Would have thought that survivorship bias is a positive reason to invest in indexes...the weak and crappy companies (the stock market makes its judgement and sends the share price down) are weeded out every quarter to make room for the strong and successful.
What are the arguments against index investing?
- Thread starter Sotnis
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Would have thought that survivorship bias is a positive reason to invest in indexes...the weak and crappy companies (the stock market makes its judgement and sends the share price down) are weeded out every quarter to make room for the strong and successful.
Sure. that's a risk. There is no free lunch.
Overtime stocks perform well because typically companies (as a whole) earn more than their fixed income and their equity costs of capital. While valuations are volatile (over the course of a lifespan) aggregate earnings continue to grow as the economy grows and the world becomes more efficient.
It's a social argument mostly put forward by guys like Warren Buffet who make their living picking stocks (allocating capital to whom they think should win).
There is a wonderful series by Ploutos on Seeking Alpha called Five Simple Ways to Beat the Market. His suggests are indeed extremely simple. One could also look at a very simple momentum system, such as that proposed by Faber in The Ivy Portfolio (he does not claim to beat the market, only to obtain the same returns as the market with less volatility, which is really the same thing as beating the market).
Although there is a lot of underperformance around, one needs to remember that pension funds and mutual funds have charters. They cannot invest however they want to, and changing anything to adapt to market conditions is like turning a battleship. However, the individual investor has a different set of opportunities and can be more nimble, and may be able to beat the market using simple methods.
Although there is a lot of underperformance around, one needs to remember that pension funds and mutual funds have charters. They cannot invest however they want to, and changing anything to adapt to market conditions is like turning a battleship. However, the individual investor has a different set of opportunities and can be more nimble, and may be able to beat the market using simple methods.
ha, ha ,ha...Only a few lucky "Beat the Market", most lose by not being in the market.
Some win, some lose in the market. While others who not in market win or lose.
It is just how many lost or win .
It is a number game.
My friend, you just called Mr Buffet , his professor Graham and all the likes, silly.
Please apologize.
Please apologize.
The amount of capital available needs to be in a "sweet" spot for the retail investor to outperform an index. Most are under-capitalized and look for lottery ticket stocks.
Earlier in the thread it was mentioned that the odds of selecting a stock to beat the S&P was 1:500. This is wrong. It is 50:50. As a general proposition, half the stocks in the S&P outperform, half under-perform (I realize this is not 100% accurate due to weightings and extremes of performance values, but for this post it is close enough to explain the concept).
What 3 to 5 sectors will outperform the index?
What 5 stocks in each sector will outperform their peers?
Now you have a basket of 15 to 25 stocks that have good odds of exceeding the index while having the gremlin of risk duct taped into its chair.
The problem is many individuals do not have the capital. To buy a small holding of 10,000 $USD per stock requires 250M. Throwing a thousand bucks into an index without thinking is so much easier. Oh yes, the self-defined basket of 25 requires significant time to manage, the capacity to think, the capacity to not self-deceive, and a lot of people are just lazy.
Mr. Buffett has commented on the other extreme, of having too much capital, so that there are not enough opportunities, but if you are in that situation, you are not reading this.
Earlier in the thread it was mentioned that the odds of selecting a stock to beat the S&P was 1:500. This is wrong. It is 50:50. As a general proposition, half the stocks in the S&P outperform, half under-perform (I realize this is not 100% accurate due to weightings and extremes of performance values, but for this post it is close enough to explain the concept).
What 3 to 5 sectors will outperform the index?
What 5 stocks in each sector will outperform their peers?
Now you have a basket of 15 to 25 stocks that have good odds of exceeding the index while having the gremlin of risk duct taped into its chair.
The problem is many individuals do not have the capital. To buy a small holding of 10,000 $USD per stock requires 250M. Throwing a thousand bucks into an index without thinking is so much easier. Oh yes, the self-defined basket of 25 requires significant time to manage, the capacity to think, the capacity to not self-deceive, and a lot of people are just lazy.
Mr. Buffett has commented on the other extreme, of having too much capital, so that there are not enough opportunities, but if you are in that situation, you are not reading this.
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25 stocks ....$10k per stock..$250k