted 6y ago
  [deleted]
- klipklop 6y ago
  I did this exact thing and got in big in march 2020. I also heavily bought US tech stocks the day brexit passed. To me it seemed like free money.
- JohnJamesRambo 6y ago
  How far would the stocks have fallen if the US hadn’t pumped absolutely massive amounts of money into the stock market? When it falls and keeps falling people suddenly realize how worthless all the paper stocks they have been buying are and don’t want to keep buying more. I suspect 30% drop would have been the tip of the iceberg and no one asked me if I wanted my tax dollars spent this way so the rich that own all the equities could keep their paper gains. Top 1% own 38% of the value in stocks.
mancerayder 6y ago
I'm running counter-current here. I bought a vaccine maker last year, putting a quarter of my stock portfolio in it over time (several buys on dips). The vaccine maker was then approved, and is one of the biggest ones rolling out globally. This wasn't a one off, as I continued to follow the news and bought more blocks over several months. My portfolio is up a significant amount. On one year blocks, I'll start to sell since it'll be taxed as long-term capital gains. That's non retirement brokerage account. Now in my IRA, I buy and sell every few months on dips and peaks. It doesn't have to be perfectly timed, but it's going up. My portfolio is 70% cash and I've been beating the market the past 5 years. Other winners include tech companies and a space company. Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds, something I did for decades prior to thjs.
- CarelessExpert 6y ago
  > Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds Simple: you got lucky in a bull market. Let's revisit how you're doing in the next recession or after a couple bad bets. If you want a deeper answer you'll have to do your own digging, as it's a big topic. But it's worth starting with the efficient markets hypothesis and reading some of the work of Jack Bogle.
  - mancerayder 6y ago
    Why would I have the same strategy during a bear market? How do index funds fare during a bear market? Might the 70 pct cash I have be used for non equity investments, like real estate? There's something strange about the framing of the passive index fund scenario. Over 20-30 years? I'm not interested in beating that benchmark if I'm interested in increasing my net wealth in the next few years. Downvote away, this is my experience and feeling on the topic, not financial advice to others.
    - CarelessExpert 6y ago
      Well you can keep arguing based on your feelings. I'm arguing based on data. You can choose to ignore that data and try your luck. Just recognize your past performance will not guarantee future returns.
stewbrew 6y ago
Any statistical prove makes certain assumptions and as with every assumption, there are diverging views. In that particular case, the prove ignores any aspects that cannot be modelled and then be tested like, e.g., domain knowledge that gives you a headstart over other market participants. As always, I'd say the truth is somewhere in the middle.
fighterpilot 6y ago
> active strategies lose out to passive ones in the long run. This is only true in the average. Most people can't do it. It's false if we're talking about specific strategies (e.g. Medallion Fund). There are computerized short-term strategies that print money almost every single day, deployed in a few of the large firms.
tim333 6y ago
Value investing strategies sometimes beat just buying the index.
martinflack 6y ago
> The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. There is a certain rationality to this, when you're coming from so far behind. If you need a million dollars and you start with $200K, you set a timeline and a prudent plan. If you need a million dollars and you start with $2K, you're so far behind[0] you may as well gamble. I do not necessarily advocate the latter. I'm just articulating the thinking/emotion. [0] 2000 at 7% p.a. takes 92 years to top a million if my arithmetic is correct.

andi999 6y ago

So Jane Street and James Simons do not exist?

djoldman 6y ago
I think it's pretty obvious that the parent is talking about the average investor.
- ghaff 6y ago
  Yes but it's also a fair point that a lot of actively-managed mutual funds out there don't beat low-cost index funds.
- baobabKoodaa 6y ago
  > I think it's pretty obvious that the parent is talking about the average investor. Really? Because this is what the (grand)parent said: "Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run." Clearly grandparent was not talking solely about the average investor.
ghaff 6y ago
It probably depends how active and how sophisticated. (And how lucky.) Certainly there are large sophisticated endowments and investment funds that don't simply stick everything in an index fund and call it a day. And many do get better than S&P 500 returns. After all, you need to decide what investments to buy and hold and, presumably, make adjustments over time even if turnover is relatively low.
wnevets 6y ago
There's always winners of the lottery but statically it wont be you.
granshaw 6y ago
Jane Street is primarily a market maker I believe, not something an individual or even a small institution can just go out and do
4TunateSon 6y ago
Jane Street and RenTech are very different institutions compared to something like Vanguard or Fidelity. They aren't accessable to retail investors/traders, they have different goals, and methods.
- baobabKoodaa 6y ago
  Nope, you're moving the goalposts now. The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim.
  - chronic2022 6y ago
    > The grandparent claimed that active investing is not a good choice for _anybody_. So a single example like RenTech is sufficient to disprove that claim. Correct. Too many passive index fund investors on this thread refuse to acknowledge that many hedge funds/proprietary trading firms consistently beat the S&P over 20-30+ years. VTI and VOO are only 9% and 13% since inception in ~2001. Top quant firms like Citadel, Renaissance, Jane Street attain 20-40% annually after fees, over 20+ years. On average, hedge funds underperform. But a UHNW investor is not investing in average hedge funds. They’re investing time-tested S&P-outperforming hedge funds.
nceqs3 6y ago
1) Jane Street isn't that successful. 2) RenTech spends billions every year on compute, data and hiring the smartest people in the world. The average person could never compete with RenTech.
- centimeter 6y ago
  > Jane Street isn't that successful. Their historical record is very good.
- baobabKoodaa 6y ago
  > The average person could never compete with RenTech. Grandparent claimed that active investing is not good for _anybody_. A single example (like RenTech) is sufficient to disprove that claim. If you want to move the goalposts to "the average person", then it'll be an entirely different discussion.

bezout 6y ago

I’m not arguing the opposite, but I’m very interested in learning more about this. Can you suggest some references?

kgwgk 6y ago
The basic idea is that if you do better than the market - because you have more of the good stocks and less of the bad ones - there may be someone somewhere with the opposite positioning. In this simple model active investors in aggregate cannot do better than the index. Adding transaction costs, fees, etc. they'll do worse - as a group.
maksimum 6y ago
A reference (that lays out the statistical arguments) is "Common Sense on Mutual Funds" by John Bogle.
- bezout 6y ago
  Thanks

bitexploder 6y ago

It will just make buy and hold that much more beneficial.

nicolas_t 6y ago

As someone who is doing buy and hold and not doing any day trading, how can I protect myself from the wild swings of the market caused by active traders gambling?

zitterbewegung 6y ago
Dollar cost averaging[1] which is basically you buy any security every x amount of days. This is usually how a 401k is setup where you buy a mutual fund every time you get a paycheck. [1] https://en.wikipedia.org/wiki/Dollar_cost_averaging https://en.wikipedia.org/wiki/Dollar_cost_averaging
- emerongi 6y ago
  Worthwhile to read the full article, as well as the sources, and decide what is best for you. > The financial costs and benefits of DCA have also been examined in many studies using real market data, typically revealing that the strategy does not deliver on its promises and is not an ideal investment strategy. > Recent research has highlighted the behavioural economic aspects of DCA, which allows investors to make a trade-off between the regret caused by not making the most of a rising market and that caused by investing into a falling market, which are known to be asymmetric.
  - nly 6y ago
    It's not a 'strategy' really. Most regular Joe investors earn a salary every month, and keep spare money invested in the market. DCA isn't a choice in this case, it's the natural result.
    - emerongi 6y ago
      It is a strategy. If you sell your house and invest the proceeds into the stock market, DCA says you shouldn't just do one huge buy order, but you should spread your orders out over a longer timeline. It's two different strategies.

baobabKoodaa 6y ago

> That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run. This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.

scarmig 6y ago
2020, Renaissance funds' performance: Closed to outsiders: Medallion, +76% Open to outsiders: RIEF, -23% RIDA, -34%
- jjoonathan 6y ago
  If I were investing someone else's money, I'd be happy to put a little in RIEF and RIDA in exchange for medallion shares.
- nceqs3 6y ago
  You forgot to mention that the external funds have performed exceedly well (20+%/year) over the past 15 years even after a 44% performance fee. Also the external funds are different strategies than Medallion.
- baobabKoodaa 6y ago
  > 2020, Renaissance funds' performance ... Since this is in reply to me, let me ask, what's the implication here? The tone of your post sounds like you disagree with me, but it's not clear what exactly you disagree with? Grandparent claimed that no-one can beat the market. I said that Renaissance Medallion Fund beats the market. Then you post a single-year performance of +76%, which is a really good performance for 2020. So... you agree with me?
  - scarmig 6y ago
    I don't disagree with you that individuals can outperform the market. I do think it's worth pointing out that that doesn't mean that the average retail investor will generally outperform the market, even if they're sophisticated enough to have even heard of Renaissance.

ericjang 6y ago

"statistically proven reality" is an oxymoron - past outperformance of passive funds (statistics) are no guarantee of future returns (reality). Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a biotech company or a specialized industry like semiconductors)

yoz-y 6y ago
Please correct me if I’m wrong. But I assume that earning while holding is based on an assumption that the overall productivity continues to rise, while active trading is more of a zero sum game. Any gains you earn is somebody’s loss. Now, the initial assumption could very well hit a wall.
- baq 6y ago
  notice you're contradicting yourself: active traders don't only trade with other active traders, they also trade with those same passive funds that bet on continuous growth in fundamentals of companies and the hope that eventually that growth will be reflected in the stock price. then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. (reminder: etfs hold ~$5T worth of assets.)
  - freetime2 6y ago
    > Then consider just how much shares passive funds move all the time due to continuous rebalancing they do due to their self-imposed mandate. One of the big selling points of passive, market weighted ETFs is their low turnover and high tax efficiency. Vanguard’s S&P 500 ETF (VOO) has an annual turnover of 4%, for example. That’s nothing compared to the turnover in an actively traded portfolio. Sure they do a lot of trading volume to account for inflows and outflows from the ETF. But one of the very nice properties of market weighting is that there is hardly any rebalancing needed as individual assets drift in price.

baq 6y ago

it used to be like this but now ETFs hold so much weight in the US market that you can easily front run additions/removals for relatively easy money.

thrav 6y ago

While you’re right about the majority, there are pockets of young people partaking in sophisticated strategies, and doing quite well. The people in the discord server that I belong to are all using stops to max their downside and get out quick if their instinct proves wrong. After several months on paternity leave, it became clear that greatest barriers to active trading are money and time, like most things. If you’re treating the market like it’s your job, day in and day out, you get a really good feel for the flows, and can move into positions that are turning north pretty easily. The fact that the Nasdaq was about to go on a tear was telegraphed for weeks. There are hundreds of opportunities to do this every day, so you just jump on the most painfully obvious ones, and avoid anything uncertain. If you have a real job, and can’t watch the market all day, every day, you don’t stand a chance. Without fail, the biggest losses in our group would come when someone tried to hop into a position while half watching the market, and then get sucked into their real work. Once you’ve got entry down, the hardest part is training yourself to exit at the right time.

CarelessExpert 6y ago
> there are pockets of young people partaking in sophisticated strategies, and doing quite well. If we could I'd make a 20 year wager that every one of those people will fail to beat the market in the long run. It's very easy to make money on "sophisticated strategies" during an historic 10 year bull run.
- MattGaiser 6y ago
  https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
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- thrav 6y ago
  They’re making money up and down. For example, SPY is likely done climbing for a while. Maybe it will squeeze up to ~4160, but it’s either going to be flat or aggressively down in the coming days. Thursday/Friday was a very clear exit day. If it squeezes north and over extends further, it’s a very clear short. If it sits flat for a week until OPEX, it’ll be a clear buy for another leg up, then you reevaluate again. This is what I mean when I say treating it like it’s your job. Go back and look at the big downturn last year. To anyone who was paying attention, it looked like a car crash in slow motion. Only to those of us with other work to do, did it look like a flash crash out of nowhere. The writing is very clearly on the wall for all of this stuff, because the big players needs days to reposition, and will be moving billions of shares, and you can literally watch them do it. The reason active funds don’t do as well as the market is because they have to hedge. You’re always paying a premium to minimize losses when you’re hedging, and you can’t exit fast when your position is worth billions. It’s like turning a freighter, versus turning a speed boat.

genericone 6y ago

But passive investing is just that, passive, theres no market information, no price information that influences the shares and prices. How is passive investing sustainable? Doesn't this destroy finance in the long run? Prices being completely detached from a listed company's financial viability and business profitability... thats bad isnt it?

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omgwtfbyobbq 6y ago
Why do you think prices are completely detached from a company's financial viability and business profitability? If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.
- paulgb 6y ago
  > If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.
  - omgwtfbyobbq 6y ago
    > If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances. Sure, but that's a big if. We're a long way from 100% anything. Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance. In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market. Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.

duxup 6y ago

How many folks are out there as active traders? I'm not sure how big en masse really is here.

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mucholove 6y ago

What it does do...for sure is make you go crazy. Traders are pretty wired. People building long term businesses (Like 10 year horizon plus) are on a different gravity.

madrox 6y ago

If there’s anything different about GenZ, it’s that they’re crowdsourcing their plays, making them behave more like a distributed mutual fund than a bunch of gamblers. Time will tell if that performs better.

airstrike 6y ago
Or they're just getting played by finance "influencers" who buy into trades first and make most of the profits
gruez 6y ago
spoiler: it won't. There's going to be outperformers, just like if you have 1000 people flipping coins, you're going to find a few with an uncanny ability to get consecutive tails/heads after several flips. That doesn't mean they're any good at it though.
- voces 6y ago
  The average of the coin flip will be near 50% though. If you let a 1000 people give their opinion on if a stock is up or down in a month, you are likely to do better than random guessing (opinion is a weighted coin). For instance, taking the top 50 stock pickers from the finance section of newspapers will demonstrably lead to a decent, better than random guessing, portfolio. You are assuming that the stock market is as-good-as-random, and that you can't crowdsource aggregate market sentiment and private information (someone who knows that they will buy the next 5 Tesla cars, so they will contribute to the growth). If you have a 100 of those private information owners, and you aggregate it, you just encoded for brand loyalty. People betting on the GameStop play did so, in part because they were made aware that they were not the only one with nostalgia and hope for GameStop. They did this by pooling their private information. Finally, if you do assume that clueless pickers are the same as a coinflip, then their noise should cancel out, leading to a very uncertain prediction of 50% (so you turned their non-knowledge into valuable information about the variance/confidence/mindshare penetration/information availability), and then the real experts votes will balance the vote in favor of the most likely prediction (you distilled their expertise). Taken my counter-example to your spoiler to the extreme: Imagine if all Redditor stock traders gave their honest best guess on if a stock would be down or up next month. The market would become very predictable with that information. Crowdsourcing a subset, just lowers this predictability (but never down to the level of a coin-flip). This crowdsourcing for predictability is precisely the reason the bigger, profitable hedgefunds are crawling Reddit, viewing 16-year old Crypto coin pickers on Youtube, and analyzing retail trades on RobinHood.

pastrami_panda 6y ago

This is true historically. But at certain times it's a complete no-brainer to enter the market or not. For instance consider post Covid at around March/April 2020. Stocks have dropped 20-30%. It took Moderna 2-3 days to develop a vaccine, is a 20% drop in e.g. Apple justified, or is it simply free money?

ghaff 6y ago
Or were we on the verge of a complete global economic meltdown? I admit I transferred a fair bit into very safe investments at the time. As a result I didn't do as well as I could have (but well enough). But it was still a reasonable hedging strategy IMO.
baobabKoodaa 6y ago
> This is true historically. Nope, this is false. Please look up the historical performance of Renaissance Technologies Medallion Fund.
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klipklop 6y ago
I did this exact thing and got in big in march 2020. I also heavily bought US tech stocks the day brexit passed. To me it seemed like free money.
JohnJamesRambo 6y ago
How far would the stocks have fallen if the US hadn’t pumped absolutely massive amounts of money into the stock market? When it falls and keeps falling people suddenly realize how worthless all the paper stocks they have been buying are and don’t want to keep buying more. I suspect 30% drop would have been the tip of the iceberg and no one asked me if I wanted my tax dollars spent this way so the rich that own all the equities could keep their paper gains. Top 1% own 38% of the value in stocks.

mancerayder 6y ago

I'm running counter-current here. I bought a vaccine maker last year, putting a quarter of my stock portfolio in it over time (several buys on dips). The vaccine maker was then approved, and is one of the biggest ones rolling out globally. This wasn't a one off, as I continued to follow the news and bought more blocks over several months. My portfolio is up a significant amount. On one year blocks, I'll start to sell since it'll be taxed as long-term capital gains. That's non retirement brokerage account. Now in my IRA, I buy and sell every few months on dips and peaks. It doesn't have to be perfectly timed, but it's going up. My portfolio is 70% cash and I've been beating the market the past 5 years. Other winners include tech companies and a space company. Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds, something I did for decades prior to thjs.

CarelessExpert 6y ago
> Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds Simple: you got lucky in a bull market. Let's revisit how you're doing in the next recession or after a couple bad bets. If you want a deeper answer you'll have to do your own digging, as it's a big topic. But it's worth starting with the efficient markets hypothesis and reading some of the work of Jack Bogle.
- mancerayder 6y ago
  Why would I have the same strategy during a bear market? How do index funds fare during a bear market? Might the 70 pct cash I have be used for non equity investments, like real estate? There's something strange about the framing of the passive index fund scenario. Over 20-30 years? I'm not interested in beating that benchmark if I'm interested in increasing my net wealth in the next few years. Downvote away, this is my experience and feeling on the topic, not financial advice to others.
  - CarelessExpert 6y ago
    Well you can keep arguing based on your feelings. I'm arguing based on data. You can choose to ignore that data and try your luck. Just recognize your past performance will not guarantee future returns.

stewbrew 6y ago

Any statistical prove makes certain assumptions and as with every assumption, there are diverging views. In that particular case, the prove ignores any aspects that cannot be modelled and then be tested like, e.g., domain knowledge that gives you a headstart over other market participants. As always, I'd say the truth is somewhere in the middle.

fighterpilot 6y ago

> active strategies lose out to passive ones in the long run. This is only true in the average. Most people can't do it. It's false if we're talking about specific strategies (e.g. Medallion Fund). There are computerized short-term strategies that print money almost every single day, deployed in a few of the large firms.

tim333 6y ago

Value investing strategies sometimes beat just buying the index.

martinflack 6y ago

> The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. There is a certain rationality to this, when you're coming from so far behind. If you need a million dollars and you start with $200K, you set a timeline and a prudent plan. If you need a million dollars and you start with $2K, you're so far behind[0] you may as well gamble. I do not necessarily advocate the latter. I'm just articulating the thinking/emotion. [0] 2000 at 7% p.a. takes 92 years to top a million if my arithmetic is correct.