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Index Investing
04-08-2017, 02:13 PM.
Post: #31
RE: Index Investing
(08-02-2017, 12:28 PM)specuvestor Wrote:
(03-01-2017, 11:31 AM)specuvestor Wrote:
(27-12-2016, 03:43 PM)specuvestor Wrote: The excellent classic 30 year old literature to look at is this (disclaimer: I agree with probably 90% of it):
https://www8.gsb.columbia.edu/articles/c...rinvestors

IMHO index investing is as sexy as the nifty fifties or the portfolio insurance or dot coms. As always there are some fundamental truths in it that is extrapolated to stratosphere. I agree with Buffett though that if one doesn't want to spend effort, ETF are good investment alternatives.

Time is the enemy of the mediocre. Over time most ETF of say 3-5 years life you can see that they underperform their respective indices by the fees compounded and unlike managed funds that are worth their salt, of no way to recover.

(30-12-2016, 08:00 PM)thinknotleft Wrote:
(27-12-2016, 10:14 PM)specuvestor Wrote: If investment outperformance over a cycle is less than 0.3% annualised, then index funds should be the next best thing since sliced bread

Hi specuvestor, can u elaborate what you mean?

Anyway, spdr STI etf has annualised 1 yr returns of 5% as at Nov 16, which is not bad.

If u are looking for outperformance, then index investing is not the place to be in. If u are looking for a very lazy way to invest, index investing may be the place for u.

For the past 5 years 2012-2016 (Note FTSE calculation started in 2008), STI returned 27.9% (5% annualised) while SPDR returned 24.4% (4.5% annualised). This 50bps gap will continue to increase next 5 years and it will NEVER recover because that's the cost of the ETF and low tracking error, not outperformance, is the methodology.

For an absolute return fund worth its salt, over an up-down cycle, approximately from 1 Jan 2012 to 21 Jan 2016 (at cycle low), it should be able to beat 8.3% STI return over that 4+ years after fees, especially over and above the 50bps compounded "sliced bread" cost for ETF. That I think is the bottomline and a reference for VBs here.

By 2018 STI ETF will have a 10 year track record of underperforming FTSE STI by >5% and academics can argue again whether it makes sense.

Going forward I think that should be the value of active fund management vs ETF, not comparing just upside, just downside or tracking error, but over a full cycle. Unfortunately I think most long and hedge funds, as well as investors which don't give the right mandate or timeline, don't get this but focus on the latest trends or themes... resulting in the current bad repute.

What Seth Klarman has to say about ETF:

Perhaps the most distinctive point he makes — at least that finance geeks will appreciate — is what he says is the irony that investors now “have gotten excited about market-hugging index funds and exchange traded funds (E.T.F.s) that mimic various market or sector indices.”
He says he sees big trouble ahead in this area — or at least the potential for investors in individual stocks to profit.
“One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to ‘lock in’ today’s relative valuations between securities,” Mr. Klarman wrote.
“When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership),” he wrote. “Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings.”
To Mr. Klarman, “stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it.”
“This should give long-term value investors a distinct advantage,” he wrote. “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.”

https://www.nytimes.com/2017/02/06/busin....html?_r=0

Another 2 detractors of ETF... Howard Marks and Paul Singer:

https://www.oaktreecapital.com/insights/...arks-memos

and

By Simone Foxman
(Bloomberg) -- Billionaire Paul Singer is warning of a
growing and menacing threat: passive investing.
“Passive investing is in danger of devouring capitalism,”
Singer wrote in his firm’s second-quarter letter dated July 27.
“What may have been a clever idea in its infancy has grown into
a blob which is destructive to the growth-creating and
consensus-building prospects of free market capitalism.”
Almost $500 billion flowed from active to passive funds in
the first half of 2017. The founder of Elliott Management Corp.
contends that passive strategies, which buy a variety of
securities to match the overall performance of an index, aren’t
truly "investing" and that index fund providers don’t have
incentive to push companies to change for the better and create
shareholder value.
Elliott, whose main hedge funds manage $33 billion, is best
known for its high-profile activist and distressed wagers,
including leading a group of holdout creditors seeking repayment
for positions in Argentine debt. One of Singer’s most recent
campaigns -- a bid to buy power distributor Oncor Electric
Delivery Co. -- has pitted him against billionaire Warren
Buffett.


No Voice

“In a passive investing world, small shareholders have
little-to-no voice and no realistic possibility of banding
together, while the biggest shareholders have no (repeat, no)
skin in the game so long as the money manager does not
underperform the index by five-hundredths of a percentage point,
in which case the customer calls up the money manager and starts
yelling,” the letter said. There’s a real likelihood that
passive investing “and its apparent stability, is unsustainable
and brittle.”


-snip-
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

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04-08-2017, 09:15 PM. (This post was last modified: 04-08-2017, 09:16 PM by HyperionTree.)
Post: #32
RE: Index Investing
(26-04-2017, 08:06 AM)gzbkel Wrote: Here is an interesting article by Cullen Roche about what he considers to be "The Biggest Risk of Passive Investing"

http://www.pragcap.com/the-biggest-risk-...investing/

One other factor is that USD nominal interest rates have been going lower and lower after peaking in 1985. That gives 30+ years of downtrend. This should contribute to ETFs outperforming.

Interestingly, Tree said that when the Fed printed money to buy bonds, the money didn't flow into the economy. Instead the money got clogged up in the stock market and in the property market. This is evident by the low velocity of money observed in US. If money is clogged up, then QE had failed to serve its purpose of revitalizing the economy. Instead, stock market and property market bubbles are created around the world. If money is stuck in stocks, and you exclude stocks and property values in calculating inflatoin, of course inflation won't increase during a period of aggressive money printing.

Hyperion notes that while retail went for ETFs, institutions went for tech via the alternative assets route. Many pension funds funded private equity and venture capital funds to invest in technology companies. From the start-up space, to IPOs like Snapchat and tech giants like Amazon, the tech sector is very overvalued. As such, for the last 5 years, the only active managers that beat the indices around the world are those who bought overvalued publicly listed technology companies like the Facebook, Amazon, Alphabet(Google previously), Netflix, Tencent, Alibaba etc.

However, recently funding for start-ups have started to dry up. There are signs that the credit tide is reversing slowly but surely.

What do you guys think?

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13-12-2017, 02:54 PM. (This post was last modified: 13-12-2017, 03:05 PM by hailstorm87.)
Post: #33
RE: Index Investing
Similar to Specuvestor, I have also read the points raised by Howard Marks and consider them to be quite cogently argued and on point.

That said, I think any discussion of market beating returns without a discussion of risk fails to truly address the issue. This typically brings us to the topic of Alpha (the holy grail of investing). For the experienced investors here who have beaten the market, would you regularly measure your 'Alpha' (i.e. the risk adjusted returns that exceed market returns) ? If so, how do you do so? (the Sharpe ratio comes to mind)

Ultimately, it would be quite meaningless to beat the market by increasing the risk taken. Taking a page out of Howard Marks' thinking:
- index investing involves exposure to market risk (and market returns) - and both downside risk and upside risk are chopped off; and
- (ideally) value investing will involve exposure to market risk and chance on the upside (i.e. market returns + upside returns if the upside event materialises) and downside risk is chopped off.

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