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I expected to see (1995) tagged to the end of this article. I personally know 3 people who run their own money ( <5 million ) who do this as their sole form of
by chollida1 11y ago
I expected to see (1995) tagged to the end of this article.
I personally know 3 people who run their own money ( <5 million ) who do this as their sole form of income.
Having said that, this isn't exactly easy. You need to know
1) if a stock is going into the index
2) when its going into the index
3) how much the index will buy
4) how much the index buy will affect the price of the stock
the first 3 are trivial for some index funds, though most have rules that allow them some leeway here so there aren't always sure things.
The 4th is where you make your money.
And it isn't like there aren't other's doing this, the article makes it seem much easier than it actually is.
If you play the game theory through you'd realize that if you knew the stock is going into the index then you are probably too late to profit from it as someone else will speculate the stock is going to go into the index the week before and already move the stock.
Funds can't really avoid this, and to be honest they don't really care to avoid it. It doesn't affect them at all, they are just supposed to mimic the index. Though you do start to get into a strange feedback loop whereby the index fund that is supposed to track the index starts to dictate how the index moves, we'll call this the "index inception" effect:)
- brownegg 11y ago> I expected to see (1995) tagged to the end of this article. +1. The "making hundreds of millions" part made me laugh too. Bet that's news to the index desks.
- jerf 11y agoIt's a nice, clear example of the anti-inductivity of the market: http://lesswrong.com/lw/yv/markets_are_antiinductive/ http://lesswrong.com/lw/yv/markets_are_antiinductive/ The very act of noticing that something is a good strategy, and beginning to trade on it, will over time drain away the utility of the strategy, until it is useless or worse than useless. Tracking indexes is "big", and has some brute simplicity about it, but eventually the market will eliminate that as a viable investment mechanism. (But that won't stop your metaphorical Dad from swearing up and down you need to buy index funds....)
- vasilipupkin 11y agoYou would think so, but this trading strategy is probably about 20 years old. So, "eventually" could take a very long time
- tosseraccount 11y agoIndex Funds have been around for 40 years. Bogle started the First Index Investment Trust on December 31, 1975. Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in the United States as of 2009. [ source : https://en.wikipedia.org/wiki/Index_fund#Origins https://en.wikipedia.org/wiki/Index_fund#Origins ]
- deleted 11y ago[deleted]
- ForHackernews 11y ago> But that won't stop your metaphorical Dad from swearing up and down you need to buy index funds.... The argument isn't that passive index investing is some kind of perfectly optimal investing strategy, it's that it's the most practical strategy for 98% of normal small, individual investors. If you don't have millions of dollars to invest, and you have a real job that prevents you from spending all your time researching investment opportunities, then you are probably better off just buying the market, instead of flailing around paying fees and trade commissions trying to beat the market. If you believe in the weak form of the Efficient Market Hypothesis, and you are not a professional investor, then you should probably be in index funds.
- Spooky23 11y agoFees are the other key factor. Most investors are really using 401k accounts with captive choices, not a real broker with access to funds and free ETFs. You're almost always better off with an index than the "HR Director Got a Kickback Growth Fund"
- mcguire 11y ago
- toth 11y agoI'm sure you are aware of this and decided not to go into the details, but for the benefit of others it's even a bit more convoluted than that. The index does not "buy" anything, there's a company that manages the index and just decides on the weights of each stock. There are then several mutual funds and ETFs that track that index who will actually have to buy/sell stock. So 3) is really 3a) how much the index weights will change 3b) which funds are tracking the index, and what's their total market cap 3c) what are the net outflows into each stock resulting from previous 2. And sometimes a stock might be entering an index but leaving another (e.g., moving from Russell 2000 to Russell 1000), so the net result might be opposite to what you'd naively expect. So yes, it is possible to make money doing this, but it's not a sure thing.
- brador 11y agoWhat kind of ROI do they get doing this? Better than 5%?
- jobu 11y agoThe article cites American Airlines jumping 11% in the 4 days before it was added to the S&P 500.
- chinathrow 11y agoMultiply that with nice leverage from options.
- frogpelt 11y agoThe American Airlines example is just one of thousands. This does not answer the question about ROI.
- jobu 11y agoIt seems likely that someone could make some decent money shorting stocks before they leave the index funds as well.
- dotnetchris 11y agoMuch riskier proposition because you have no idea of the timeframe of WHEN their positions will be divested. Your margin might get called before it happens and you lose or lose alot. With the long position buying the stock prior to its entry to the index you have a much more reliable indicator that you'll make profit. Honestly the simplest thing to do is just monitor the big houses and whatever they do en masse do the same. Most giant purchases have to be announced and 10M shares aren't just bought on a whim.
- sdenton4 11y agoI actually found $20 on the ground yesterday as I left the Bart. It just sat there, contradicting fundamental economic axioms like it wasn't no thang. And yeah, sure, I picked it up, but I'm also not quitting my day job.
- donjuanica 11y agoAnd where would one look to answer questions 1-3? Doesn't seem as trivial as you make it out to be.