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I'm Too Risk-Averse for Index Investing

• imtringued 5y ago
  The whole article is quite weird. It's almost as if he hasn't heard of the MSCI world or factor investing. The latter beats conventional market cap index strategies at the expense of having long bad streaks/droughts followed by a few years of good performance. Yes, that means increased risk but you also see higher returns. The MSCI World Value Index beats the MSCI World Index. The reason why factor indices see droughts is that most of them don't do momentum trading, i.e. they don't surf/coast on the bubble which means they lose out over the short term. For most people, there is no reason to bother with factor investing if they are happy with the risk/reward profile of their existing portfolio.
• impostervt 5y ago
  Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?
  • imtringued 5y ago
    It's called factor investing and it's a niche for a reason. (It's worth it, but not for everyone).
  • dbsmith83 5y ago
    You can always just let someone else do the research and buy shares of Berkshire Hathaway
    • throw0101a 5y ago
      Berkshire Hathaway has under-performed the S&P 500 for >10 years now. And one of the main reasons why they're doing so well at all is probably because they have a sizeable holding of AAPL.
      • paulpauper 5y ago
        i don't think it has. also, it has less volatility.
        • throw0101a 5y ago
          As of late 2021, if you invested ten years back: * https://seekingalpha.com/article/4423498-berkshire-hathaway-versus-s-and-p-500-through-years https://seekingalpha.com/article/4423498-berkshire-hathaway-... Note: price only comparison. S&P 500 funds generally give dividends (which can be re-invested). The (very) recent pull back has evened things out a bit: > Over the past year, Berkshire is up 33%, double the gain in the S&P 500. The stock is now ahead of the S&P 500 over the past 10 years, 15.4% annualized versus 14.5% for the index, but still behind in the past five years, 13.3% annualized against 14.9% for the index. * https://www.barrons.com/articles/warren-buffetts-berkshire-hathaway-is-trouncing-the-s-p-500-this-year-51646409527 https://www.barrons.com/articles/warren-buffetts-berkshire-h... Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
          • dbsmith83 5y ago
            The article is all about the really long overview though. It is basically arguing that the market gaining is not a given. See the Japan example starting around 1990. That was over 30 years ago. If you look at Berkshire Hathaway 20 years back, it is clearly beating out the S&P500 by a lot. > Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it. Agreed. I hope to not be very invested in the stock market when I only have 10 years of work left. Seems too risky.
        • lotsofpulp 5y ago
          How do you define volatility? How can a market weighted index of the top 500 publicly listed US companies be more volatile than a single company? Which itself is 25%+ invested in a single other company and then the rest spread out over a handful of other companies. Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.
    • rdtwo 5y ago
      You are just buying Apple shares by proxy
  • pantulis 5y ago
    I believe indexes protect me from my own lack of knowledge on market operations and analysis. I have a couple of investments in indexed funds and of course I do not expect them to be resilient to bubbles or crashes. If what the FA says was true everyone would be doing this "value investing". It's about how you balance risk vs benefits.
  • brightball 5y ago
    All completely true. The average investor should probably be using a financial advisor. One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase. Ultimately, investing boils down to finding something where you're comfortable. 401k investing makes people comfortable because of all the pre-tax benefits. Even if you make bad picks, you're still making the percentage of income tax every single time. A lot of people invest directly in real estate or franchise businesses. Others in big, safe, dividend payers. Some people buy timber land. IMO it's just going to be comfort level and experience.
    • scarface74 5y ago
      No one should be using a financial advisory unless they are a fiduciary who gets paid based on the amount of assets under management. Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day. Most people can’t afford to max out their retirement plans. After you do that, then a fiduciary advisor might come in handy.
      • brightball 5y ago
        The 401k funds are effectively an automated advisor. It’s tough to draw the line in a conversation like this because I completely agree with everything you said. An advisor only comes in at the point that a person is investing their money directly and consistently. Your average person doesn’t have the market knowledge or the time to learn it so an advisor is likely the best bet for the average person in that scenario. Anyone willing to do some research and learn will likely find their own comfort zone without an advisor.
        • deleted 5y ago
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  • colinmhayes 5y ago
    There are value index funds. Vanguards is VTV
    • sbelskie 5y ago
      The article suggests that “value investing” is not just about price ratios (which is mostly all such indexes can offer).
      • imtringued 5y ago
        They still offer superior performance by avoiding bubbles.
      • deleted 5y ago
        [deleted]
  • bumby 5y ago
    A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time. So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).
    • maigret 5y ago
      You might be confusing volatility and growth here. One doesn’t imply the other.
      • bumby 5y ago
        Can you help me understand what you mean? The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta. I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model
  • satai 5y ago
    Then just pick a value index. Or a total market index but other weight then market cap (fundamentals...).
  • baxtr 5y ago
    Yes, agreed. This is comparing Apples and Oranges. Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the peak of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now. I think it is easy to dismiss indices in a bear situation. When in doubt, zoom out and relax.
    • throw0101a 5y ago
      > Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the height of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now. It should be noted that the NASDAQ is heavily skewed to one particular sector, and so less diversified. Going for the S&P 500, US Total Market (Russell 3000), or world index would spread the risk around more. Even investing only at market peaks, as long as you didn't panic and sell, would still give results most people would find satisfactory: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market...
    • deleted 5y ago
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  • thomasfl 5y ago
    Actively managed funds with low costs and a value investment style, can be a good alternative to picking stocks. It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of value and quality investement style. I work for a Fintech startup. We are working on a tool to do quantitative fund analysis.
    • VBprogrammer 5y ago
      Actively managed funds don't tend to come with low costs as a general rule. It's more expensive to pay a bunch of interns to sit around generating reports and a rockstar to actually pick which stocks to buy or sell at each moment than it is to simply make a few trades to keep the portfolio in line with the market.
• mhb 5y ago
  Averse. It's risk averse.
  • k2enemy 5y ago
    I spent half the article trying to figure out if it was some kind of clever pun. But no, they are just using the wrong word.
    • politelemon 5y ago
      The word they chose was averse one
      • drcongo 5y ago
        Much verse
  • lukeholder 5y ago
    Both adverse and averse are used to indicate opposition. Adverse, usually applied to things, often means "harmful" or "unfavorable" and is used in instances like "adverse effects from the medication." Averse usually applies to people and means "having a feeling of distaste or dislike." It is often used with to or from to describe someone having an aversion to something specific, such as "he is averse to taking risks" or "he is risk averse."
    • nerdponx 5y ago
      I appreciate that you're trying to be charitable to the author, but this sounds more like a retroactive justification than a new and valid usage. Yes, I know that plenty of our words today evolved out of mistakes, solecisms, misspellings, etc. But that doesn't mean we shouldn't at least try to be kind-of correct.
      • oarsinsync 5y ago
        > Yes, I know that plenty of our words today evolved out of mistakes, solecisms, misspellings, etc. But that doesn't mean we shouldn't at least try to be kind-of correct. This is literally the worst misuse of the language. (This is a joke about the way the word literally has evolved, badly)
• armitron 5y ago
  Makes you wonder why the 89% of fund managers that fail to beat the market don't just pick "value" stocks.
  • bombcar 5y ago
    Because back-testing is really easy to pick value stocks, forward picking is really hard. (Fun fact I've heard, funds beat the indices before expenses but fail after expenses ...)
  • SamBam 5y ago
    My uneducated guess is because they are driven to try and "win big," and they consistently overestimate they chances of doing so, and are uninterested in safe-but-boring.
  • bumby 5y ago
    I suspect there's a lot at play, including cognitive biases. For example, value stocks tend to be contrarian plays. The stock is a good value because the price is down, meaning the majority don't have faith in it. Fund managers don't want to be holding these stocks when others are crushing it because people will look at their holdings and have FOMO. When, say, tech is flying high, people want to see that their fund manager owns tech. Another example is leverage limits may incentivize fund managers into high-beta stocks. These are the one's that are most likely to win (or lose) by a large margin compared to the market. Over-optimism bias makes fund managers think they can disproportionately pick the winners.
  • pavlov 5y ago
    Because the way to get ahead as an active fund manager isn't to deliver returns that match S&P 500, it's to deliver returns that are uncorrelated with the primary market. Once you're in top half of that 11% who consistently beat the market that way even if by luck, survivorship bias will have customers beating a path to your door. Nobody remembers the 89%.
  • JKCalhoun 5y ago
    You're a true Boglehead like myself. That was my exact thought reading the article. Seems the crux of the problem is ... how can you pick value stocks? I'm not Warren Buffett who can spend my entire career weighing a companies value.
• brewmarche 5y ago
  Shouldn’t we look at net return indices when talking about recovering?
• dc-programmer 5y ago
  One thing missing from the analysis is that many index funds pay dividends. So even if your country is having a rough decade, fund holders are getting paid the whole time. Additionally index funds are tax efficient with low management costs so that has to be considered when comparing to individual stocks as well. More saliently, (1) it’s hard to identify value stocks and (2) the time frames he was looking at are not that long. I feel fairly confident that markets will be way up in 50 years if for no reason other than technological progress
• joosters 5y ago
  You can't look at a chart of an index price and simply say "it's down from the peak, I would have lost money". If you do that, you are forgetting that stocks pay dividends, and they aren't included in the index price. Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).
  • MacroChip 5y ago
    Expectations around dividends could be priced in though. https://www.investopedia.com/terms/d/dividendirrelevance.asp https://www.investopedia.com/terms/d/dividendirrelevance.asp
  • cissou 5y ago
    100%. European markets are known to pay out more dividends whereas the US market is known to prioritize stock price growth. Return-wise that makes no theoretical difference.
    • gargarplex 5y ago
      Makes a huge difference when considering the tax implications.
      • fennecfoxen 5y ago
        Many retirement funds are in a tax shelter either way, though.
        • Scoundreller 5y ago
          Problem is, the US-based euro or emerging market fund will have withholding taxes applied to it, unless it’s a retirement-specific fund. You just won’t see the tax withholdings on your statement because it shows up on theirs.
        • bradlys 5y ago
          Many but not all and that is the important detail. Also I keep money in index funds even if I don't plan on using that money for retirement. (e.g. downpayment on a house, saving for another large purchase, financial buffer, etc.) I also keep money in index funds that are in regular brokerage accounts because 401k + backdoor roth ira isn't sufficient for retirement if you make $200k+/yr. (True for even lower amounts too but whatever)
• assbuttbuttass 5y ago
  There's something really insidious about tying 401ks and other retirement accounts to the stock market. People including myself end up with a large portion of our assets essentially gambled on the future success of US corporations. It gives some false legitimacy to this idea that our media is constantly pushing, that if the stock market is going well then regular Americans are doing well.
  • bleuchase 5y ago
    > There's something really insidious about tying 401ks and other retirement accounts to the stock market. Insidious? That’s a bit rich. You can allocate money in your 401k however you want. It’s self-directed. If you don’t like stocks keep it in bonds or cash.
    • ask_b123 5y ago
      Right! I wish my country's 401k equivalent was self-directed.
    • discardedrefuse 5y ago
      > If you don’t like stocks keep it in bonds or cash. This is disingenuous advice considering all financial vehicles for savers have been gutted. You can't even hedge inflation without the stock market (or real estate, if you can afford the buy-in). Take a look at some historical CD rates. https://www.bankrate.com/banking/cds/historical-cd-interest-rates/ https://www.bankrate.com/banking/cds/historical-cd-interest-...
      • imtringued 5y ago
        Well, savings have risen exponentially for a century. Maybe it's time for that to stop? I mean think about all the people that would have to be in debt for you to have savings. The economy clearly has too much debt and therefore too much savings. If this is driven by demographics, e.g. old people saving for retirement while there are no young people willing to provide for them when they are old, then really the problem isn't the fact that the bank doesn't want to lie to you any longer (the bank is currently lying btw), it's the fact that nobody will be there to take care of you.
• qixxy 5y ago
  Buffett. Not Buffet.
• meany 5y ago
  The author uses Buffets essay to justify value investing over index funds, but Buffet is a strong proponent of index funds for non professional investors. Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.” He’s even putting 90% of his own estate into index funds. https://www.google.com/amp/s/www.cnbc.com/amp/2019/02/26/warren-buffett-wants-90-percent-of-his-estate-invested-in-index-funds.html https://www.google.com/amp/s/www.cnbc.com/amp/2019/02/26/war...
  • anonu 5y ago
    Interesting. Investing in Berkshire is like investing in a diversified index fund.
    • derf_ 5y ago
      Maybe from 10,000 feet. Buffett only invests in certain kinds of companies (those within his "circle of competence"), so you only get so much diversity. Also, because Berkshire is a conglomerate, businesses which generate large amounts of cash (e.g., insurance float, or businesses that would pay dividends if they were a stand-alone companies) can be used to fund capital-intensive businesses (railroads, energy companies, etc.) without paying taxes to move the money from business A to business B, because they're all owned by the same legal entity. Don't underestimate the power of this effect. It is not possible to achieve with an index fund.
      • danielmarkbruce 5y ago
        What will Buffett not invest in today? He used to have a tight circle of competence, but if you look at his portfolio today, you'll see financials, energy companies (of various types), technology, healthcare, industrials, consumer (staples and discretionary), media, telco. And then his guys invest even wider.
      • zzleeper 5y ago
        You made me think. The weights of e.g. the SP500 are not ideal then. Berkshire is in the SP500, but so are Apple, Coca Cola, Amex, BoA, etc. which are Berkshire largest investments. So if Coca Cola has an idiosyncratic hit, then you get hit twice by it: first in your KO holdings, then in your BRK.A holdings. At the extreme, if there is a company that then invests in Berkshire and so on, you could end up overweighting a lot certain firms. Also, isn't there double counting in terms of the stock market cap?
• blockwriter 5y ago
  Reading the Intelligent Investor, it is striking to see how many stocks there were with a P/E ratio under 15 and with sound financials and that paid good dividends, I.e. a value stock, in the 1950s, when the book was written. If you try to apply the value investing principles today, you will end up spending an inordinate amount of time looking for a stock like this. The risk of an index fund is less than the amount of dedicated time you would need to spend to practice value investing.
  • neogodless 5y ago
    > the risk... is less than the... time You're comparing two different units here. You might say "the trade off of value investing to reduce risk is a huge investment of time."
  • JumpCrisscross 5y ago
    > is striking to see how many stocks there were with a P/E ratio under 15 P/E of 15 is an earnings yield of 6 2/3 percent. Look at contemporaneous interest rates and that yield makes sense.
  • throw0101a 5y ago
    In his last published interview even Graham himself said you probably shouldn't bother with Graham (and Dodd): >> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues? > In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors. * http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Benjamin%20Graham/A%20Conversation%20with%20Ben%20Graham%20-%20Financial%20Analysts%20Journal%20-%201976.pdf http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Ben... That was in 1976.
• sbelskie 5y ago
  The part of the argument made by looking at individual countries is much less compelling in a world where low cost total world stock etfs exist. They are of course weighted heavily to the US just given the size of US stocks, but one can reduce that exposure by buying low cost regional etfs or even just total world ex-US. That seems like a better risk averse approach (possibly with some allocation to a total bond etf depending on your time horizon) than trying to pick individual value stocks.
• programmarchy 5y ago
  Michael Burry has two main points against index funds: 1) large-scale passive investing has deteriorated the price discovery mechanism for index funds and 2) there's a liquidity risk because trillions of dollars are linked to stocks in index funds that only have hundreds of millions of trade volume. So if there's a cascading failure, as smarter money realizes the price is wrong and begins to exit, there will be no buyers and the majority of index fund holders will be holding the bag.
  • criddell 5y ago
    Does he have advice for what passive investors should do instead?
    • JKCalhoun 5y ago
      Also, we're not $Billion USD investors like Burry.
    • rootusrootus 5y ago
      A common theme that keeps popping up in this thread. People pointing out that index funds have downsides, then going silent on what's better. Heck, up thread a ways someone even said they just don't invest. Wait, what? That's the better alternative?
      • programmarchy 5y ago
        Suggesting alternate investments is a separate issue than a critique of index funds. Of course people will be reluctant to offer financial advice. But the author of the article is advocating for value stocks.
  • bombcar 5y ago
    A more interesting argument was made by the "inventor" of index funds - Bogle (paraphrased) [1]: Companies are no longer "owned" by people who feel ownership in the company (with some few exceptions) - they are "owned" by funds and therefore by "managers" who do not care about anything but keeping their manager job going. When Ford is majority owned by the Ford family, the company can act the way the family wants it to act - but when it's majority owned by small investors and random funds there's no "main owner" who can make decisions against the common grain. [1] http://johncbogle.com/wordpress/wp-content/uploads/2019/08/niri-6-03.pdf http://johncbogle.com/wordpress/wp-content/uploads/2019/08/n...
• throw0101a 5y ago
  > In summary, what I’m arguing is that the risks to buying an entire index are underappreciated, and that is possible to look at the financials of a company and see if they’re reasonably priced. I personally sleep better with a portfolio of companies that I think are intrinsically worth what I paid for them. Yes, you and every other analyst out there. I'm curious to why the author thinks they have some extra informational edge over everyone else with a spreadsheet that allows him to find deals that seem to be invisible to everyone. Hedge funds are using real-time satellite imagery to try to get an edge over other market participants: * https://www.theatlantic.com/magazine/archive/2019/05/stock-value-satellite-images-investing/586009/ https://www.theatlantic.com/magazine/archive/2019/05/stock-v... When the author does a buy or sell on a particular stock, why does he think he's getting the better end of the transaction? Further the author brings up Graham and Dodd, which is now called value investing. While Fama and French show that there's still some premium to it (as mentioned in the article), in his last published interview Graham himself said: >> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues? > In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors. * http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Benjamin%20Graham/A%20Conversation%20with%20Ben%20Graham%20-%20Financial%20Analysts%20Journal%20-%201976.pdf http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Ben... That was in 1976. I ran across an interesting observation by Nick Maggiulli about investing feedback loops: > For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about. > It’s just like this XKCD comic: https://xkcd.com/451/ https://xkcd.com/451/ > But, what about stock picking? How long would it take to determine if someone is a good stock picker?* > An hour? A week? A year? > Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years. > And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even if you make money on absolute terms, you can still lose money on relative terms. * https://ofdollarsanddata.com/why-you-shouldnt-pick-individual-stocks/ https://ofdollarsanddata.com/why-you-shouldnt-pick-individua... Even Buffett himself has said that buying an index is probably the best way for most people. If you're worried about any single country not being productive, just buy the index of the entire planet: * https://investor.vanguard.com/etf/profile/VT https://investor.vanguard.com/etf/profile/VT If the entire planet tanks… we probably have bigger problems at that point. Generally, feel free to try to beat the market, but the odds are against you. We've know this at least the 1970s: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
• TIPSIO 5y ago
  Article was structured a little weird (with the headings) and either proposed nothing as an alternative or was saying Value Investing is the better route. This is kind of my beef in general, where does a normal family park cash? Value Investing isn’t exactly easy. I used to be big into FI/RE, but as I get older I am realizing cash flow is better (maximize your dollars in as easy and as stable as possible). Is more sustainable long-term than giant index fund nest egg… if I could choose.
• bleuchase 5y ago
  Risk comes in many forms. Eg the risk of under-performing market indexes vs the author’s approach. Incomplete picture without that.
• nonsapreiche 5y ago
  why not simple sell a market when goes up and buy it othewise?
  • neogodless 5y ago
    Do you mean a timing mindset, where you hold cash until a market index drops a preset amount, and then immediately dump all cash into it, and if it rises a preset amount, you immediately sell all of it? What would those presets be? Could you model this and see how that performs traditionally?
    • nonsapreiche 5y ago
      I think more like discrete functions of capital allocation in timeframes driven by a common trend
  • rootusrootus 5y ago
    That requires hindsight. The market is frequently irrational, you'd have to know what direction it goes next. Think it's going to stop growing because it just spiked upwards? Think again, it may keep going. Think it's going to keep going because that's the trend up to now? Probably not, it'll drop like a rock for no particular reason. I took a fun little class once on algorithmically playing the stock market. The take away lesson was that the main public stock markets have so many players, many of which are algorithmically driven, that there's nothing left for easy picking. It's basically noise. Best advice? Go play the algorithm game in smaller markets that don't have as many sophisticated players in them. E.g. some smaller betting markets, things like that. And only with play money, but your retirement money in an index fund ;-).
    • nonsapreiche 5y ago
      yes it's noise but sometimes is pink other is brown
• QuadrupleA 5y ago
  When I've read Graham's book or learned about value investing, I always hit a wall where I realize I'm just not willing to put in the vast amount of time it takes to research companies, scour financials and do a proper job of it. I've already got a career, I don't need a second. Plus I'm not sure how much value I contribute to the world by spending all day picking the stocks that will make me the richest.
• nknealk 5y ago
  One can buy alternative indexes that prioritize value factors. Vanguard, Schwab, and other large brokerages offer these products. See, for example, VTV which uses a multi-factor weighting scheme to try to find stocks that are “cheap” or FNDX which weights based on debt-adjusted free cashflows. I think the title should say “too risk-averse for market-cap weighted index investing”
• erehweb 5y ago
  On the one hand, it seems reasonable that you could do better than average by doing some value investing. On the other hand, if you had done that, you'd have missed out on the big gains in Gamestop and AMC. Would you do better by constructing a portfolio that excludes them, now we know they're meme stocks? Maybe, but they're not that big, so any gains you get by excluding them are going to be minimal. And now they have enough money to diversify and perhaps turn things around and justify their value. Better to just buy the index.
• satellite2 5y ago
  All the indices he is comparing the USA to (Japan, France, etc...) are not total return index. The S&P500 is total return (includes reinvesting the dividends). If you take the total return version of those indices, they also look exponential (but with less return than the US). So I'm not sure his point stands.
• tommiegannert 5y ago
  1. Invest your money. Ownership is important. Owning a private business might be best, but the public market is less work. 2. Think about how much time you want to spend on anything more complicated than stocks and cash. Three-fund portfolio? Individual stocks? Which ones? Compare the opportunity cost of you spending that time compared to something else. 3. Read https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3805927 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3805927 from last year [1], and realize that a 25 year old book was based on bad data. It might be true that stocks outperform bonds right now, but that's not the whole history. It also seems to confirm that all correlations go towards 1 in crises. I'm at (3). Not sure what (4) is, but I'm sure (5) is "Profit!!!" [1] Credit to https://dumbwealth.com/2021/06/23/bonds-for-the-long-run/ https://dumbwealth.com/2021/06/23/bonds-for-the-long-run/ for introducing me to the paper.
• lordnacho 5y ago
  If you're a coding nerd this way of thinking will naturally lead you to some sort of statistical arbitrage. Break out you favorite ML framework, get some data from somewhere, and try to test the hypotheses about whether one or another trading strategy works. I went down this rabbithole a long time ago and I'm still in the cave.
• Traster 5y ago
  So there's two things I don't really understand this article. Firstly, what is the difference between you "value investing" your own money, and sticking your money in a hedge fund which does "value investing" for you? Other than the fact that you're doing this in your spare time whilst the hedge fund manager is doing it full time. Surely what this article is basically saying is "89% of hedge funds underperform the index, but I think I've got a way to beat the index" when in reality, he's just taking the bad side of the bet. The second thing is, that the author points to 89% of funds underperforming the S&P500. But in that same paper, there is another shocking statistic - 97% of large cap value investing funds lagged the S&P500 Value Index. So surely, if you what you believe in is value investing, that doesn't prevent you from using a passive index, it just means you should choose the value indexes[1], not that you should suddenly put on your boldest pin stripe suit and start picking stocks. [1]: https://www.ishares.com/us/products/239728/ishares-sp-500-value-etf https://www.ishares.com/us/products/239728/ishares-sp-500-va...
  • belval 5y ago
    1) Management fees. A fund will usually get ~1% as a management fee. That means that if their allocation strategy gives return of 5%, you will see a return of 4%. Index funds have really low fees (<0.2%) so they don't have to perform as much as an actively managed fund to give better returns. You can think of it as moving your average return up by 0.8%, that's very significant, especially when you consider that on average funds don't beat the market. 2) Correct, the article is either written by someone with a lot of time to pick stock and do due diligences or someone who convinced himself that their "gut feel" can beat the market. Either way historically those takes are not great. EDIT: One thing I didn't add. Funds still have a good reason to exist, and that is risk management. Not all financial products want to replicate the SP500 index. You don't want your retirement fund to drop ~25% during a pandemic. That's where funds will shine. They can get you the right mix of bonds, banks and natural resources to stabilize your portfolio to +-4% every year. Some index funds do offer something similar (XCNS, XBAL) but it can still be worth having something actively managed.
    • bern4444 5y ago
      On top of the management fee (which typically is around 2%, they also will take a large percentage of any returns they generate on your behalf (10% - 20%). So if they earn $x of return, you only keep .8 * x. This is the typical 2 and 20 quote. Sometimes it may be 1.5 and 15 or even 1 and 10 but that's the typical range.
• deleted 5y ago
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• Glyptodon 5y ago
  I don't think the value investing concept really addresses the birth rate bomb the author mentions.
• shawnz 5y ago
  Value stocks give better returns because they are riskier, not because of the quality of OP's analysis into what companies are worth. And why do they ignore the fact that indexes can be diversified across countries? These counterarguments seem to only be applicable to single country indexes.
• paulpauper 5y ago
  If you assume that a bad bear market is a 40% drawdown, and since 2009 the S&P 500 has gained 20% on a good year, you only need just 2 good years or a mixture of some good and mediocre years to offset a bear market. So this means staying out of the market even for just 2-4 years may mean never having the chance to buy back at a lower price even in a bear market. Indeed, the market crashed in early 2020 due to Covid but only got as low as where it was in early 2017. Also, huge firms are generating more cash than ever . This is $ that must go to shareholders such as in the form of buybacks , dividends , or retained earnings , even in the absence of growth. A $1 billion company that generates $100 million in annual profit means that every year shareholders become 10% richer even if the company does not grow earnings or size at all. Less fertility not such a big deal if people have more disposable income and high standards of living to offset it. Predictions of overvaluation , crisis, are commonplace and yet the market keeps marching higher. Pays to be optimistic as far as investing is concerned.
  • arberx 5y ago
    History has no value in predicting future returns. You just randomly picked a period to make your point. Many such instances disprove it where the breakeven return is more on the magnitudes of decades. We're approaching a seismic shift in monetary policy, from expansion to compression in a high inflation world—something many investors haven't yet experienced.
    • paulpauper 5y ago
      >History has no value in predicting future returns. You just randomly picked a period to make your point. Many such instances disprove it where the breakeven return is more on the magnitudes of decades. The DJIA has posted real returns since its inception 100 years ago . I like those odds of it continuing to do so. Japan and the Great Depression are outliers. US equities tend to do better than foreign ones. Time sitting out of the market awaiting the crash that never comes means missed returns you will never see, means losing $ to inflation too.
      • arberx 5y ago
• kache_ 5y ago
  I'm too risk averse to hold cash. I unironically denote my assets/nw spreadsheet in the current price of mcdoubles rather than actual dollars.
• lemax 5y ago
  Doesn't dollar cost averaging avoid the whole issue of timing the market? Index investing feels fairly safe to me with DCA if you can stick with it.
  • syntheticcdo 5y ago
    If you have $120k today and the choice is invest $120k immediately or $10k a month for the next 12 months, based on historical trends, it is better to invest the 120k today -- studies have shown lump sum beats DCA about 2/3 of the time. Naturally, if you have $0 today, but are going to have 10k of additional free cash each month for the next 12 months, then 10k each month as soon as possible beats waiting a year for the full 120k.
• nowherebeen 5y ago
  He is confusing country risk with index fund investing. They are two different concepts. Index fund investing is a trading strategy, but if you are investing in a risky country to begin with, it doesn't matter what trading strategy you use. The risk will always be there.
• lottin 5y ago
  This is not very good advice. An index investor is exposed to systemic risk, that is, risks that affect the market as a whole, but the problem is you can't escape systemic risk by investing in individual stocks, because individual stocks also have the same systemic risk... in addition to other risks which are collectively known as idiosyncratic risk. In short, stock-picking is always inherently more risky than index investing. Also Warren Buffet may or may have not beaten the market (depending on who you ask), but even if he has that doesn't mean that value investors, on average, tend to beat the market.
  • marcosdumay 5y ago
    Even if he does beat the market, and you manage to pick the same stocks as he, at the same time, it doesn't mean you will also beat the market. Investing is heavily biased for favoring large players. A normal person has to take that bias into account too.
    • oliv__ 5y ago
      "Investing is heavily biased for favoring large players" How?
      • imtringued 5y ago
        Smaller players may sell their assets to supplement their income or must pick one specific asset class (often a house) because they don't have enough money to diversify. A billionaire that already has absolutely everything he wants will simply get richer automatically while retirees funding their retirement by selling stocks will see their wealth diminish year by year.
      • matheusmoreira 5y ago
        I assume it's because large investors move huge amounts of money. When they trade, they cause ripples all over the market. When we trade, the price barely changes.
        • 5y ago
• glofish 5y ago
  Go to Fidelity.com and search for VTV (Vanguard Value Index Funds) Plot the stock price then select compare to SP500. You can select 1 year, 2 year, 5 year, 10 year, Max range What will you find? For all of those ranges SP500 outperformed VTV. The longer the the period, the larger the margin. As an example over 10 years SP500 went up 220% VTV went up 160% Now your choice is to trust paranoidvalueinvestor.substack.com or actual observations.
  • julienchastang 5y ago
    Your time range is not long enough and it too skewed to a small number of companies that are dominating the sp500. For all of those espousing value investing in this HN discussion, try to read this pay-walled WSJ article one or another: https://www.wsj.com/articles/how-to-understand-this-crazy-year-in-investingand-what-to-do-now-11607698800 https://www.wsj.com/articles/how-to-understand-this-crazy-ye...
    • glofish 5y ago
      I went ahead and compared VTV (Small Value Index) to VTI (Total Stock Market index) that includes all US companies. On the 1 year range the VTI underperformed. Over 2, 5, 10 and Max (18 years) VTI outperforms VTV, the longer the period the larger the difference. But I will say the author is right in that VTV shows less volatility, thus it may offer one more peace of mind.
  • challenger-derp 5y ago
    An assumption being made here is VTV is the kind of value investing you would (personally) define as value investing. I don't know VTV's methodology, but I've encountered ETFs by reputable companies that are quite shabbily managed for their claimed goal.
• dtwest 5y ago
  Reading HN comments about the stock market is like listening to a bunch of MBAs talk about software engineering.
  • FastMonkey 5y ago
    A lot of the posts and comments I see on here are made by people in the dangerous phase between becoming interesting in markets and actually having experience.
  • albertwang 5y ago
    I definitely get your point, but over-generalized comments like these are also dangerous. Just as there are many MBAs who were or are veteran software developers, the HN community is large enough that there are many members who are professional investors.
    • dtwest 5y ago
      You are correct, some know what they are talking about. But there are also many people who think that being a smart person in one field makes them a smart person in every field. It is disrespectful, it implies that they think their field is easier than yours and it must not be that hard to figure out. It is also very easy to spot. I did not mean to imply that everyone is one-dimensional, I personally have professional experience in the finance and software industries and have respect for the people in them. But when some finance expert suddenly becomes an opinionated epidemiologist I call bullshit (a random example that has happened far too often the past few years).
• deleted 5y ago
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• ITB 5y ago
  Many international companies trade in U.S. public markets, even if they are foreign. Like the dollar, the U.S. stock exchanges are to some extent the international exchanges.
• layer8 5y ago
  Investing into a world ETF is fine. If that collapses, you probably have bigger problems.
• kazinator 5y ago
  Index investing does eliminate risks: - an index contains a basket of equities, so it is less risky compared to picking one stock - an index eliminates the risk of the fund manager's investment choices, which may be wonky - it eliminates some management fees (the "risk" of which is 100%). Value investing is almost certainly will be more risky than index investing. If it uses fewer stocks, it's risky due to poor diversification. It can make poor choices. Even if some companies have objective value, they can succumb to a host of other problems and competition. The stock market isn't the only irrational market; the consumer market also is: it doesn't always reward value. If you get someone else to do value investing for you, you may be paying fees. As an individual, small investor, you may need to get into a bigger value fund to get the benefits. And now you're just into another managed fund.
• someelephant 5y ago
  Would be better off getting some therapy and buying index funds. I'm guessing in the long run this person would make a lot more money even after paying for therapy. Unless the plan is to turn this into a paid subscription newsletter. In that case, there are tens of thousands of similarly high anxiety people looking for a similar way out that are willing to pay for this. Paid investment advice is a form of therapy when you think about it.
• jliptzin 5y ago
  I think the point of putting retirement money in an index fund is that you are basically in the same boat as everyone else. If the economy stagnates for 30 years and your money hasn't grown during that time, the same is true for everyone else so your buying power has stayed the same. If there was some kind of market catastrophe and you lose 90% of your money, again everyone is in the same boat as you so at that point you are probably looking at some form of government intervention to keep you whole. On the other hand if you put your money in some alternative assets that didn't do so great and only returned 20% while the S&P returned 1000% over that time then you are really in a bad situation that no one is going to help you out of.
• onpensionsterm 5y ago
  The link makes the point that this information should change the way you invest. I'd argue that it makes more sense to change what you invest - how much you save. If your saving rate is defined by how much you need to save for 4-10% growth to allow you to retire comfortably, you're not saving enough. Save pessimistically & then, if you're wrong, your punishment is that you can just spend more later in life. Of course, most people aren't well-paid SV software engineers and will find themselves unable to save this much. They might be forced to contend with the possibility that saving 10% of your gross income for 40 years is not a sustainable way to guarantee 20-30 years of continual annual leave. Public pensions became popular because the masses feared what would happen when they were too old to work. Effectively, that's a welfare net for being disabled due to old age and should be treated differently from the modern retirement ideal of a healthy, mobile adult playing golf all week.
• bootwoot 5y ago
  The "proof" given that hedge funds can't beat the market is very cherry-picked. The "hedge" in hedge fund is about hedging systemic risk, typically attempting to remain market-neutral. A perfect hedge-fund should have consistent returns every year. Which means it will under-perform in wild bull markets like that of the chosen year. I don't know what the stats are across longer time-spans and/or in bear markets -- but picking a boom year as the "proof" is not useful.
• BeetleB 5y ago
  > The Little Book That Still Beats the Market Go look at people's experiences investing using the advice in this book. It typically is negative. Also, the book really is just a giant ad to subscribe to the author's stock picker. > Professor Aswath Damodaran I've attended his talks. Very entertaining, but he conveniently sets up his valuations in a way that they can't/shouldn't be tested. He even pointed out that it's entirely 100% speculation based on story telling, and that he doesn't care if it's accurate.
• Thrymr 5y ago
  This idea that even professional money managers, let alone amateurs with their own retirement funds, can consistently beat a market index has been debunked for decades by Jack Bogle, Burton Malkiel and others. There is still no good evidence that anyone (no, not even Warren Buffet) can reliably beat the market, and even if there were, you as an average investor would have no chance of identifying them before the fact. Play the market if you want, but don't think you can beat it, and keep the bulk of your long-term savings in index funds. [0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
  • twobitshifter 5y ago
    Your statement about no investors beating the market is demonstrably false. Look at Michael Burry for example. What the statements about index funds say about is the average investor, not the atypical high performer. The argument is also weakened by $0 commission trading which did not exist when those studies were being done. https://en.m.wikipedia.org/wiki/Michael_Burry https://en.m.wikipedia.org/wiki/Michael_Burry > After shutting down his website in November 2000, Burry started the hedge fund Scion Capital, funded by an inheritance and loans from his family. He named it after Terry Brooks' The Scions of Shannara (1990), one of his favorite novels. He quickly earned extraordinary profits for his investors. According to author Michael Lewis, "in his first full year, 2001, the S&P 500 fell 11.88%. Scion was up 55%. Burry was able to achieve these returns by shorting overvalued tech stocks at the peak of the internet bubble.[13] The next year, the S&P 500 fell again, by 22.1%, and Scion was up again: 16%. The next year, 2003, the stock market finally turned around and rose 28.69%, but Burry beat it again, with returns of 50%. By the end of 2004, he was managing $600 million and turning money away."[6] In 2005, Burry started to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly predicted that the real estate bubble would collapse as early as 2007. His research on the values of residential real estate convinced him that subprime mortgages, especially those with "teaser" rates, and the bonds based on these mortgages, would begin losing value when the original rates were replaced by much higher rates, often in as little as two years after initiation. This conclusion led him to short the market by persuading Goldman Sachs and other investment firms to sell him credit default swaps against subprime deals he saw as vulnerable.[14][15][16] During his payments toward the credit default swaps, Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry's analysis proved correct: He made a personal profit of $100 million and a profit for his remaining investors of more than $700 million.[6] Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500, widely regarded as the benchmark for the US market, returned just under 3%, including dividends over the same period.[6]
• chx 5y ago
  When talking about investing you need to read Kahnemann. The entire Thinking Fast And Slow book is very, very good but the relevant part is at https://acquirersmultiple.com/2018/04/daniel-kahneman-the-illusion-of-stock-picking-skill/ https://acquirersmultiple.com/2018/04/daniel-kahneman-the-il... > Our host, a senior investment manager, had invited us to discuss the role of judgment biases in investing. I knew so little about finance that I did not even know what to ask him, but I remember one exchange. “When you sell a stock,” I asked, “who buys it?” He answered with a wave in the vague direction of the window, indicating that he expected the buyer to be someone else very much like him. That was odd: What made one person buy and the other sell? What did the sellers think they knew that the buyers did not? > Nevertheless, the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. > More important, the year-to-year correlation between the outcomes of mutual funds is very small, barely higher than zero.
• jatone 5y ago
  > I'm so risk adverse that even risks that are defined as periods longer than my life span are too risky! ok then nothing useful will be gleaned from this article. lol
• skeeter2020 5y ago
  This article doesn't make an sense. If the timeline for extrapolation supporting an index is too short, how can any single item comprised within the index be better? Do you want to go broke with an index? That will potentially take > 100 years. Everything else is combination of luck and quicker.
• md_ 5y ago
  I do think the author is correct to imply that there's substantial survivorship bias when people talk about US market returns over the 20th century. (A stronger statement than the author makes: the causality is bidirectional; strong US market returns are not merely a consequence of the 20th century being "the American century", but a cause of it.) But equally weighting other country markets is also nonsensical; the lower returns of the Nikkei in the last 20 years go hand-in-hand with that exchange have a smaller total market cap. A more meaningful comparison would be to look at whole-world market-weighted returns, and try to correct for survivorship bias, as the authors of this paper have done: https://www.nber.org/digest/jul97/century-global-stock-markets https://www.nber.org/digest/jul97/century-global-stock-marke....
• pixodaros 5y ago
  A wise person outside the USA once wrote that they never met someone who failed to meet their savings goals because they only earned the market rate on their stocks, but they met many who failed because they did not earn enough, did not save enough, kept their savings in cash, or paid high fees for their investments. Its hard for an individual investor with a few months' to a few years' average income in investments to diversify effectively and not eat up their money in transaction fees and their time researching dozens of companies (including many foreign companies).
• MikeDelta 5y ago
  Maybe he could try bonds or deposits.
• benreesman 5y ago
  I’ve never understood why so many non-professional investors are like making a case to the Internet that they should be stock picking. Very serious hedge funds beat SPY by however much grey edge they have, in spite of much better information, financing, execution, and focus. Beating the indices is hard. Playing the market is fun! People like doing it, and sometimes they come up. It’s fine. But arguing that some random person with a Schwab account has lasting alpha is just sufficiently implausible to border on silly.
• _ink_ 5y ago
  IMHO if there would be an objective way (e.g. some kind of algorithm) to look at the company data and spot value stocks that will outperform the market, then somebody would have created a tool to detect these. Probably there would even be an index and an ETF to invest in. The lack of these indicates to me that stock movement is rather random and that some people are more lucky than others.