GoSeigen wrote:Degsy67 wrote:No agenda. I’m all for debate. Best of luck with those innate set of skills.
Degsy
You might at least state your assumptions clearly. You're assuming markets price stocks correctly. They do not. Far from it. If markets mostly priced stocks correctly your faith in the power of trackers might be justified. But there are at least three basic flaws in the method as far as I can see:
1. People who buy index trackers don't care a jot what price the individual stocks trade at. That means they will pay whatever price is bid by a savvy seller or take whatever price is offered by a savvy buyer [ignoring the fundamental value of the businesses]. For all one hundred (or however many) components. If you want to know why banks have been trading so cheaply for so long this may be one reason. [It's worth noting that these tracker funds have both outflows and inflows.]
2. If they don't care for the price of the individual stocks the corollary is that they don't care about the price of the entire index either! And as usual many of them will be buying at a poor price and selling at a poor price (both for reason 1. and because many are poor timers of the market for whatever reason).
3. A large enough stock of people who don't care about prices implies that much of the time stocks are mispriced. This means not only that the careless investors are losing money on their trades, it also means that with the entire market mispriced, capital is being inefficiently allocated and returns of the entire market will suffer as capital is allocated to poor businesses at the expense of good ones. This further reduces returns to careless investors so they are shooting themselves twice, once in each foot!
Because of the above I believe tracker buyers, especially if they do it without any real care for value, are ripe for exploitation by savvy active investors. Given the undeniable fashion for theses things I think any investor who aspires to actually do what investing is about should largely avoid them and rather focus on individual stocks.
Just a quick aside on why "average returns" might not be particularly attractive:
1. What average are you talking about?
2. If the distribution of returns is skewed (not normally distributed/uneven tails) then are you still happy with an average outcome?
3. If the average/mean itself is worse than it might otherwise have been because of capital misallocation then are you happy with that?
4. How does it help to get the average return over a period if you buy at too high a price and the start and sell at too low a price at the end of the period?
GS
P.S. The above is grounded in my admittedly rusty and average
A-level/engineering-degree-level understanding of statistical maths. Happy for more knowledgeable fools to educate me if I've gone wrong. Or if a mathematician could express the above ideas in clear and simple mathematical expressions that would be wonderful too.
The market is the collective wisdom of millions (billions) of people and computational power, if there is even a high probability of mispricing such as 60/40 odds of a rise/fall - that will be arbitraged out of the market rapidly, typically by those with large financial resources and computer power - to the extent that some even have their computers placed very close to the actual market in order to gain the nano seconds advantage that light speed data transfer conveys at. Some with their single brain and laptop opine that they can outsmart that collective, easier seen with hindsight, foresight however is more inclined to yield below average (market) results.
The average is good, most don't even achieve that (costs/taxes). Similarly most don't lump all-in or all-out at single points in time, more typically they buy (save) over many years, sell (spend) over retirement years. Japan 1989 peak subsequently looked bad over the lost-two-decades, but the average investor adding the same inflation adjusted savings amount each year in the lead up to that, and subsequent same inflation adjusted withdrawal rate from 1990 onward - still resulted in reasonable outcome. Below the broader all-time average, but still OK.
Yes with all averaging in/out some shares will have been purchased at highs, some sold at lows, but it averages (median) out via time-averaging in/out. Other cases will have purchased at lows, sold at highs. Some additionally like to combine stocks and bonds as the periodic rebalancing between those back to target weightings is yet another form of overall averaging/smoothing.
Not caring about what stocks are in the index, or the price paid (sold for) at the time - is not ignorance. It's recognition that with low costs and taxes they're more inclined to achieve the average - that is more than what many will achieve, and is more often good-enough. In contrast those that opine their single brain and laptop can do better than that average more often leads to outcomes worse than had they instead saved into/spent from a cash deposit account. If xyz is thought to be cheap by one, another who sells that person their shares does so in the opinion that its a good time to sell those shares, basic price discovery.
