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I'm curious if this is demonstrably an optimal strategy for individual investment too... I haven't had much success getting any clear data about whether active

I'm curious if this is demonstrably an optimal strategy for individual investment too... I haven't had much success getting any clear data about whether active management demonstrably produces better results.

asdasdsddd 2y ago
The catch 22 for active management is that if they are actually good then they would just use their strategies to manage their own money.
- deleted 2y ago
  [deleted]
- throwaway3306a 2y ago
  The catch 22 for this assumption is that they want to be richer than their own money would allow
- samus 2y ago
  They probably do. They just make it their day job by selling their services to others as well.
- OJFord 2y ago
  They do. But if you offer the service to other people, you get a lot more money to play with (meaning you can do more or different things than you could with less) and get to charge performance fees etc. in addition to your own capital gains. Really, you could say it about absolutely any job, it's just a bit more direct with managing money. 'If you were any good at writing software you would just sell your own SaaS', etc.
  - asdasdsddd 2y ago
    That's the common claim, but if you actually look at the successful funds that beat market year after year, their public fund is always the low yield, experimental strategies while the internal funds demolish the market. The reality is that most lucrative strategies have a yield cap and people who find them quickly surpass the cap so they just keep the strategies to themselves.
    - OJFord 2y ago
      That doesn't really invalidate my point though: the extra capital gives the option, and the fees.
windwindow 2y ago
There's strong data supporting passive investment. I've found the stats in Andrew Hallam's book, "Balance: How to Invest and Spend for Happiness, Health, and Wealth" (https://www.amazon.ca/Balance-Invest-Happiness-Health-Wealth/dp/1774580756 https://www.amazon.ca/Balance-Invest-Happiness-Health-Wealth...) quite eye-opening.
cornstalks 2y ago
There’s the famous bet Warren Buffett won against an actively managed fund: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
elil17 2y ago
Short answer re: investing in active managers (based on my many years listening to rationalreminder.ca) is that, if you eliminate some of the worst active managers, the average returns net of fees are the same. However, eliminating the worst managers is challenging (but not impossible) to do ex-ante. Even then, you’re only getting the same average returns as indexing, not better. Plus, you will experience a higher dispersion with active managers (greater chance of extreme negative or positive outcome), which is not desirable. Because of these two issues, It’s definitely better to pick an index fund. Re: picking stocks yourself, the answer is also pretty cut and dry. There’s strong evidence no individual trader can expect to beat the market. Active managers can only beat the market gross of fees because they employ large teams of people to do a lot of work to gain a small edge (stuff like predicting retail sales numbers from satellite images of store parking lots). This is my attempt at summarizing a whole field of research in a few sentences. There are many more nuisances. I highly recommend listening to the Rational Reminder podcast if you’re curious about this sort of thing. They interview a lot of academics.
- chii 2y ago
  > a higher dispersion with active managers (greater chance of extreme negative or positive outcome), which is not desirable. some people prefer the chance to win the lottery rather than get a steady income stream.
  - throwaway2037 2y ago
    Except this is a myth. You will not win the lottery without taking crazy amounts of risk. The active managers who do beat a major index for a long, long time almost do not exist in retail space, and they beat the market by a tiny amount (~1%). In my era Legg Mason was the most famous, but even they fell too.
    - selestify 2y ago
      How does that explain Warren Buffet’s spectacular success?
throwaway2037 2y ago
But why stress about beating the market? Just be the market with an ETF that tracks the S&P 500 index. Literally, setup auto invest from your paycheck. Go to sleep (Rip van Winkel style). Wake up 40 years later and retire comfortably. Look at total returns over the last 40 years on the most popular indices in the world. S&P 500 crushes them all. I see a lot of "Internet advice" recommending various MSCI world indices. They are all much worse than the S&P 500.
- theK 2y ago
  Sometimes I wonder whether ETFs that track top valuation will lead to some weird stickyness and overvaluation in say, S&P500.
  - rblatz 2y ago
    I have the same thoughts. Eventually there will be a lot of money to be made breaking the s&p 500.
    - throwaway2037 2y ago
      Can you explain the "breaking" trade? And why haven't we seen more written about it?
      - cess11 2y ago
        Not sure what they mean specifically but you've probably seen a lot written about it, in terms of BRICS, the petrodollar, ARM in China, subsidies on electric cars, and so on. Personally I try to avoid investing in the US for political reasons, besides the wishful expectation that the empire could fall within my lifetime and hence be a not so good investment.
      - rblatz 2y ago
        Think of when George Soros broke The Bank of England for an example of the type of trade. There is a lot of demand for S&P 500 index , but that demand isn’t exactly tied to the fundamentals of the index, and the price isn’t tied to value of the underlying companies, it’s tied to demand of people looking to save money for retirement or a place to store a nest egg. This is an opportunity for price discovery to get things wrong and eventually the market should correct that. https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp https://www.investopedia.com/ask/answers/08/george-soros-ban...
wenc 2y ago
The common refrain is that "time in the market always beats timing the market". The implicit assumption in that refrain is that, despite periodic dips, the U.S. stock market always goes up over time. This has been true since the Great Depression (see graph of S&P 500 since 1929) https://www.officialdata.org/us/stocks/s-p-500/1929 https://www.officialdata.org/us/stocks/s-p-500/1929 The implicit assumption behind that is that the American economy always invents a way to grow. Buffet famously said, "never bet against America". For as long as these assumptions match reality, it's likely that passive management will continue to succeed.
- gizajob 2y ago
  It’s also just capitalism and fiat currency - in a world where the money supply has to inflate, the prices in the market have to go along with it.
- 317070 2y ago
  That is too strong of a condition. The economy doesn't need to grow for passive investing to work. Even when the economy is flat, passive management works. As long as companies are economically productive, capitalism will hand over a chunk of the profits to the owners of the capital. Of course, growth increases the size of that chunk year over year, but capitalism doesn't stop when growth stops. Active investing is when you are looking to exceed this passive margin by timing your trades well. Active investing requires changes in productivity (such as growth).
  - kjksf 2y ago
    Returns from stock investing come from increasing stock prices. Stock prices increase when earnings of the company grow. In other words: when the economy grows. You can argue that Amazon and Apple and Google and Facebook etc. will grow earnings even if the overall economy is flat or shrinks but I don't see how that would apply to passive investing i.e. investing in S&P 500 i.e. investing in 500 largest US companies. S&P 500 is U.S. economy and they all are sensitive to overall economic situation. If people have less money, they buy less stuff. Amazon makes less money, their stock goes down. Apple sells less iPhones, their stock goes down. All other companies make less money, they spend less on advertising, Google and Facebook make less money. I don't see a scenario where overall U.S. (or world) economy declines and S&P 500 doesn't decline. In fact, declining economy is an argument for active investing. Even when overall economy declines, among 6000 companies listed on stock market there will be some that will be growing and if you invest in them, you'll make money.
acchow 2y ago
The general wisdom is that it’s basically impossible for most people to tell the good fund managers from the bad/mediocre ones. Except Warren buffet. A lot of people went with Berkshire Hathaway and did very well.
- throw0101d 2y ago
  > Except Warren buffet. A lot of people went with Berkshire Hathaway and did very well. Buffett has been underperforming the S&P 500 for about twenty years now: * https://www.linkedin.com/pulse/warren-buffett-has-underperformed-sp-500-last-20-years-jain-cfa https://www.linkedin.com/pulse/warren-buffett-has-underperfo... * https://news.ycombinator.com/item?id=37827101 https://news.ycombinator.com/item?id=37827101
danielmarkbruce 2y ago
It's sort of self evident - if you are freakishly capable of spotting mispriced securities in a market full of smart hard working people who are paying attention, you can do better than average. If you aren't freakishly capable... you cant. It's sort of like "does playing pro golf make sense?".
- bumby 2y ago
  There’s an interesting corollary to this. There’s some evidence that low-volatility strategies can outperform, at least when not using leverage. My working theory is that it is due to an overconfidence bias. People who actively trade assume they can pick better stocks, or else they wouldn’t trade. This manifested in more volume in high-beta stocks, leaving low beta stocks undervalued.
- gizajob 2y ago
  They’re only mispriced until they’re not though, or they’re priced well until they’re suddenly mispriced. That is the say the market is an evolving system varying on the time axis - that things are mispriced assumes that time isn’t rolling along and new events don’t happen and new information doesn’t arrive. Everything’s price today is just a guesstimate until tomorrow’s guesstimate following some new data. Granted it’s not like the past where whole companies were sitting there underappreciated because of a lack of analytics, but at the same time coming out of covid companies like Rolls Royce (makes aircraft engines) had their prices crash completely, then were demonstrably “mispriced” for ages and are still recovering now air travel is back to 2019 levels. But the price wasn’t mispriced when the planes weren’t flying, just cheap to those who believed covid would get sorted eventually and the debt RR took on to survive would get repaid.
  - danielmarkbruce 2y ago
    The fact they are mispriced then not mispriced at a later time is almost the entirety of the reason one has the potential to make better than average returns.
llelouch 2y ago
Active does better much better. If you know how the price moves you can easily beat the market.
- abbadadda 2y ago
  Source?
taraparo 2y ago
It is the opposite. Market timing does not work reliably. Active management produces worse results on the long run. no individual trader or active manager can consistently beat the market. however active fonds may have periods (even several years) where they out perform. for private investors buy-and-hold of highly distributed ETFs is the best way to do it. The easiest way to get started is a one ETF portfolio like e. g. Vanguard FTSE All World or SPDR MSCI ACWI IMI. They perform internal rebalancing automatically and you virtually have nothing to do. buy them and don't look at them for the next 20 years.
- TrainedMonkey 2y ago
  Noting that it is possible to beat market, with strategies / algorithms that are generally non-public. For example medallion fund, see https://posts.voronoiapp.com/markets/Jim-Simons-Medallion-Fund-vs-SP-500-Returns-1558 https://posts.voronoiapp.com/markets/Jim-Simons-Medallion-Fu... . Note that these crazy performance stats are after the steep fixed + performance fees.
  - amanaplanacanal 2y ago
    Strangely, the other funds operated by the same company and actually open to outside investors, have not performed as well. It is unexplained exactly why.
    - benrapscallion 2y ago
      Acquired.fm has a great episode on RenTec medallion fund vs their institutional funds. ‘David: The way that some folks we talked to described the difference between the institutional funds and Medallion to us is that Medallion’s average hold time for their trades and positions is (call it) a day, maybe a day-and-a-half. Whereas the average hold time for the institutional funds positions is a couple of months.’
    - mikeyouse 2y ago
      From some of their legal settlements it seems a not insignificant part of their advantage is dreaming up obscure illegal tax dodges on short term capital gains that are later revealed as such to keep more funds invested. https://www.moomoo.com/news/post/5891516/the-biggest-tax-evasion-scandal-in-history-renaissance-fund-may?level=1&data_ticket=1720964443732464 https://www.moomoo.com/news/post/5891516/the-biggest-tax-eva...
pizzalife 2y ago
Yes, read "The little book of common sense investing" by Bogle.
graemep 2y ago
On average yes. An index tracker will get the average market return ignoring fees, so its returns will be those of an average active fund. However, the active find will charge higher fees.
aantix 2y ago
Take a look at the automated systems that have resided on Collective2 for more than 2 years. https://collective2.com/grid https://collective2.com/grid There are only a couple that has a large history of trades, fairly even equity curves, older than two years, and small(ish) drawdowns (< 30%). In other words, it's difficult but possible.

asdasdsddd 2y ago

The catch 22 for active management is that if they are actually good then they would just use their strategies to manage their own money.

deleted 2y ago
[deleted]
throwaway3306a 2y ago
The catch 22 for this assumption is that they want to be richer than their own money would allow
samus 2y ago
They probably do. They just make it their day job by selling their services to others as well.
OJFord 2y ago
They do. But if you offer the service to other people, you get a lot more money to play with (meaning you can do more or different things than you could with less) and get to charge performance fees etc. in addition to your own capital gains. Really, you could say it about absolutely any job, it's just a bit more direct with managing money. 'If you were any good at writing software you would just sell your own SaaS', etc.
- asdasdsddd 2y ago
  That's the common claim, but if you actually look at the successful funds that beat market year after year, their public fund is always the low yield, experimental strategies while the internal funds demolish the market. The reality is that most lucrative strategies have a yield cap and people who find them quickly surpass the cap so they just keep the strategies to themselves.
  - OJFord 2y ago
    That doesn't really invalidate my point though: the extra capital gives the option, and the fees.

windwindow 2y ago

There's strong data supporting passive investment. I've found the stats in Andrew Hallam's book, "Balance: How to Invest and Spend for Happiness, Health, and Wealth" (https://www.amazon.ca/Balance-Invest-Happiness-Health-Wealth/dp/1774580756 https://www.amazon.ca/Balance-Invest-Happiness-Health-Wealth...) quite eye-opening.

cornstalks 2y ago

There’s the famous bet Warren Buffett won against an actively managed fund: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...

elil17 2y ago

Short answer re: investing in active managers (based on my many years listening to rationalreminder.ca) is that, if you eliminate some of the worst active managers, the average returns net of fees are the same. However, eliminating the worst managers is challenging (but not impossible) to do ex-ante. Even then, you’re only getting the same average returns as indexing, not better. Plus, you will experience a higher dispersion with active managers (greater chance of extreme negative or positive outcome), which is not desirable. Because of these two issues, It’s definitely better to pick an index fund. Re: picking stocks yourself, the answer is also pretty cut and dry. There’s strong evidence no individual trader can expect to beat the market. Active managers can only beat the market gross of fees because they employ large teams of people to do a lot of work to gain a small edge (stuff like predicting retail sales numbers from satellite images of store parking lots). This is my attempt at summarizing a whole field of research in a few sentences. There are many more nuisances. I highly recommend listening to the Rational Reminder podcast if you’re curious about this sort of thing. They interview a lot of academics.

chii 2y ago
> a higher dispersion with active managers (greater chance of extreme negative or positive outcome), which is not desirable. some people prefer the chance to win the lottery rather than get a steady income stream.
- throwaway2037 2y ago
  Except this is a myth. You will not win the lottery without taking crazy amounts of risk. The active managers who do beat a major index for a long, long time almost do not exist in retail space, and they beat the market by a tiny amount (~1%). In my era Legg Mason was the most famous, but even they fell too.
  - selestify 2y ago
    How does that explain Warren Buffet’s spectacular success?

throwaway2037 2y ago

But why stress about beating the market? Just be the market with an ETF that tracks the S&P 500 index. Literally, setup auto invest from your paycheck. Go to sleep (Rip van Winkel style). Wake up 40 years later and retire comfortably. Look at total returns over the last 40 years on the most popular indices in the world. S&P 500 crushes them all. I see a lot of "Internet advice" recommending various MSCI world indices. They are all much worse than the S&P 500.

theK 2y ago
Sometimes I wonder whether ETFs that track top valuation will lead to some weird stickyness and overvaluation in say, S&P500.
- rblatz 2y ago
  I have the same thoughts. Eventually there will be a lot of money to be made breaking the s&p 500.
  - throwaway2037 2y ago
    Can you explain the "breaking" trade? And why haven't we seen more written about it?
    - cess11 2y ago
      Not sure what they mean specifically but you've probably seen a lot written about it, in terms of BRICS, the petrodollar, ARM in China, subsidies on electric cars, and so on. Personally I try to avoid investing in the US for political reasons, besides the wishful expectation that the empire could fall within my lifetime and hence be a not so good investment.
    - rblatz 2y ago
      Think of when George Soros broke The Bank of England for an example of the type of trade. There is a lot of demand for S&P 500 index , but that demand isn’t exactly tied to the fundamentals of the index, and the price isn’t tied to value of the underlying companies, it’s tied to demand of people looking to save money for retirement or a place to store a nest egg. This is an opportunity for price discovery to get things wrong and eventually the market should correct that. https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp https://www.investopedia.com/ask/answers/08/george-soros-ban...

wenc 2y ago

The common refrain is that "time in the market always beats timing the market". The implicit assumption in that refrain is that, despite periodic dips, the U.S. stock market always goes up over time. This has been true since the Great Depression (see graph of S&P 500 since 1929) https://www.officialdata.org/us/stocks/s-p-500/1929 https://www.officialdata.org/us/stocks/s-p-500/1929 The implicit assumption behind that is that the American economy always invents a way to grow. Buffet famously said, "never bet against America". For as long as these assumptions match reality, it's likely that passive management will continue to succeed.

gizajob 2y ago
It’s also just capitalism and fiat currency - in a world where the money supply has to inflate, the prices in the market have to go along with it.
317070 2y ago
That is too strong of a condition. The economy doesn't need to grow for passive investing to work. Even when the economy is flat, passive management works. As long as companies are economically productive, capitalism will hand over a chunk of the profits to the owners of the capital. Of course, growth increases the size of that chunk year over year, but capitalism doesn't stop when growth stops. Active investing is when you are looking to exceed this passive margin by timing your trades well. Active investing requires changes in productivity (such as growth).
- kjksf 2y ago
  Returns from stock investing come from increasing stock prices. Stock prices increase when earnings of the company grow. In other words: when the economy grows. You can argue that Amazon and Apple and Google and Facebook etc. will grow earnings even if the overall economy is flat or shrinks but I don't see how that would apply to passive investing i.e. investing in S&P 500 i.e. investing in 500 largest US companies. S&P 500 is U.S. economy and they all are sensitive to overall economic situation. If people have less money, they buy less stuff. Amazon makes less money, their stock goes down. Apple sells less iPhones, their stock goes down. All other companies make less money, they spend less on advertising, Google and Facebook make less money. I don't see a scenario where overall U.S. (or world) economy declines and S&P 500 doesn't decline. In fact, declining economy is an argument for active investing. Even when overall economy declines, among 6000 companies listed on stock market there will be some that will be growing and if you invest in them, you'll make money.

acchow 2y ago

The general wisdom is that it’s basically impossible for most people to tell the good fund managers from the bad/mediocre ones. Except Warren buffet. A lot of people went with Berkshire Hathaway and did very well.

throw0101d 2y ago
> Except Warren buffet. A lot of people went with Berkshire Hathaway and did very well. Buffett has been underperforming the S&P 500 for about twenty years now: * https://www.linkedin.com/pulse/warren-buffett-has-underperformed-sp-500-last-20-years-jain-cfa https://www.linkedin.com/pulse/warren-buffett-has-underperfo... * https://news.ycombinator.com/item?id=37827101 https://news.ycombinator.com/item?id=37827101

danielmarkbruce 2y ago

It's sort of self evident - if you are freakishly capable of spotting mispriced securities in a market full of smart hard working people who are paying attention, you can do better than average. If you aren't freakishly capable... you cant. It's sort of like "does playing pro golf make sense?".

bumby 2y ago
There’s an interesting corollary to this. There’s some evidence that low-volatility strategies can outperform, at least when not using leverage. My working theory is that it is due to an overconfidence bias. People who actively trade assume they can pick better stocks, or else they wouldn’t trade. This manifested in more volume in high-beta stocks, leaving low beta stocks undervalued.
gizajob 2y ago
They’re only mispriced until they’re not though, or they’re priced well until they’re suddenly mispriced. That is the say the market is an evolving system varying on the time axis - that things are mispriced assumes that time isn’t rolling along and new events don’t happen and new information doesn’t arrive. Everything’s price today is just a guesstimate until tomorrow’s guesstimate following some new data. Granted it’s not like the past where whole companies were sitting there underappreciated because of a lack of analytics, but at the same time coming out of covid companies like Rolls Royce (makes aircraft engines) had their prices crash completely, then were demonstrably “mispriced” for ages and are still recovering now air travel is back to 2019 levels. But the price wasn’t mispriced when the planes weren’t flying, just cheap to those who believed covid would get sorted eventually and the debt RR took on to survive would get repaid.
- danielmarkbruce 2y ago
  The fact they are mispriced then not mispriced at a later time is almost the entirety of the reason one has the potential to make better than average returns.

llelouch 2y ago

Active does better much better. If you know how the price moves you can easily beat the market.

abbadadda 2y ago
Source?

taraparo 2y ago

It is the opposite. Market timing does not work reliably. Active management produces worse results on the long run. no individual trader or active manager can consistently beat the market. however active fonds may have periods (even several years) where they out perform. for private investors buy-and-hold of highly distributed ETFs is the best way to do it. The easiest way to get started is a one ETF portfolio like e. g. Vanguard FTSE All World or SPDR MSCI ACWI IMI. They perform internal rebalancing automatically and you virtually have nothing to do. buy them and don't look at them for the next 20 years.

TrainedMonkey 2y ago
Noting that it is possible to beat market, with strategies / algorithms that are generally non-public. For example medallion fund, see https://posts.voronoiapp.com/markets/Jim-Simons-Medallion-Fund-vs-SP-500-Returns-1558 https://posts.voronoiapp.com/markets/Jim-Simons-Medallion-Fu... . Note that these crazy performance stats are after the steep fixed + performance fees.
- amanaplanacanal 2y ago
  Strangely, the other funds operated by the same company and actually open to outside investors, have not performed as well. It is unexplained exactly why.
  - benrapscallion 2y ago
    Acquired.fm has a great episode on RenTec medallion fund vs their institutional funds. ‘David: The way that some folks we talked to described the difference between the institutional funds and Medallion to us is that Medallion’s average hold time for their trades and positions is (call it) a day, maybe a day-and-a-half. Whereas the average hold time for the institutional funds positions is a couple of months.’
  - mikeyouse 2y ago
    From some of their legal settlements it seems a not insignificant part of their advantage is dreaming up obscure illegal tax dodges on short term capital gains that are later revealed as such to keep more funds invested. https://www.moomoo.com/news/post/5891516/the-biggest-tax-evasion-scandal-in-history-renaissance-fund-may?level=1&data_ticket=1720964443732464 https://www.moomoo.com/news/post/5891516/the-biggest-tax-eva...

pizzalife 2y ago

Yes, read "The little book of common sense investing" by Bogle.

graemep 2y ago

On average yes. An index tracker will get the average market return ignoring fees, so its returns will be those of an average active fund. However, the active find will charge higher fees.

aantix 2y ago

Take a look at the automated systems that have resided on Collective2 for more than 2 years. https://collective2.com/grid https://collective2.com/grid There are only a couple that has a large history of trades, fairly even equity curves, older than two years, and small(ish) drawdowns (< 30%). In other words, it's difficult but possible.