PF Investing Club

Per the above: no investor, disciplined or otherwise, professional or amateur, human or computer should be doing any work to analyze individual companies when it comes to setting up long-term retirement investment funds.

That goes against common sense. How do you choose a company to invest in without due diligence in evaluating the performance of the company and using trusted techniques in assessing the possibility of future success? You need to understand what the company is doing how it is doing it and determine when the company is no longer able to reasonably live up to your expectations.

Mentor
That's like saying if 95% of high school students can't understand theoretical physics, we should give up expecting any of them to understand it.
No, it really isn't. In this example, *none* of them understand physics.
I agree with the advice that index funds are good choice if the decision is to pick an index fund at random versus pick a managed fund at random.
You're trying to find a way around the fundamental issue: if we knew which 5% were "good" and they were *actually* good, we could just invest with them and all the rest would go away, leaving us, in short order, only with those "good" funds. The fact that this doesn't happen tells us that these "good" funds simply don't exist.
(!) I wonder what salaries pension fund managers make.
They make a ton of money, especially considering that they reduce value instead of increasing it.
Are there yet many computer managed funds? Do we have extensive statistics about their performance?
All managed funds are at least in part computer managed.
I merely asked a question. I don't know how computers will impact the long term behavior of the stock market.
Fair enough: I got the impression you thought they could had had an idea of how.
That's wasn't the focus of my question. HFT came up only as an example that computers are already a factor in the markets.
Fair enough.

Mentor
It interesting to me that many people who don't accept consensus opinions about politics, nuclear power, global warming etc, are willing to defer to the consensus opinion of "the market" about stock prices.
I'm not sure about the former, but on the latter, I think what you are missing here is that it doesn't matter if you accept the consensus opinion or not, you are still bound by it. A share of facebook stock costs $149 today, whether you agree that it is properly priced or not! If you want to buy or sell today, that is the price you have to buy/sell at. I have exactly as much ability to change how stock prices are determined as I do to change the weather. So I had better accept it and dress accordingly. Science Advisor So I think we largely agree that short term trading is a gambling game where some can win and others lose. In any stock transaction, whether by short or long-term holders of stocks, both sides can gain. The seller gains immediate funds, the buyer gets hope of future gains. I agree that buyer can lose if his future gain doesn't materialize. I agree that the seller can lose vis-a-vis what he originally paid for the stock or lose the opportunity of making an even greater gain had he not sold. But I think you are still under the mistaken impression that this is the same game long-term investors are playing and can affect that game. It isn't/can't. That wasn't the focus of my original question, but I've seen no proof that it can or can't. By the way, it would be a mistake to think that people who supervise index funds don't do a lot of short-term trades. They must do a lot of trades unless they close themselves to new investments and redemptions. It's the actively managed funds that can get away with by-laws that allow them to do fewer trades. There are "closed-end" mutual funds that do not directly accept investments. Instead they have stocks that are traded like the stocks of other companies. (Are we permitted to mention specific stocks in this thread? I could give an example.) Some closed-end funds are index funds over an index for a market sector - like technology. It's interesting to read the variety of indexes that such funds use. Many are quite obscure and I often wonder whether they are only used by one single index fund. I think closed-end index funds obligate themselves to fewer trades than open-end funds because there is no such thing as redemptions or new investments to a closed-end fund. Science Advisor I'm not sure about the former, but on the latter, I think what you are missing here is that it doesn't matter if you accept the consensus opinion or not, you are still bound by it. You aren't bound by its forecast of the future value of a stock. If you think the stock will be worth more than the current market price implies then you reject the opinion of the market by buying the stock at the market price. Mentor That goes against common sense. How do you choose a company to invest in without... You're assuming we need to choose and then asking how. What I'm saying is the premise is flawed: we should not be choosing. Mentor In any stock transaction, whether by short or long-term holders of stocks, both sides can gain. The seller gains immediate funds, the buyer gets hope of future gains. Hope of future gains is not gains. The shorter the term of the holding, the higher the future gains can be, and the higher the losses can be, amplifying the effect of the skill of the traders vs the long-term value gain of the stock. If$100 in stock becomes $110 in stock in a year, the gain is$10 or 10%. But when two entities trade that stock back and forth a million times in that year, if one of them is 1% better than the other, that guy ends up earning a $1,000,005 dollars and the other guy ends up losing a$999,995 dollars.

That's what it means for day-trading to be "essentially" zero sum.
That wasn't the focus of my original question, but I've seen no proof that it can or can't.
Consider:
3 guys walk into a casino. Two of them sit down at a poker table, playing only against each other, and the 3rd watches. At the end of the day, 1 person has a little more money, one person has a lot less money, one person has the same amount of money and the house has gained some money.

Investing works the same way except that the value of the money grows on its own, without you doing anything. So the same 3 people start with $1 apiece. At the end of a certain time period when the value of the market doubles, the person who invested in an index fund has$2, the better daytrader has $2.25, the worse daytrader has$1.25 and the brokerage firm has \$0.50.

The daytraders don't affect the index fund investor because the index fund investor declines to ever trade with them!
By the way, it would be a mistake to think that people who supervise index funds don't do a lot of short-term trades. They must do a lot of trades unless they close themselves to new investments and redemptions.
That isn't what active management is. Active management is changing the allocation of the money in the fund, not the amount of money in the fund.

You're assuming we need to choose and then asking how. What I'm saying is the premise is flawed: we should not be choosing

I am definitely missing something here. You need t choose to invest. How do you know what to invest in.

Mentor
You aren't bound by its forecast of the future value of a stock. If you think the stock will be worth more than the current market price implies then you reject the opinion of the market by buying the stock at the market price.
On the small/individual scale yes, on the large scale, no. On the large scale, the present and future prices are set by a consensus collection of metrics and logic. Since that collection sets both the current and future price (to the extent that the future price is predictable), that's the value to shoot for. That's why it is circular that over the long term, the market value is what it is, based on logic that is what it is and the average investor, by definition of "average", follows/sets that logic/price.

Mentor
I am definitely missing something here. You need to choose to invest. How do you know what to invest in.
You choose you risk tolerance, which sets the types of funds (stocks vs bonds, etc.), and then DON'T choose the individual securities to own. Choose index funds instead.

I'll pull some quotes tonight from my go-to book on the subject, but essentially the advice is that for the vast majority of investors, the vast majority of their money should be in index funds like the S&P, not individual stocks.

Gold Member
By the way, it would be a mistake to think that people who supervise index funds don't do a lot of short-term trades. They must do a lot of trades unless they close themselves to new investments and redemptions.
This isn't really how open-ended funds work. Traditional open-ended mutual funds only settle up once a day, and ETFs aren't directly available to most individual investors. Instead, financial institutions will do an in-kind trade of blocks of ETF shares with a basket of the underlying stock. This allows ETFs to be traded on exchanges like a stock, but it also means that the price of an ETF can diverge from the underlying net asset value. But in the market, this problem quickly solves itself via arbitrage. (This mispricing is, of course, almost immediately gobbled up by high frequency traders.)

russ_watters
Mentor
...if we knew which 5% were "good" and they were *actually* good, we could just invest with them and all the rest would go away, leaving us, in short order, only with those "good" funds. The fact that this doesn't happen tells us that these "good" funds simply don't exist.
...er, well, this is only partially true. The best at anything always rise to the top. It's just that...can anyone guess what the largest funds are...?

You choose you risk tolerance, which sets the types of funds (stocks vs bonds, etc.), and then DON'T choose the individual securities to own. Choose index funds instead.

I missed that the discussion was on index funds. Index funds are constituted to a certain set of criteria so there are choices of classes of stock that have something in common like small cap or mid cap. So someone is doing some choosing in making the funds and you choose the one you think will do the best.
Fidelity has about 20 index funds to choose from. ETF are still essentially mutual funds except without the need to analyze any of the components

Mentor
Index funds are constituted to a certain set of criteria so there are choices of classes of stock that have something in common like small cap or mid cap. So someone is doing some choosing in making the funds and you choose the one you think will do the best.
Unless, of course, you choose to take all the classes together by choosing a total market index fund.

russ_watters
Unless, of course, you choose to take all the classes together by choosing a total market index fund.

And that's a good choice? The major indices only have a fraction of all the publically traded companies. In the last 5 years the Nasdaq is about 60% higher than the DOW industrials or the S&P. Interestingly the DOW and the S&P 500 have increase about the same amount even thought the DOW industrial contain only 30 stocks. So what to choose.

Mentor
I missed that the discussion was on index funds. Index funds are constituted to a certain set of criteria so there are choices of classes of stock that have something in common like small cap or mid cap. So someone is doing some choosing in making the funds and you choose the one you think will do the best.
Fidelity has about 20 index funds to choose from. ETF are still essentially mutual funds except without the need to analyze any of the components
Yes; caveat on total market funds aside, they are still sort of actively managed, but with a much simpler set of criteria designed to mirror a market segment as opposed to seeking market beating growth, and not by the investment company (so there is no management to pay for).

The daytraders don't affect the index fund investor because the index fund investor declines to ever trade with them!

The index fund in which index fund investor invests must do short term trading. An investor who wishes to behave as the investor in your example must buy the stocks that track the index and then hold them himself - which might not a be a bad idea for someone who can afford to do that.

That isn't what active management is.
Did I say it was?

Active management is changing the allocation of the money in the fund, not the amount of money in the fund.

The point I made was that index funds must do short term trades. One day new money comes in and they are required to invest it in the stocks that are on their index. The next day people redeem their shares and the fund must sell some of the same shares to get the cash to pay out.

Mentor
And that's a good choice? The major indices only have a fraction of all the publically traded companies. In the last 5 years the Nasdaq is about 60% higher than the DOW industrials or the S&P. Interestingly the DOW and the S&P 500 have increase about the same amount even thought the DOW industrial contain only 30 stocks. So what to choose.
No, total market, not market index. These funds are composed of thousands of stocks.

. On the large scale, the present and future prices are set by a consensus collection of metrics and logic.
The actual future prices aren't set by anything in the present.

Since that collection sets both the current and future price (to the extent that the future price is predictable), that's the value to shoot for.
That implies that you accept the current market price as the most accurate prediction. If so, what exactly does it predict?

No, total market, not market index. These funds are composed of thousands of stocks.

Which particular index funds hold thousands of stocks? - you do mean stocks from thousands of different companies, correct?

Mentor
The index fund in which index fund investor invests must do short term trading.
Not in the way you are suggesting, it doesn't. Even if they bought and sold immediatly as people order, which they aren't, the buys and sells are/would be allocated to specific investors, their accounts and their transactions. There is no cris-cross/churn of individual investors' funds. Put another way: if what you were suggesting were true, the value of a fund would not necessarily track against the index it is supposed to track against. They do - what you are suggesting does not happen.
An investor who wishes to behave as the investor in your example must buy the stocks that track the index and then hold them himself...
Again, this simply isn't true. If index funds didn't work as advertised - they didn't actually track the index - there would be no point in having them.
Did I say it was?
I would hope so, since that is the point you were responding to. If you weren't then I can't see a point to your statement.
The point I made was that index funds must do short term trades. One day new money comes in and they are required to invest it in the stocks that are on their index. The next day people redeem their shares and the fund must sell some of the same shares to get the cash to pay out.
1. This doesn't even match the "short term trades" that we have been discussing as stated.
2. They only need to settle-up the difference between yesterday's and today's deposits and withdrawals, not the actual trades. So the amount of trading they actually do is a small fraction of the amount that people put in and take out each day.

1. This doesn't even match the "short term trades" that we have been discussing as stated.

It doesn't match up with high frequency trading. It matches up with human scale short term trading.

2. They only need to settle-up the difference between yesterday's and today's deposits and withdrawals, not the actual trades.

The current price doesn't predict anything. It gives some credence on whether a stock is fairly prices or not base on a consensus of the opionions of those who have studies the concept of fairly priced e.g. some range in EPS. Value in in the eye of the analyst however near sighted.

russ_watters
It doesn't match up with high frequency trading. It matches up with human scale short term trading.

Not in this sense. Daily trading or short term trading is simply trading for short term positions. ETF rebalancing are not trading to change their position but to correct the leverage ratio that is occurred with gains.

Vanguard Total Stock Market Index, for one:
https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0085#tab=2
Click on the "Portfolio & Management" tab if it doesn't come up at first. This fund tracks the CRSP US Total Market Index, and held 3591 different stocks on May 31.

That's an impressive number of stocks. But the page says it has 16.5% of its holdings in ten of them.

Not in this sense. Daily trading or short term trading is simply trading for short term positions.
Are we defining "position" to mean owning a stock or not owning any of it? I agree that index funds don't do that - it would break their own by-laws. However, owning more and then owning less is still a trade that can take place over a short time span.

Sure, however no one speaks of short term trading in that functionality. Short term trading is taking a position for a "short" duration me it minutes or days or even weeks with the hopes that you beat a correction. ETF maintain their positions but have to rebalance their leverage ratio otherwise you'll see a divergence between the ETF value and the underlining assets. In fact, you can even say that the rebalance is really there in order to maintain their functionality not for gains.

russ_watters
Mentor
But the page says it has 16.5% of its holdings in ten of them.
That's probably because 16.5% of the money in the market as a whole is invested in those ten stocks. The fund holds stocks in proportion to their capitalization in the market.

Question_
I've been following the market for a while and have a background in economics.

Investing in property or 'real estate' is one of the safest and highest earning investments you can make. Combined with the fact that the bubble in real estate has already burst fairly recently, I'd say find a real estate fund/REIT (watch out for the fees though, as they are typically high) then put away what you can in that. They also highly tax efficient and distribute at least 90% of taxable income to shareholders.

Next, in my book for safe and high return investments, I'd look into investing in core companies. By 'core' I mean essential, think waste management, mining companies, and some other core businesses like 3M or defense companies. Commodities apart from gold (to some extent, due to the fact that gold is more of a psychological/emotional investment than one driven from analysis) tend to be subject to too much speculation.

If one doesn't want to go through the hassle of going through with picking your own stocks of choice, then I don't think there are lower costing investment portfolios than one's provided by Vanguard and Berkshire.

Investing in property or 'real estate' is one of the safest and highest earning investments you can make.
I've heard so many landlord horror stories to keep me away from property.

NTL2009
Question_
Haha, well the end game of such a strategy is to own your own property and not have to answer to anyone.

Haha, well the end game of such a strategy is to own your own property and not have to answer to anyone.
btw I also bought a condo in 2007. In 2015 I sold it for 30% bath. Not always safe.

Mentor
Here's some quotes from "The Only Investment Guide You'll Ever Need" (2002)
Current ed, 2011:
https://www.amazon.com/dp/0547447256/?tag=pfamazon01-20

From the chapter entitled "Choosing (to Ignore) Your Broker"
There are no brokers who can beat the market consistently and by enough of a margin to more than make up for their brokerage fees...

[and even if there are and are willing to work for you, you small-timer]...there's no way for you to know who they are.

By and large, you should manage your own money (via no-load mutual funds).

[emphasis included]
The book includes lots of details and statistics about the [lack of] performance of managed funds to back up this advice. Including that - from actual tests - you are probably better off having a literal dartboard or random number generator manage your money than a broker/fund manager.

Mentor
btw I also bought a condo in 2007. In 2015 I sold it for 30% bath. Not always safe.
No, but if the next Great Depression comes, you can still live in your house. They don't even issue stock certificates anymore that you could wrap yourself into keep warm if you were a renter and got evicted because you can no longer pay your rent!