5 ms·

"Investing is heavily biased for favoring large players" How?

by oliv__ 5y ago

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.
- buzzdenver 5y ago
  That is an advantage for the little guy though. If I sell 10 shares when the price is $100, then I'll get $100/share. A huge investor selling 1,000,000 of the same shares might move the price to $98 and average $99/share. Obviously these are made up numbers, and you don't sell a million shares by using just one market order, but the principle is the same. Large investors do have advantages, like better information.
  - matheusmoreira 5y ago
    Where do they get better information?
    - imtringued 5y ago
      It's not really about where, it's that they do it at all. Are you really going to spend 100 hours researching a company before you make a $1000 investment? If you are going to spend millions dollars on a single company long term you're going to spend hundreds of hours on research before you close the deal.
    - buzzdenver 5y ago
      A CEO will answer Blackrock's phone call, not yours. Hedge funds can afford to hire analysts and buy information because they have many orders of magnitude more under management than you or me.
skybrian 5y ago
In Buffett's case, he sometimes gets to buy investments at discounts not available to the general public, and then the stock goes up on the news that he bought them.
- ericmay 5y ago
  Yes, but Buffet doesn't then turn around and sell at that higher price, and even if he did the price would start going down as he sold his position. If his purchase is bad, in the long run the market will punish him, even if the stock price goes up in the short-term due to the positive signal from his purchase. I certainly agree that Buffet can make moves that normal people can't, though. Goldman Sachs in 2008 is a great example.
  - skybrian 5y ago
    Value investing (promoted by Benjamin Graham and adopted by Buffett) is largely about understanding when you're buying at a discount. Getting a discount is better even if you buy and hold. It's harder to do these days because everyone does it, so there are fewer bargains. But Buffett can still do it more often, due to the halo effect.
  - scarface74 5y ago
    He makes deals to limit his downside risks. https://www.forbes.com/sites/adamhartung/2014/11/19/why-you-cant-invest-like-warren-buffett-and-shouldnt-try/ https://www.forbes.com/sites/adamhartung/2014/11/19/why-you-...
dragosmocrii 5y ago
If you have 1000$ to invest and it appreciated 7%, that made you a 70$ profit, which is not much from a coat of living perspective. If you had 1,000,000$ to invest, that gives you 70,000$ profit, which is pretty good at covering living expenses, bit not leaving you much else. Now if you have 10,000,000$ to invest that yields 700,000$ in profit, that is marginally way more and covers living expenses, plus gives you room to invest in other actives, thus improving your chance to grow your wealth.
- luckman212 5y ago
  TL;DR—being rich is better than being poor.
marcosdumay 5y ago
Between fixed cost fees, things that are sealed behind an accreditation process, investments that need real person to person negotiation, opportunities that aren't widely published, and even data that isn't shared with anybody that shows up, I'm really surprised that anybody can be even be mildly surprised by that phrase. There is absolutely no investment transaction where it's not obvious that larger players have it better. Even when entering in a shared fund, more money means lower fees.
- ac29 5y ago
  > There is absolutely no investment transaction where it's not obvious that larger players have it better. Even when entering in a shared fund, more money means lower fees. Fees are so low on index funds that I'm not sure this is really true any more. VTI, the largest broad US stock market ETF, has fees of 3 bp (0.03%). Fidelity even offers some zero fee funds like FZROX (presumably actual expenses are subsidized by other products, though).
  - marcosdumay 5y ago
    Yes, ironically one of the forms of investment that maybe isn't biased (or isn't as much biased) is the same one you should favor because of the bias. There are probably a few others exceptions. For sure they are hard to find, but it's very likely that they exist.
- sacado2 5y ago
  OTOH, as soon as you're a very big investor, you can't really invest a ton of money in, say, a small, discounted stock. Let's say you have ten billions to invest and you find that cute little company at an incredible discount, with a market value of 100 million bucks. Just investing 0.5% of your capital in that stock would mean buying half the company, which would make its price raise dramatically (if it were at all possible). But if you only had 100 millions to invest... I'm pretty sure I've seen Buffett say more than once something like "if only I didn't have all those billions to invest, I would be able to make more money".
- skybrian 5y ago

"Investing is heavily biased for favoring large players" How?

by oliv__ 5y ago

"Investing is heavily biased for favoring large players" How?

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.

buzzdenver 5y ago
That is an advantage for the little guy though. If I sell 10 shares when the price is $100, then I'll get $100/share. A huge investor selling 1,000,000 of the same shares might move the price to $98 and average $99/share. Obviously these are made up numbers, and you don't sell a million shares by using just one market order, but the principle is the same. Large investors do have advantages, like better information.
- matheusmoreira 5y ago
  Where do they get better information?
  - imtringued 5y ago
    It's not really about where, it's that they do it at all. Are you really going to spend 100 hours researching a company before you make a $1000 investment? If you are going to spend millions dollars on a single company long term you're going to spend hundreds of hours on research before you close the deal.
  - buzzdenver 5y ago
    A CEO will answer Blackrock's phone call, not yours. Hedge funds can afford to hire analysts and buy information because they have many orders of magnitude more under management than you or me.

skybrian 5y ago

In Buffett's case, he sometimes gets to buy investments at discounts not available to the general public, and then the stock goes up on the news that he bought them.

ericmay 5y ago
Yes, but Buffet doesn't then turn around and sell at that higher price, and even if he did the price would start going down as he sold his position. If his purchase is bad, in the long run the market will punish him, even if the stock price goes up in the short-term due to the positive signal from his purchase. I certainly agree that Buffet can make moves that normal people can't, though. Goldman Sachs in 2008 is a great example.
- skybrian 5y ago
  Value investing (promoted by Benjamin Graham and adopted by Buffett) is largely about understanding when you're buying at a discount. Getting a discount is better even if you buy and hold. It's harder to do these days because everyone does it, so there are fewer bargains. But Buffett can still do it more often, due to the halo effect.
- scarface74 5y ago
  He makes deals to limit his downside risks. https://www.forbes.com/sites/adamhartung/2014/11/19/why-you-cant-invest-like-warren-buffett-and-shouldnt-try/ https://www.forbes.com/sites/adamhartung/2014/11/19/why-you-...

dragosmocrii 5y ago

If you have 1000$ to invest and it appreciated 7%, that made you a 70$ profit, which is not much from a coat of living perspective. If you had 1,000,000$ to invest, that gives you 70,000$ profit, which is pretty good at covering living expenses, bit not leaving you much else. Now if you have 10,000,000$ to invest that yields 700,000$ in profit, that is marginally way more and covers living expenses, plus gives you room to invest in other actives, thus improving your chance to grow your wealth.

luckman212 5y ago
TL;DR—being rich is better than being poor.

marcosdumay 5y ago

Between fixed cost fees, things that are sealed behind an accreditation process, investments that need real person to person negotiation, opportunities that aren't widely published, and even data that isn't shared with anybody that shows up, I'm really surprised that anybody can be even be mildly surprised by that phrase. There is absolutely no investment transaction where it's not obvious that larger players have it better. Even when entering in a shared fund, more money means lower fees.

ac29 5y ago
> There is absolutely no investment transaction where it's not obvious that larger players have it better. Even when entering in a shared fund, more money means lower fees. Fees are so low on index funds that I'm not sure this is really true any more. VTI, the largest broad US stock market ETF, has fees of 3 bp (0.03%). Fidelity even offers some zero fee funds like FZROX (presumably actual expenses are subsidized by other products, though).
- marcosdumay 5y ago
  Yes, ironically one of the forms of investment that maybe isn't biased (or isn't as much biased) is the same one you should favor because of the bias. There are probably a few others exceptions. For sure they are hard to find, but it's very likely that they exist.
sacado2 5y ago
OTOH, as soon as you're a very big investor, you can't really invest a ton of money in, say, a small, discounted stock. Let's say you have ten billions to invest and you find that cute little company at an incredible discount, with a market value of 100 million bucks. Just investing 0.5% of your capital in that stock would mean buying half the company, which would make its price raise dramatically (if it were at all possible). But if you only had 100 millions to invest... I'm pretty sure I've seen Buffett say more than once something like "if only I didn't have all those billions to invest, I would be able to make more money".
skybrian 5y ago