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Everytime one of these articles comes up, someone says, "but who will do price discovery, this is terrible" What's the argument that active managers aren't jus

Everytime one of these articles comes up, someone says, "but who will do price discovery, this is terrible" What's the argument that active managers aren't just rent seeking parasites lying about their roles? Why have active fees gone down if they provided value all along?

pkulak 4y ago
> but who will do price discovery, this is terrible Whoever actually believes they have more information than the market and is willing to stake their own money on the proposition. I'd guess that we need surprisingly few of those folks to keep the machinery humming.
michaelt 4y ago
> What's the argument that active managers aren't just rent seeking parasites lying about their roles? "That might be true of other active managers - not me though, this fund I manage has outperformed the market over the past 10 years."
- dmoy 4y ago
  * shovels records of 9 other defunct funds under the rug, to hide any evidence of survivorship bias *
  - briHass 4y ago
    Also, forgets to mention 'before fees'. When the ER is included, it is a loser compared to a low ER index fund.
lvl102 4y ago
Price discovery just happens on a different pace mostly around earnings. But you’re still at the mercy of market makers which is a big problem on its own. We also have bonds/convertibles to help price securities.
deleted 4y ago
[deleted]
oneoff786 4y ago
If everyone invests in the sp500 then the price of the sp500 will climb, guaranteed, because you know that next months paychecks will purchase more of it. You can’t really do anything about this even if you’re actively aware of this mechanism and think it’s fundamentally over valued. It’s like a decentralized Ponzi scheme
- gruez 4y ago
  What isn't a ponzi scheme these days? If you're passively investing in stocks, it's a ponzi because of the reason you outlined. However, if you're actively investing and bought a stock that's a little too popular (eg. tesla), then that's also a ponzi because "the company doesn't make a profit and the way people are making money is from new investors paying older investors". Hell, even if you only buy blue chip stocks with reliable earnings, some of your original complaint is still there (ie. people mindlessly buying it because they know it's reliable, new investors paying old investors).
  - fartcannon 4y ago
    I cant tell if youre joking or not because I sorta do think it is all a scam. I think the stock market is a way to keep the sociopaths doing something less dangerous than continuous war and insurrection. Whether intentionally or not, I think that's it's primary value. It basically magnifies wealth discrepancy which is what the sociopaths want. The rest of us just try not to become poor by playing their games. Whenever everyone gets too close to fair, they invent a new game, or take the ball and go home. You know? I'm only sort of kidding. :D
    - andsoitis 4y ago
      > Whenever everyone gets too close to fair, they invent a new game, or take the ball and go home. who is “they”?
      - fartcannon 4y ago
        Sociopaths
legitster 4y ago
Well, we've kind of known that the benefits of active management would be diminishingly small. In theory they could be working just as hard, but at this point they are being paid to clip coupons that aren't there.
throw0101a 4y ago
> Everytime one of these articles comes up, someone says, "but who will do price discovery, this is terrible" Note that this has been around since 1980: > The Grossman-Stiglitz Paradox is a paradox introduced by Sanford J. Grossman and Joseph Stiglitz in a joint publication in American Economic Review in 1980[1] that argues perfectly informationally efficient markets are an impossibility since, if prices perfectly reflected available information, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse.[2] * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox Paper: * http://www.dklevine.com/archive/refs41908.pdf http://www.dklevine.com/archive/refs41908.pdf * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=228054 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=228054 Price discovery happens at the edges: you probably don't need a lot activity for it. I think we're seeing a lot of the also-ran active managers (slowly) being weeded out, and the remainders will increasingly be those that actually manage to get things right every so often.
- ItsMonkk 4y ago
  This isn't taking into account that there is really no such thing as 'passive'. In reality, passive investors are constantly either investing with their paycheck, or selling in retirement. They are the world's simplest active investors. If you put money into passive then the index buys. If you request money, the index sells. So what you need to track is the net flows. If the net flows are positive, and there is so little active left in the market that no matter what the active investors do the stock still has positive net flows, then active has no other option than to buy. This eventually leads to stocks having an infinite price as there is no downward force. On the other hand, if net flows are negative, then prices go to 0.
  - im3w1l 4y ago
    That's a passive failure mode I haven't seen before. To elaborate on what you said: Imagine an index, and an index fund tracking it. The index fund will own x% of every stock in the index. Someone buys the index fund, and the index fund now try to achieve x+epsilon% in every stock. But what if 100-x% of the stock is owned by diamond-hands hodlers, that wont sell at any price? The index fund bids higher and higher, and the sellers refuse to let their shares go, making the price reach ridiculous levels. The price reaching 0 seems less likely, as there will always be bargain hunters.
jeffreyrogers 4y ago
> What's the argument that active managers aren't just rent seeking parasites lying about their roles? That someone has to set prices and structurally index funds can't do that job. How are prices going to be set without active participants? You could do it by formula I guess, but that would be gamed by companies around earnings time and doesn't account for differences in industries or differences in corporate strategy. > Why have active fees gone down if they provided value all along? That's exactly what you would expect as more firms enter providing the same service. The same thing happens in every other market. More competition drives down margins.
- cyphar 4y ago
  If markets stop being efficient at price discovery, why wouldn't active managers and hedge funds exploit that inefficiency? In other words, why are active managers and their supporters arguing that they aren't good at their job? (The answer is that they would exploit the inefficiency and the market would maintain efficient price discovery, but they'll get more business by fear-mongering around index funds.)
LatteLazy 4y ago
The arguement in both cases is that if someone is doing something useful in a market (like price discovery) they'll be paid according to how useful they are. And if their pay exceeds the cost then they'll profit. If not then your guy (or girl, or other descriptor) isn't useful and you're paying them from your picket. But it's your job to check and move your money accordingly. And you'll be paid for doing so, and penalised for not doing so. If your active manager beats the index (in returns and risk) after fees then he is earning his keep both for you and the world in gen
wsostt 4y ago
You’re not considering that a lot of active managers are helping clients define bespoke investment strategies that suit their assets and liabilities. They set a strategy, pick a benchmark, and invest. In some cases, a portion of those investments may be passive instruments and other portions may be research-driven asset allocation by the manager.
- m3nu 4y ago
  That sounds like a financial adviser, not a manager of an active fund.
  - SkipperCat 4y ago
    There are actively managed funds that hold stocks, bonds and other instruments and constantly balance those ratio on a daily basis to give investors a steady state of returns (think 4% to 6%). A lot of folks who want fixed income returns instead of cap gains growth purchase these funds. Retirees and pension funds are big consumers of these product. This requires complex daily work and would be nearly impossible for a financial advisor to perform.
    - 55555 4y ago
      Can you give any examples of these which can be bought via brokerage account?
      - wsostt 4y ago
        Not OP, but I doubt it. These are individual mandates with mandatory minimums in the tens of millions of dollars for a small shop.
      - SkipperCat 4y ago
        Vanguard targeted retirement funds. VTTHX is their 2035 target fund. They are constantly readjusting their balance of stocks/bond/cash to meet a stable return in the year 2035. Virtus AZNAX is another fund that blends a bunch of financial instruments to achieve a targeted return. There's plenty others and they're all available from any retail brokerage firm.
whimsicalism 4y ago
Price discovery can be left to the prop traders.
blitzar 4y ago
> "but who will do price discovery, this is terrible" - just rent seeking parasites lying about their roles I think you copied and pasted your rant from a different rant about finance as it really doesnt have anything to do with this.
IMSAI8080 4y ago
There'll never be a shortage of people who think they can beat the market. Market beating is just such a compelling illusion. Also passive funds are not quite 100% passive. What does everyone do when they're broke? Stop investing. How about when times are good? Pile more into investments. There's also many different types of passive funds with slightly different biases. There's world passive funds (which have maybe 40% not in the S&P). There's passive funds that track other specific countries. There's ESG passive funds that avoid oil companies and such. There's passive that skips China. There's investor biases in there and prices being discovered all over.
- Invictus0 4y ago
  Yes, Berkshire Hathaway and Renaissance are just figments of the imagination.
  - lotsofpulp 4y ago
    Has BRK outperformed SP500 since 2009?
  - IMSAI8080 4y ago
    Now throw in all the other active funds and average them out. Also Berkshire would not have been the better investment over the last decade. Can you guarantee me Berkshire will pull ahead before I retire?
    - Invictus0 4y ago
      What a silly thing to stay. Let me just ignore that and explain why Berkshire works. It's possible to beat the market because it's possible to buy $1 for $0.95. That's the whole trick. It takes a lot of work, a lot of smart people, and you have to make big enough deals to cover the cost of paying the managers, but yes, these opportunities exist and they are abundant. The real mistake is thinking that the market is a bunch of random number generators with no rhyme or reason to it. But no, there are no guarantees--the SPY doesn't come with a guarantee either.
andi999 4y ago
Personally, I dont think price discovery is the biggest problem, but no overseight of the board of directors. Etf do not actively vote (as far as i understand). So this opens up for management and minority owners to run the comopany badly (or even plunder it). This is a negative effect in the long run though.
- matthewowen 4y ago
  BlackRock absolutely votes. The concern is arguably the _opposite_: in the index model ownership is concentrated in a few large institutions with very broad diversification, which creates some odd incentives. Matt Levine has a bunch of articles touching on this topic.
  - cromka 4y ago
    But ultimately the indices are incentivized by the underlying companies' growth, as to make their customers happy, thus it is in their best interest to take sane votes?
- kwere 4y ago
  they vote , usually against all stewardship bogus they like to signal [0]. [0] https://shareaction.org/news/new-data-shows-scant-improvement-in-fund-managers-voting-on-esg-resolutions https://shareaction.org/news/new-data-shows-scant-improvemen...
missedthecue 4y ago
Wouldn't fees go down as a result of more competition in the sector?
jshaqaw 4y ago
Interest to revisit such militant attitudes should the current crash of inflated bullshit techcos continue. Is your kids 529 plan on the S&P. Well congrats - you got to buy Tesla at the peak of Elon’s pump train just in time to be a ticket holder for his self-immolation show. Does your 401k hold small cap exposure to the Russell. Yippee you get to be the bag holder for a good chunk of the SPAC garbage VCs dumped into public markets based on things like projections that personal electric helicopter taxis would become ubiquitous in US urban markets by 2025. Passive investing got gamed by Silicon Valley and isn’t exactly what Bogle had in mind when he got started.
- sepiasaucer 4y ago
  I don’t understand what point you are trying to make. Specific stocks being bad investments is not an argument against passive investing. The whole point of index funds is to diversify your portfolio so you track the overall market, not any specific stock or group of stocks. If you are assuming you know which stocks/sectors are under or overvalued, then I guess active investing makes sense, but that seems like a flawed premise to start from.
  - jshaqaw 4y ago
    You aren’t tracking the whole market. An index is a subset. Even total market indices have weightings which embed biases. And the whole game has been reverse engineered by charlatans to dump crap into rivers of blind money. If think capital offerings aren’t designed explicitly to target index inclusion criteria then you aren’t in on the joke.
    - cromka 4y ago
      > And the whole game has been reverse engineered by charlatans to dump crap into rivers of blind money. If think capital offerings aren’t designed explicitly to target index inclusion criteria then you aren’t in on the joke. This is an interesting and plausible take, just wondering if you have actual published resources on that or is it your personal, arguably justified hunch?
FunnyBadger 4y ago
The market does price discovery if it's not program traded. What markets are doing is recording and publishing the results of auctions for the particular good as a time series of data. Indexes hide some of that but there's something far worse: HFT. The problem is that program trading and HFT has far more in common with the old Scientific American COREWAR game than it does with the fundamentals of price discovery. The buy/sell decisions are about gaming other players rather than discovering price. There are also nonlinear feedback loops with very short loop time constants created that are "nonconservative" in a physics sense and create instablity. The fact that hard limits are required to deal with flash crashes is a warning, not a solution!!

pkulak 4y ago

> but who will do price discovery, this is terrible Whoever actually believes they have more information than the market and is willing to stake their own money on the proposition. I'd guess that we need surprisingly few of those folks to keep the machinery humming.

michaelt 4y ago

> What's the argument that active managers aren't just rent seeking parasites lying about their roles? "That might be true of other active managers - not me though, this fund I manage has outperformed the market over the past 10 years."

dmoy 4y ago
* shovels records of 9 other defunct funds under the rug, to hide any evidence of survivorship bias *
- briHass 4y ago
  Also, forgets to mention 'before fees'. When the ER is included, it is a loser compared to a low ER index fund.

lvl102 4y ago

Price discovery just happens on a different pace mostly around earnings. But you’re still at the mercy of market makers which is a big problem on its own. We also have bonds/convertibles to help price securities.

deleted 4y ago

[deleted]

oneoff786 4y ago

If everyone invests in the sp500 then the price of the sp500 will climb, guaranteed, because you know that next months paychecks will purchase more of it. You can’t really do anything about this even if you’re actively aware of this mechanism and think it’s fundamentally over valued. It’s like a decentralized Ponzi scheme

gruez 4y ago
What isn't a ponzi scheme these days? If you're passively investing in stocks, it's a ponzi because of the reason you outlined. However, if you're actively investing and bought a stock that's a little too popular (eg. tesla), then that's also a ponzi because "the company doesn't make a profit and the way people are making money is from new investors paying older investors". Hell, even if you only buy blue chip stocks with reliable earnings, some of your original complaint is still there (ie. people mindlessly buying it because they know it's reliable, new investors paying old investors).
- fartcannon 4y ago
  I cant tell if youre joking or not because I sorta do think it is all a scam. I think the stock market is a way to keep the sociopaths doing something less dangerous than continuous war and insurrection. Whether intentionally or not, I think that's it's primary value. It basically magnifies wealth discrepancy which is what the sociopaths want. The rest of us just try not to become poor by playing their games. Whenever everyone gets too close to fair, they invent a new game, or take the ball and go home. You know? I'm only sort of kidding. :D
  - andsoitis 4y ago
    > Whenever everyone gets too close to fair, they invent a new game, or take the ball and go home. who is “they”?
    - fartcannon 4y ago
      Sociopaths

legitster 4y ago

Well, we've kind of known that the benefits of active management would be diminishingly small. In theory they could be working just as hard, but at this point they are being paid to clip coupons that aren't there.

throw0101a 4y ago

> Everytime one of these articles comes up, someone says, "but who will do price discovery, this is terrible" Note that this has been around since 1980: > The Grossman-Stiglitz Paradox is a paradox introduced by Sanford J. Grossman and Joseph Stiglitz in a joint publication in American Economic Review in 1980[1] that argues perfectly informationally efficient markets are an impossibility since, if prices perfectly reflected available information, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse.[2] * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox Paper: * http://www.dklevine.com/archive/refs41908.pdf http://www.dklevine.com/archive/refs41908.pdf * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=228054 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=228054 Price discovery happens at the edges: you probably don't need a lot activity for it. I think we're seeing a lot of the also-ran active managers (slowly) being weeded out, and the remainders will increasingly be those that actually manage to get things right every so often.

ItsMonkk 4y ago
This isn't taking into account that there is really no such thing as 'passive'. In reality, passive investors are constantly either investing with their paycheck, or selling in retirement. They are the world's simplest active investors. If you put money into passive then the index buys. If you request money, the index sells. So what you need to track is the net flows. If the net flows are positive, and there is so little active left in the market that no matter what the active investors do the stock still has positive net flows, then active has no other option than to buy. This eventually leads to stocks having an infinite price as there is no downward force. On the other hand, if net flows are negative, then prices go to 0.
- im3w1l 4y ago
  That's a passive failure mode I haven't seen before. To elaborate on what you said: Imagine an index, and an index fund tracking it. The index fund will own x% of every stock in the index. Someone buys the index fund, and the index fund now try to achieve x+epsilon% in every stock. But what if 100-x% of the stock is owned by diamond-hands hodlers, that wont sell at any price? The index fund bids higher and higher, and the sellers refuse to let their shares go, making the price reach ridiculous levels. The price reaching 0 seems less likely, as there will always be bargain hunters.

jeffreyrogers 4y ago

> What's the argument that active managers aren't just rent seeking parasites lying about their roles? That someone has to set prices and structurally index funds can't do that job. How are prices going to be set without active participants? You could do it by formula I guess, but that would be gamed by companies around earnings time and doesn't account for differences in industries or differences in corporate strategy. > Why have active fees gone down if they provided value all along? That's exactly what you would expect as more firms enter providing the same service. The same thing happens in every other market. More competition drives down margins.

cyphar 4y ago
If markets stop being efficient at price discovery, why wouldn't active managers and hedge funds exploit that inefficiency? In other words, why are active managers and their supporters arguing that they aren't good at their job? (The answer is that they would exploit the inefficiency and the market would maintain efficient price discovery, but they'll get more business by fear-mongering around index funds.)

LatteLazy 4y ago

The arguement in both cases is that if someone is doing something useful in a market (like price discovery) they'll be paid according to how useful they are. And if their pay exceeds the cost then they'll profit. If not then your guy (or girl, or other descriptor) isn't useful and you're paying them from your picket. But it's your job to check and move your money accordingly. And you'll be paid for doing so, and penalised for not doing so. If your active manager beats the index (in returns and risk) after fees then he is earning his keep both for you and the world in gen

wsostt 4y ago

You’re not considering that a lot of active managers are helping clients define bespoke investment strategies that suit their assets and liabilities. They set a strategy, pick a benchmark, and invest. In some cases, a portion of those investments may be passive instruments and other portions may be research-driven asset allocation by the manager.

m3nu 4y ago
That sounds like a financial adviser, not a manager of an active fund.
- SkipperCat 4y ago
  There are actively managed funds that hold stocks, bonds and other instruments and constantly balance those ratio on a daily basis to give investors a steady state of returns (think 4% to 6%). A lot of folks who want fixed income returns instead of cap gains growth purchase these funds. Retirees and pension funds are big consumers of these product. This requires complex daily work and would be nearly impossible for a financial advisor to perform.
  - 55555 4y ago
    Can you give any examples of these which can be bought via brokerage account?
    - wsostt 4y ago
      Not OP, but I doubt it. These are individual mandates with mandatory minimums in the tens of millions of dollars for a small shop.
    - SkipperCat 4y ago
      Vanguard targeted retirement funds. VTTHX is their 2035 target fund. They are constantly readjusting their balance of stocks/bond/cash to meet a stable return in the year 2035. Virtus AZNAX is another fund that blends a bunch of financial instruments to achieve a targeted return. There's plenty others and they're all available from any retail brokerage firm.

whimsicalism 4y ago

Price discovery can be left to the prop traders.

blitzar 4y ago

> "but who will do price discovery, this is terrible" - just rent seeking parasites lying about their roles I think you copied and pasted your rant from a different rant about finance as it really doesnt have anything to do with this.

IMSAI8080 4y ago

There'll never be a shortage of people who think they can beat the market. Market beating is just such a compelling illusion. Also passive funds are not quite 100% passive. What does everyone do when they're broke? Stop investing. How about when times are good? Pile more into investments. There's also many different types of passive funds with slightly different biases. There's world passive funds (which have maybe 40% not in the S&P). There's passive funds that track other specific countries. There's ESG passive funds that avoid oil companies and such. There's passive that skips China. There's investor biases in there and prices being discovered all over.

Invictus0 4y ago
Yes, Berkshire Hathaway and Renaissance are just figments of the imagination.
- lotsofpulp 4y ago
  Has BRK outperformed SP500 since 2009?
- IMSAI8080 4y ago
  Now throw in all the other active funds and average them out. Also Berkshire would not have been the better investment over the last decade. Can you guarantee me Berkshire will pull ahead before I retire?
  - Invictus0 4y ago
    What a silly thing to stay. Let me just ignore that and explain why Berkshire works. It's possible to beat the market because it's possible to buy $1 for $0.95. That's the whole trick. It takes a lot of work, a lot of smart people, and you have to make big enough deals to cover the cost of paying the managers, but yes, these opportunities exist and they are abundant. The real mistake is thinking that the market is a bunch of random number generators with no rhyme or reason to it. But no, there are no guarantees--the SPY doesn't come with a guarantee either.

andi999 4y ago

Personally, I dont think price discovery is the biggest problem, but no overseight of the board of directors. Etf do not actively vote (as far as i understand). So this opens up for management and minority owners to run the comopany badly (or even plunder it). This is a negative effect in the long run though.

matthewowen 4y ago
BlackRock absolutely votes. The concern is arguably the _opposite_: in the index model ownership is concentrated in a few large institutions with very broad diversification, which creates some odd incentives. Matt Levine has a bunch of articles touching on this topic.
- cromka 4y ago
  But ultimately the indices are incentivized by the underlying companies' growth, as to make their customers happy, thus it is in their best interest to take sane votes?
kwere 4y ago
they vote , usually against all stewardship bogus they like to signal [0]. [0] https://shareaction.org/news/new-data-shows-scant-improvement-in-fund-managers-voting-on-esg-resolutions https://shareaction.org/news/new-data-shows-scant-improvemen...

missedthecue 4y ago

Wouldn't fees go down as a result of more competition in the sector?

jshaqaw 4y ago

Interest to revisit such militant attitudes should the current crash of inflated bullshit techcos continue. Is your kids 529 plan on the S&P. Well congrats - you got to buy Tesla at the peak of Elon’s pump train just in time to be a ticket holder for his self-immolation show. Does your 401k hold small cap exposure to the Russell. Yippee you get to be the bag holder for a good chunk of the SPAC garbage VCs dumped into public markets based on things like projections that personal electric helicopter taxis would become ubiquitous in US urban markets by 2025. Passive investing got gamed by Silicon Valley and isn’t exactly what Bogle had in mind when he got started.

sepiasaucer 4y ago
I don’t understand what point you are trying to make. Specific stocks being bad investments is not an argument against passive investing. The whole point of index funds is to diversify your portfolio so you track the overall market, not any specific stock or group of stocks. If you are assuming you know which stocks/sectors are under or overvalued, then I guess active investing makes sense, but that seems like a flawed premise to start from.
- jshaqaw 4y ago
  You aren’t tracking the whole market. An index is a subset. Even total market indices have weightings which embed biases. And the whole game has been reverse engineered by charlatans to dump crap into rivers of blind money. If think capital offerings aren’t designed explicitly to target index inclusion criteria then you aren’t in on the joke.
  - cromka 4y ago
    > And the whole game has been reverse engineered by charlatans to dump crap into rivers of blind money. If think capital offerings aren’t designed explicitly to target index inclusion criteria then you aren’t in on the joke. This is an interesting and plausible take, just wondering if you have actual published resources on that or is it your personal, arguably justified hunch?

FunnyBadger 4y ago

The market does price discovery if it's not program traded. What markets are doing is recording and publishing the results of auctions for the particular good as a time series of data. Indexes hide some of that but there's something far worse: HFT. The problem is that program trading and HFT has far more in common with the old Scientific American COREWAR game than it does with the fundamentals of price discovery. The buy/sell decisions are about gaming other players rather than discovering price. There are also nonlinear feedback loops with very short loop time constants created that are "nonconservative" in a physics sense and create instablity. The fact that hard limits are required to deal with flash crashes is a warning, not a solution!!