Article on passive investing

[toofast2live]

If only TMF UK could publish such quality....

https://www.fool.com/investing/2018/06/ ... ubble.aspx

[tjh290633]

Agreed. A refreshing change to have a sensibly argued point of view

TJH

[GoSeigen]

If only TMF UK could publish such quality....

https://www.fool.com/investing/2018/06/ ... ubble.aspx

There were posters on TMF arguing similar years ago.

GS

[hiriskpaul]

If only TMF UK could publish such quality....

https://www.fool.com/investing/2018/06/ ... ubble.aspx

This is utter garbage, regularly trotted out either by those ignorant of what cap-weighted investing actually means, or those with vested interests they see being undermined by the move to cheaper collective investments.

[Dod101]

If only TMF UK could publish such quality....

https://www.fool.com/investing/2018/06/ ... ubble.aspx

This is utter garbage, regularly trotted out either by those ignorant of what cap-weighted investing actually means, or those with vested interests they see being undermined by the move to cheaper collective investments.

Would you like to expand on these views please?

Dod

[hiriskpaul]

If only TMF UK could publish such quality....

https://www.fool.com/investing/2018/06/ ... ubble.aspx

This is utter garbage, regularly trotted out either by those ignorant of what cap-weighted investing actually means, or those with vested interests they see being undermined by the move to cheaper collective investments.

Would you like to expand on these views please?

Dod

Only briefly because I am going out:

Rule 1 of data analysis - correlation is not causation.

The overall value of the S&P 500 is determined by supply and demand by all market participants - Active and passive S&P500 cap weighted buyers.

The relative pricing of stocks is determined by supply and demand amongst those who do not cap weight, be they individual stock pickers, or alternatively weighted passive investors (smart beta, those making sector bets, equal weighted, value/growth passives, momentum ETFs, etc.).

If the top 25 have outperformed the rest, that has nothing to do with those investing in all the shares by cap weight.

[Dod101]

I am not sure what the article tells us but if I were to start an index fund tomorrow I would start with say £100 million and then look at the index I was proposing to track. If say it is worth £10 billion, then I would need to buy 1% of each constituent of the index at a given time. My total fund would then exactly replicate the index and it would be 1% of its size. Then until there is a change of constituent surely my index fund would exactly replicate the index as the value of each constituent would vary just as the index varies. Or is that too simplistic? I would be putting more into the large cap stocks of course, but proportional to their size. If not I would not be replicating the index so I do not understand what the article is telling us.

Dod

[tramrider]

I am not sure what the article tells us but if I were to start an index fund tomorrow I would start with say £100 million and then look at the index I was proposing to track. If say it is worth £10 billion, then I would need to buy 1% of each constituent of the index at a given time. My total fund would then exactly replicate the index and it would be 1% of its size. Then until there is a change of constituent surely my index fund would exactly replicate the index as the value of each constituent would vary just as the index varies. Or is that too simplistic? I would be putting more into the large cap stocks of course, but proportional to their size. If not I would not be replicating the index so I do not understand what the article is telling us.

Dod

I agree that increasing the size of the index fund should just proportionally increase the holding of each share and not alter the cap-weightings.

Perhaps the conclusion from his results is that all the non-index active fund managers are being rather lazy (inactive!) and all investing most in the top end of the index. I am sure this is a temptation to invest most in the more 'popular' shares at the top of the cap-weighted index.

Tramrider

[GeoffF100]

I am not sure what the article tells us but if I were to start an index fund tomorrow I would start with say £100 million and then look at the index I was proposing to track. If say it is worth £10 billion, then I would need to buy 1% of each constituent of the index at a given time. My total fund would then exactly replicate the index and it would be 1% of its size. Then until there is a change of constituent surely my index fund would exactly replicate the index as the value of each constituent would vary just as the index varies.

Yes, that is exactly right. You just buy a fixed percentage of each constituent and hold forever, unless and until there are corporate actions or companies enter or leave the index. A whole market market weighted tracker does not affect the price of anything.

If you think large cap stocks are overpriced, you can buy a small cap tracker. In the US, you can also buy an equally weighted tracker. Doing either of these makes you an active investor.

The article is complete nonsense. The financial services industry thrives on people who lap up rubbish.

[Lootman]

If only TMF UK could publish such quality....

https://www.fool.com/investing/2018/06/ ... ubble.aspx

This is utter garbage, regularly trotted out either by those ignorant of what cap-weighted investing actually means, or those with vested interests they see being undermined by the move to cheaper collective investments.

The irony is that when TMF US started out it expounded the merits of passive investing for the small investor, and argued against active funds with their higher fees. And against trying to beat the market by picking individual shares.

But at some point TMF went from cute, eccentric market commentator to a business, and it realised that it could not make any money telling small investors to just buy index funds. So it rediscovered the religion of active investing, with all its related products like tip sheets and advisory services.

As to why the top holdings are more concentrated now I think the answer is quite simple. There are a few blockbuster shares who were first or best of breed, like Apple, Amazon, Google and so on. Those are the companies with the best growth profiles and investors will always pay up for growth.

And in fact the US index is very diverisified - certainly much more so than the UK. Even Apple is only about 3% of US market cap. BP has been two to three times that in the UK .

[OhNoNotimAgain]

If only TMF UK could publish such quality....

https://www.fool.com/investing/2018/06/ ... ubble.aspx

This is utter garbage, regularly trotted out either by those ignorant of what cap-weighted investing actually means, or those with vested interests they see being undermined by the move to cheaper collective investments.

The irony is that when TMF US started out it expounded the merits of passive investing for the small investor, and argued against active funds with their higher fees. And against trying to beat the market by picking individual shares.

But at some point TMF went from cute, eccentric market commentator to a business, and it realised that it could not make any money telling small investors to just buy index funds. So it rediscovered the religion of active investing, with all its related products like tip sheets and advisory services.

As to why the top holdings are more concentrated now I think the answer is quite simple. There are a few blockbuster shares who were first or best of breed, like Apple, Amazon, Google and so on. Those are the companies with the best growth profiles and investors will always pay up for growth.

And in fact the US index is very diverisified - certainly much more so than the UK. Even Apple is only about 3% of US market cap. BP has been two to three times that in the UK .

Lootman is dead right. The Fool sold out to the devil many years ago and is now part of the mainstream active industry. Publishing articles knocking passive, or rules-based funds is entirely to be expected.

[Dod101]

So unless the first two or three contributors on this thread were being ironic it just goes to show how people are prepared to accept anything that is written apparently with some 'authority'. It is really quite ridiculous that such articles see the light of day.

I have never thought anything of TMF articles. Either they are so bland as to have no value or they are just trying to sell their wares. Actually I have little truck with most investor articles or indeed with most investment theories.

Dod

[hiriskpaul]

The top 25 shares will have outperformed for a number of reasons and it is possible that the switching from active funds to passive ones may have contributed, but not for the reason discussed in the article. I should point out that I do not have a shred of evidence to suggest that what I am about to say has happened, it is just a scenario that could have contributed to the outperformance. It could also have detracted from the outperformance or had no influence at all.

In the switch from active to passive, shares that were in active funds end up in passive funds. That happens by investors drawing cash from active funds, forcing managers to sell, then putting the cash in passive mutual funds, which is then used by the passive fund managers to buy shares. Alternatively the money may be spent on ETF shares in the secondary market. That increases demand for ETF shares, which is then met by APs creating more ETF shares from underlying shares the APs buy in the secondary market. Either way the result is the same, a net movement of shares from active to passive funds/ETFs. Now if shares bought minus shared sold is not in balance, resulting in a deficit of the top 25 shares, the deficit has to be made up somewhere else. Demand for the top 25 shares will increase and to encourage sellers the price of these shares will need to rise. Again, I have no evidence that this contributed to outperformance and it could easily be that the investors switching from funds underweight the top 25 into active funds overweight the top 25 was responsible for some of the outperformance.

[Alaric]

Again, I have no evidence that this contributed to outperformance and it could easily be that the investors switching from funds underweight the top 25 into active funds overweight the top 25 was responsible for some of the outperformance.

I suppose it must be necessary for the operation of an effective market, that investors seek different objectives, so that actual prices are in equilibrium. With the proliferation of funds seeking to follow a multitude of indexes, perhaps the growth of explicitly passive funds has little impact. Those active funds which are benchmark huggers are likely to mostly replicate an index anyway.

[Dod101]

In fact therefore the whole premise on which the article was based appears to be totally irrelevant, certainly in the absence of any real evidence to the contrary. A complete waste of space.

Dod

[hiriskpaul]

In fact therefore the whole premise on which the article was based appears to be totally irrelevant, certainly in the absence of any real evidence to the contrary. A complete waste of space.

Dod

The whole point of the article is to persuade people to buy their tip sheet instead of simply investing in the S&P 500. The approach is to spout dubious, often repeated nonsense in the hope that some punters will get sucked in. I guess it works to some extent otherwise they wouldn't bother.

They could have discussed the S&P properly instead, but maybe they find dubious nonsense sells more tip sheets than well researched and thought provoking editorial. There are some scary things about the S&P which they could have discussed, such as the historically high valuation, but it has been that way for years and I seem to remember it was something like 3 years from the time Greenspan talked of irrational exuberance and the S&P peak, over which time the S&P more than doubled. So high valuations do not provide helpful sell signals. Another interesting thing is the way the valuation ratios of the growth stocks has accelerated away from value stocks, particularly so over the last 18 months. Something that last happened in the run up to the dot-com crash, but this time round it may all be different of course.

[tjh290633]

The whole point of the article is to persuade people to buy their tip sheet instead of simply investing in the S&P 500. The approach is to spout dubious, often repeated nonsense in the hope that some punters will get sucked in. I guess it works to some extent otherwise they wouldn't bother.

You obviously have not read the article, as there is no attempt to sell a tip sheet, in the way that TMF-UK invariably does.

I have just re-read it to make sure of that point.

There are some prejudices showing here.

TJH

[Lootman]

Another interesting thing is the way the valuation ratios of the growth stocks has accelerated away from value stocks, particularly so over the last 18 months. Something that last happened in the run up to the dot-com crash, but this time round it may all be different of course.

One thing that is "different this time" is that the FAANG stocks have real earnings, which the dot.com enterprises mostly did not.

Throw in the huge cash piles, positive cashflows and YOY earnings growth and those valuations and multiples are not so daunting.

Might they falter? Yes, of course. But where is the better bet?

[hiriskpaul]

The whole point of the article is to persuade people to buy their tip sheet instead of simply investing in the S&P 500. The approach is to spout dubious, often repeated nonsense in the hope that some punters will get sucked in. I guess it works to some extent otherwise they wouldn't bother.

You obviously have not read the article, as there is no attempt to sell a tip sheet, in the way that TMF-UK invariably does.

I have just re-read it to make sure of that point.

There are some prejudices showing here.

TJH

"Click here to be among the first people to hear about..."

Does that not lead to selling a tip sheet? Could be wrong, I have not followed the link.

[hiriskpaul]

Another interesting thing is the way the valuation ratios of the growth stocks has accelerated away from value stocks, particularly so over the last 18 months. Something that last happened in the run up to the dot-com crash, but this time round it may all be different of course.

One thing that is "different this time" is that the FAANG stocks have real earnings, which the dot.com enterprises mostly did not.

Throw in the huge cash piles, positive cashflows and YOY earnings growth and those valuations and multiples are not so daunting.

Might they falter? Yes, of course. But where is the better bet?

It is true that there were a lot of stocks with no earnings, but there were also a lot of large established tech/comms related stocks that had real earnings that also got swept up in the mania, such as Cisco, AT&T and BT in the UK. (Has BT ever regained its dot-com peak price?).

Agree with you though that with these kind of stocks it is not earnings that matter so much as earnings growth. Something even more difficult to forecast than earnings. Sentiment and momentum can have a heavy influence on the share prices as well, both of which can turn on a sixpence.

Better bet? I would say value stocks, but not with any real confidence, so I will keep holding my ETFs but with dividends/allocation adjustments directed more towards value.