Agreed with your points, I just think people seem to overestimate the chances in the last scenario of the individual value investing, we are still only talking about the top 5-10% or so (the data here is less clear, for obvious reasons). That’s impressively high though, probably not far behind mutual funds which despite their many disadvantages do still have a tonne of resources beyond the individual investor - like research and corporate access budgets an individual could only dream of.
I think your binary view on market efficiency is probably confusing a few understandings though, markets are neither perfectly efficient nor inefficient - and if your professor taught it that way then that’s pretty misleading, but that doesn’t make it a myth. It’s clear markets are much more efficient than they were 10, 20, 50 years ago but that said many inefficiencies obviously do exist and present an opportunity.
Yup @Cameron. Also most text books, that I have read, make it clear what the context of the FMH is. Or to use another aphorism used at University “All models are wrong; some are useful”. And neither Buffet nor Munger deny that. References to Buffet complaining about the EMH model often miss both the fact that (1) Buffet makes it clear that his view is that EMH is approximately and/or almost always true and (2) Fama also explicitly stated in his book that it is virtually impossible to consistently “beat the market”. The point is that Fama never said it was impossible. Any interpretation that says otherwise is not faithfully reproducing the original argument.
Some people may have interpreted Fama’s model as never but I don’t think that is how it is taught today and in fact any textbook on my shelves makes it clear that is not the case. Moreover, in any commercial setting, that I am aware of, market efficiency in the sense of Fama is not viewed as something that is absolute but rather a starting point for model development.
Fair point on efficient market theory. Lucky for me I didn’t study economics or finance. But yes, probably best to say markets are mostly efficient but frequently not. I’m not convinced this has changed over the decades. What causes inefficiency is human emotions, fear and greed, and this has not changed for 100,000+ years
His firm’s research finds that buying the outgoing stock in discretionary deletions from the S&P 500 at the closing price on the day it’s removed from the index has beaten the market by an average of nearly 20% over the following 12 months.
Some of the links you posted are polemic and without content. I don’t think throwing random links into a discussion helps anyone and just hurts it.
Over the decades there have been hundreds of professionals or even academics claiming to have found ways to beat the market and every single time it was incorrect calculations or assumptions in backtesting or a statistical fluke that will vanish once published since traders try to act accordingly the anomaly stops. This chairman dude will have done the same.
Every random investment guy cannot be used as an example. You shouldn’t believe everything you read on the internet. Reading these articles actually makes people dumber. Here I recommend reading some Nassim Taleb if you want a polemic but at least intelligent criticism of Modern Finance/Portfolio Theory and on how reading such news makes you know less about the topic. You’re just reading noise not the signal.
I love Taleb’s books, some of the most brilliant stuff ever written.
Back testing etc will be done on formulaic investment strategies which I would not recommend.
Also, we should consider whether passive investing has grown to the point where it is in and of itself now creating market inefficiency. As the episode with Tesla joining the S&P500 showed.
I like to think of the stock market as a wealth redistribution system. It takes from the impatient, shortermist and emotional and gives to the patient, longtermist and unemotional.
Anyway, there’s no need to blindly trust research. I’ve run my own split test for the last ten years and anyone can do this. Put half you funds in an index tracking portfolio and the other half in your own basket of 10-12 stocks and do your own research/ split test. In a decade or so you will start to see if a winner is emerging.
I had the pleasure of reading Tim Harford’s recent book recently - How to make the world add up. Anyone well versed in Data and Stats won’t be surprised with the key points. But he has absolutely great stories in there and if someone wants to start to get a handle on how not to be misled (not just in the the realm of Finance but just about anywhere where numbers are banded about e.g. politics) then I’d recommend reading it.
A quote doesn’t necessarily vinculates me. It never did. It never will.
Far too many are the occasions where people jump into the following conclusion: he posted the link or posted the quote, therefore he agrees or supports the view shared. I find this behavior of jumping into conclusions annoying and superficial and I am happy to be vinculated to this statement. The interpretations of others are their problem, not mine: they say nothing about me, and say something about them.
This post was flagged by someone. Whoever flagged did so without presenting material evidence that the claim was false or wrong. One possible explanation for such behaviour may be that the person flagging it didn’t like the message, or somehow disproves of it for reasons known solely by the flagger.
In my view, rather than flagging, the reasonable adult behaviour would have been to share factual evidence showing the claim is false, wrong or misguided.
If anyone is aware of data that shows the specific claim buying stocks dropped “from the SP500 at the closing price on the day it’s removed from the index has beaten the market by an average of nearly 20% over the following 12 months” on average because of the gigantic scale of the indexes, please share it for the benefit of all. That would be much appreciated
Edit: it seems the post was flagged because I quoted an excessive amount of text which could be in violation of copyright rules. I’ve deleted 5 of the quotes and left only one.
I’d like to thank @bitflip for point it in a post below
I think this is a really interesting idea, it is turning the greatest strengths of these colossal funds into a weakness.
It appears to be that as they grow in size small opportunities exist land a punch, it doesn’t mean you’d win a fight but nothing is stopping someone being long S&P500 then liquidating a % of their holding a few times are year to take advantage before moving back into the ETF’s.
Exactly what I’ve done since I started buying individual stocks a few years ago. The Freetrade insights graph gives some good data as well. Only goes back to March 2020 though:
@raul I have seen this disappearance on other chat discussions too: my assumption is that it potentially broke UK copyright laws (i.e. links are safer than copying and pasting large chunks of text).
There are many “trading tricks” that people use at different times of the year to boost earnings. These have very little to do with whether shares are in these giant funds or not. Moreover, this can be supplemented by “technical analysis”. The latter is a misleading term … it is about assuming certain patterns hold and has nothing to do with “valuation”.
So if the trick mentioned above ‘works’ or has worked many times … I would not be surprised.
So? Some shares like PayPal did great but now are down 40% in a month. 2020 was a volatile year but many stocks have recently retraced. The whole passive vs active is all about long term returns of 5-10 years, not picking individual years as examples.
Easy to have confidence over a few years but very few professional investors even hedge funds etc beat the market over decades. Usually people get too confident in their own abilities after a few years of success. But if you disprove this then good luck to you! I’ve only bought two individual stocks in past year and I’m up 100% on there but 95% of my portfolio is in a mix of Investment Trusts and Passive Funds, just because I believe in risk management.
An 18 month figure may be skewed by some companies doing very well over the short-term e.g Tesla.
I believe the research shows that over the long term i.e >5-10 years, an index will normally beat you.
Good luck but it would be interesting to see this in 2031! I suspect some of those growth stocks you currently have may stagnate in the coming years whereas the index will catch and/or surpass you.
I suspect Elon sold out of Telsa but used his poll as a cover-up for this very reason.
I don’t think throwing random links into a discussion helps anyone and just hurts it.
