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If the market always knows best then why do I need traders except for market making purposes? Shouldn't everyone just buy the lowest cost passive ETF of a big e

by kriro 4y ago

If the market always knows best then why do I need traders except for market making purposes? Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains come from some sort of other unfair advantages like the deals only he gets to make). I also think that human behaviour isn't always rational and herd effects and the like are a thing and not always priced in correctly. And while the flow of information feels pretty efficient in this day and age, I also think that there have to be some pockets where individuals can gain informational advantages. I do like Sorros' book (Alchemy of Finance) which is dense and hard to get through but vibed well with me philosophically.

misja111 4y ago
> Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.
- jocaal 4y ago
  You can also save yourself time. I see so many people use enormous amounts of time reading headlines about companies and consuming videos about the economy and all that jazz to stay up to date and make "informed trades". But in the end a lot of that time is wasted. And you might say that's ok if that is their hobby, but lets be honest, the reason people do this is because they got sold on the idea that they can get rich from it.
- bluGill 4y ago
  If everyone invested in index funds, then there would be a lot of money to be made from you alone looking at the market. There are often companies that announce some new product that will (at least for a few years) outsell their competition. Index fund have no way to know that the company will thus be worth more money than their competition, but you do. The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it) I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.
  - edmundsauto 4y ago
    > I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it I'd be curious how you reached this conclusion. The outside view (lots of academic papers on this) is that nobody beats the market over a long time frame. I've often thought this assumes scale-invariance; as I look to make lower volumes of money, I'll see things that aren't worth a real trader's time. Another way I can see this as true is if you don't need to have the money invested all the time - if you strategically pick 1 investment every 5 years, can I expect to beat the market by picking the absolute best trade? Despite those ideas, I concluded long ago that nobody can beat the market over time, with maybe 1-2 exceptions.
    - bluGill 4y ago
      There are a handful of people - Peter Lynch, Warren Buffet... That over the years have proven that thesis false. The vast majority do not beat the market, but the vast majority are investing on emotion and fads. I would have completely missed amazon and google, but there were other companies that would for a while grow at better than market rates that I would have found (or so I think!), and would have been able to get out of in time (this isn't hard because I don't need to call the top, I can be off by many months and still have a nice return). These companies carry much less downside risk vs dot coms - most of which failed, and part of doing well long term is ensuring that your losses are not good because you will have them from time to time. Note that you don't have to beat the market by much to pull this off so long as you live cheap those first years.
      - edmundsauto 4y ago
        > nobody can beat the market over time, with maybe 1-2 exceptions. Apologies for the poor wording. Agreed there do appear to be a few people who beat the market regularly. My perspective is those people are not using the same tools available to even elite traders - Buffett gets really good deals because of who he is. That kind of thing isn't available to anyone else and in the context of "could GP beat the market if they worked really hard and were really smart", it rounds to "nobody can beat it".
lucozade 4y ago
> If the market always knows best then why do I need traders except for market making purposes? You may not. It doesn't follow that the market doesn't. Long term US stock investment isn't the only reason people use capital markets. And even for passive etfs, your counterpart is likely hedging their exposure with someone who you didn't buy the etf from.
TEP_KimIlSung 4y ago
Seems to me you're missing the forest for the trees. "The Market" is the spontaneous order generated by millions of individual transactions seeking equilibrium. Individual traders can fail, be greedy, or succeed, and the market as a whole still balances out. Think of it like a biotope pond, which exists and naturally adjusts to all sorts of conditions, and think of the Federal Reserve and Banks lending practices as a corporation dumping 40 metric tons of mislabled organic fair-trade ketchup into that pond. Too much of even a good thing, still poisons the system.
regpertom 4y ago
I thought the market knows best was kind of a joke. As in all your best reasoning and prayers, but it can still go against you, the market knew best. Is it in the same vein as a wizard being neither early or late, he arrives precisely when he means to (nothing’s ever priced incorrectly)? Or, like a loving mother who beats you (you didn’t properly factor in jupiter)? Depends how you’re feeling, but the market always knows best.
- relaxing 4y ago
  That is not what is meant, and you should stop thinking that.

by kriro 4y ago

misja111 4y ago

> Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then? Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.

jocaal 4y ago
You can also save yourself time. I see so many people use enormous amounts of time reading headlines about companies and consuming videos about the economy and all that jazz to stay up to date and make "informed trades". But in the end a lot of that time is wasted. And you might say that's ok if that is their hobby, but lets be honest, the reason people do this is because they got sold on the idea that they can get rich from it.
bluGill 4y ago
If everyone invested in index funds, then there would be a lot of money to be made from you alone looking at the market. There are often companies that announce some new product that will (at least for a few years) outsell their competition. Index fund have no way to know that the company will thus be worth more money than their competition, but you do. The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it) I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.
- edmundsauto 4y ago
  > I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it I'd be curious how you reached this conclusion. The outside view (lots of academic papers on this) is that nobody beats the market over a long time frame. I've often thought this assumes scale-invariance; as I look to make lower volumes of money, I'll see things that aren't worth a real trader's time. Another way I can see this as true is if you don't need to have the money invested all the time - if you strategically pick 1 investment every 5 years, can I expect to beat the market by picking the absolute best trade? Despite those ideas, I concluded long ago that nobody can beat the market over time, with maybe 1-2 exceptions.
  - bluGill 4y ago
    There are a handful of people - Peter Lynch, Warren Buffet... That over the years have proven that thesis false. The vast majority do not beat the market, but the vast majority are investing on emotion and fads. I would have completely missed amazon and google, but there were other companies that would for a while grow at better than market rates that I would have found (or so I think!), and would have been able to get out of in time (this isn't hard because I don't need to call the top, I can be off by many months and still have a nice return). These companies carry much less downside risk vs dot coms - most of which failed, and part of doing well long term is ensuring that your losses are not good because you will have them from time to time. Note that you don't have to beat the market by much to pull this off so long as you live cheap those first years.
    - edmundsauto 4y ago
      > nobody can beat the market over time, with maybe 1-2 exceptions. Apologies for the poor wording. Agreed there do appear to be a few people who beat the market regularly. My perspective is those people are not using the same tools available to even elite traders - Buffett gets really good deals because of who he is. That kind of thing isn't available to anyone else and in the context of "could GP beat the market if they worked really hard and were really smart", it rounds to "nobody can beat it".

lucozade 4y ago

> If the market always knows best then why do I need traders except for market making purposes? You may not. It doesn't follow that the market doesn't. Long term US stock investment isn't the only reason people use capital markets. And even for passive etfs, your counterpart is likely hedging their exposure with someone who you didn't buy the etf from.

TEP_KimIlSung 4y ago

Seems to me you're missing the forest for the trees. "The Market" is the spontaneous order generated by millions of individual transactions seeking equilibrium. Individual traders can fail, be greedy, or succeed, and the market as a whole still balances out. Think of it like a biotope pond, which exists and naturally adjusts to all sorts of conditions, and think of the Federal Reserve and Banks lending practices as a corporation dumping 40 metric tons of mislabled organic fair-trade ketchup into that pond. Too much of even a good thing, still poisons the system.

regpertom 4y ago

I thought the market knows best was kind of a joke. As in all your best reasoning and prayers, but it can still go against you, the market knew best. Is it in the same vein as a wizard being neither early or late, he arrives precisely when he means to (nothing’s ever priced incorrectly)? Or, like a loving mother who beats you (you didn’t properly factor in jupiter)? Depends how you’re feeling, but the market always knows best.

relaxing 4y ago
That is not what is meant, and you should stop thinking that.