by cristiandima on 4/10/21, 6:54 PM with 305 comments
by xyzelement on 4/10/21, 8:13 PM
There will always be a mix of active and passive.
Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on average
This breaks down if passives outnumber actives, or if actives are exceptionally stupid.
Imagine 100% is passive. That means any stock in an index will be bought tomorrow and forever regardless of price. I could exploit that in a ton of ways. For example, do a "squeeze" (think of the recent GME short squeeze but in reverse.)
Or, imagine company X will obviously default but stock keeps going up because passives are obligated to buy. Very easy to exploit by going active!
Finally - think about this. Does your index fund have any GME? That part of your portfolio trades at the price set by Reddit apes. The more of that goes on, the more tempting it is to go "active" on the other side.
by lupire on 4/10/21, 7:41 PM
Also, saying "no more" to refer to a blip fad is a ridiculous healdit.
by jackcosgrove on 4/10/21, 11:39 PM
Risky activities tend to hurt more investors than they help, and lead to a small number of big winners and many losers. You can't just increase risk and increase reward for everyone.
Regarding the predicament Gen Z is in, just remember that the older generations - one of which is very large - will need to sell their assets at some point. I know it's hard to hear, "Be patient" when you are young and have already been patient, but demographics is working against asset values in the next twenty years or so.
by Rury on 4/11/21, 3:19 AM
While the idea behind passive investing may seem like a good one, people often forget it's a double edge sword. By this I mean, when you invest into an ETF or index fund, that money in turn goes into everything underneath it. All too often that money isn't invested in the underlying equities in any intelligent way, and so some of it ends up in ridiculously bad equities. Because of this, there are complete zombie companies that are worth multi billions today, which sell no more than 2 widgets a year and haven't seen growth for nearly a decade... They are only worth so much because money keeps flowing into them from being apart of a hot ETF.
by pmorici on 4/11/21, 3:27 AM
I'm also not sure that I buy the argument made elsewhere in this thread that you need active to make passive work. Indexes upon which funds are based often have a system of rules for how individual stocks are added and removed from the index that are based on the companies financial performance which is what ultimately drives the stock.
by Animats on 4/11/21, 1:04 AM
Um, yes. Retail investors as a class lose money.
Remember, you're betting against people for whom this is their day job, work in a business that drops the losers, and have far more money than you.
by bromquinn on 4/10/21, 8:04 PM
by WalterBright on 4/10/21, 8:13 PM
The longest stock I've held is Boeing (40 years).
by JohnJamesRambo on 4/11/21, 2:00 AM
I think we are reaching the end of that era. I guess we shall see.
by m3kw9 on 4/10/21, 8:18 PM
Long trade is definitely still around, just wait till everyone has other things to do
by CarelessExpert on 4/10/21, 7:39 PM
That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run.
> has catalyzed a lean-in mindset around investing, particularly among Gen Z.
And it will burn them, just like it burned penny stock traders in the 80s and Internet stock traders in the late 90s.
The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. And if that happens en masse, it's not gonna be pretty.
by RickJWagner on 4/11/21, 1:08 AM
We quickly saw that wasn't really the case.
I believe in the Boglehead philosophy..
by xiphias2 on 4/10/21, 8:10 PM
Passive investing means doing what your bank advisor suggests. People are starting to realize that those advisors may not make smarter decisions on where the world is going than the people themselves.
by playingchanges on 4/10/21, 7:46 PM
by kbos87 on 4/11/21, 2:53 PM
Public is an interesting place where you can see behind the curtain of who the folks using these services actually are and what their logic is. (Trades on Public are visible to everyone by default, and it’s basically a giant message board.)
Five minutes in and you’ll see that 98% of the activity looks a lot more like gambling than anything that might be driven by a plan or strategy. That’s fine and I don’t say that to disparage Public’s users, but it’s important to be realistic about what’s going on here.
I believe Public also encourages/seeds the community with celebrities and “experts” / quasi-influencers who are clearly trying to make a name for themselves on the platform. Some of them share basic advice, while others drive short spurts of mania based on their investment decisions. Watching it all play out has solidified in my mind that active investing is a losing game all around.
by tim333 on 4/11/21, 1:30 PM
by worker767424 on 4/11/21, 1:23 AM
by worik on 4/11/21, 2:40 AM
by LatteLazy on 4/11/21, 1:28 PM
The sad thing is I think this is true except that far fewer active trades than hustles make a profit...
by CynicusRex on 4/10/21, 8:07 PM
by user743 on 4/11/21, 3:06 PM
by im3w1l on 4/11/21, 12:01 AM
Then came an uncomfortable realization. There are multiple indices. Which one should you aim to beat and why? This question stuck with me and I didn't manage to resolve it at the time.
Then I learned about the argument that active investors cannot beat passive investors because on average these two groups will hold the same stocks in the same proportions. The active investors are just trading stock back and forth and incurring fees in the process. This seemed logical and convincing at the time.
A few years later I was trying to think on a theorethical level, how can active investors stand a chance against passive investors, if on average they hold the same things, and the passive investors don't incur fees? What I came up with was this: Stocks enter and exit indices. So even index funds have to do the occasional trade. If active investors as a group buy a stock before it enters an index, they can gain a leg up on the passive investors.
Then I thought of something even worse. A bad actor could "poison" the index by founding companies. Trade a few stocks back and forth with a buddy to establish a high market cap. If it makes it into the index, the index funds have to buy from you.*
Another thing that an index fund has to do is buy and sell when people enter and exit the fund, and when it does it has to trade with active investors. If active investors can predict in/outflows into the index-fund they can beat its cap-weighted**performance.
Recently I've been thinking about the inclusion criteria for the index. This kind of ties in with all of the previous threads I mentioned and unifies them. Every index has a bunch of inclusion criteria, this is completely necessary and inescapable or else the poison problem becomes serious. Whichever index you choose, there will be some good companies inside and some bad companies outside. Thus there is no right index to choose. And here is another opportunity for active investors as a group, trying to beat the inclusion criteria of the index. Avoiding the poison better than the index funds. And picking good companies that didn't make it inside, and of course investments that are outside the index because it's in a different region, or because they are not stock at all.
* This is a simple example. You could imagine a much more sophisticated scheme, with many different actors trading stocks back and forth, and mixing real companies in with the duds.
** An example to help the imagination: An index fund falls in value, almost everyone exit the fund. It recovers, people come back. Even though the fund is +-0, the average investor has lost money.
by hehaheha on 4/10/21, 8:25 PM
What’s the economic impact of this behavior though? I want to say it’s generally negative since it’s bound to grossly disrupt proper price discovery but was that even the case before this period of excess leverage? I doubt it.
by Black101 on 4/11/21, 12:49 PM
by voces on 4/11/21, 12:57 AM
I think the resurgance of retail stock trading in the last 2 years or so, is not due to the uncertain economy (again, only big players really benefit from market uncertainty), but because there really were few other places to put your money (negative interests rates, high gold prices, impossible real estate market) and the Fed printing money and keeping the market from collapsing, led to a fairly certain economy, where the Fed would garantuee your losses, but you could keep the wins. This top-down manipulation was obvious enough to trickle down to retail investors using RobinHood.
In smaller, emerging, markets, quantitative active trading has become very competitive. Some markets, still profitable to active trading, are now beaten by a "mindless" passive trading strategy. Like stocks, it makes little sense anymore.
Wallstreet bets is a non-regulated pump-and-dump group, in the upper echelons ethically worse than the owners of the biggest hedge funds (who won't take profit on some plays if they know it causes long-term damage to the economy, the economy being a matter of national security). The GameSpot play made a few of those a millionaire, lost the college funds of people too late to jump on the bandwagon, and done damage to the degree of billions, when hedge - and pension funds had to withdraw from solid businesses such as Google and Amazon, to cover the losses from this memetic war. You can also state that the drivers of the bandwagon, were doing a passive strategy spanning years. It is the active trading of the bandwagon that made their strategy worthwhile (and not a poorly-informed play based on nostalgia and potential).
Numerai also is a passive investing (3 weeks+) fund. They are not that different from a hedge fund buying prop data.
I do think the article is interesting, and adds information on a new emerging trend. But it also reads a bit too kind and objective, like a music journalist describing a new album she isn't a particularly personal fan of. Subtleties will be missed, while the overal picture still is objective and correct to the quality.
As an investor myself, both active and passive, I progressed the most when I learned how the game is played at the top level. Active meme traders should do well to investigate these top players, just like these top players are studying them. RobinHood's order book is fed to the top players. They stand to gain by promoting this active retail trend, and taking near-certified profit on top of these predictable low-information emotion-driven masses. Buy things like Tesla or social media technology, which you as a 20-year-old, see using in 10 years. That's the way to beat the 35 year old senior Goldman Sachs analyst.