Poll

Passive index fund investing is on pace to overtake active investing in 2024. At what market ownership % will you start picking stocks?

50%
5 (5.6%)
60%
2 (2.2%)
70%
4 (4.4%)
80%
8 (8.9%)
Never, index funds for life
71 (78.9%)

Total Members Voted: 90

Author Topic: At what % of passive market ownership would you start picking stocks?  (Read 2083 times)

J Boogie

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Trying to get an idea of what mustachians think about the growth of indexing and if it will affect their future investing strategy.

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.

Or do folks here believe that index funds create markets with equal or greater efficiency than a market with greater active investing?

robartsd

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #1 on: February 04, 2019, 04:48:45 PM »
I expect there will always be people managing orders of magnitude more assets than I will ever have snapping up every stock picking opportunity before I can find them.

ILikeDividends

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #2 on: February 04, 2019, 04:52:21 PM »
I chose never.

Not because I think allocating some percentage to single issue picks is a patently terrible idea -- I don't -- it's just that I am too lazy in my advanced years to devote the time necessary to trying to do it competitively.

Indexing is just too easy to do for me to contemplate any other method, so I have a don't-fix-it-if-it-aint-broke kind of an attitude.  ;)
« Last Edit: February 04, 2019, 06:15:27 PM by ILikeDividends »

nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #3 on: February 04, 2019, 05:34:44 PM »
I don't particularly enjoy spending the substantial amount of time it would take to become an above-average stock picker (would rather be doing something else) and if it ever became easy there would be such an enormous amount of money to be made that it soon wouldn't be easy anymore. 

plus - indexing provides me with what i need for near-zero effort. 

ETA:  Just because someone indexes doesn't mean they are limited to the SP500 or total market indexes.  If one is so inclined he/she can buy index funds that track a single country, region or sector.
« Last Edit: February 05, 2019, 05:11:25 AM by nereo »

PDXTabs

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #4 on: February 04, 2019, 07:40:25 PM »
I'd rather do something that I find fun, enriching, or that might benefit the world.

Linda_Norway

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #5 on: February 05, 2019, 02:59:59 AM »
My DH mentioned that maybe he wants to start investing some in individual stocks. I said that indexing is much safer and that a random person is not good at timing the market for normal stocks. I said he should only play with a very small amount, if he wants to do this, as I can't stop an adult person from investing his own money in what he wants.

Blueberries

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #6 on: February 05, 2019, 07:50:44 AM »
Trying to get an idea of what mustachians think about the growth of indexing and if it will affect their future investing strategy.

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.


Or do folks here believe that index funds create markets with equal or greater efficiency than a market with greater active investing?

If there isn't an active market in the stocks within the fund, look out below! I tend to disagree with your conclusion.  You can have too much of a good thing.

stimepy

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #7 on: February 05, 2019, 10:53:22 AM »
I'd say what ever percentage you feel comfortable with up to and including never.

TLDR: Stick with indexing, unless you really want to take you time to learn stock picking.

I personally invest in individual stocks AND in ETFs.  So I put my money where my mouth is.

Personally whenever a question like this comes up, I have to ask why?   If you are comfortable with investing in indexes, why do you want to figure out stock picking?   Don't get me wrong I've done my time, I've learned lots (and lost some here and there as a reminder) and I enjoy still it but I would rarely recommend that people do it.

If you want to learn, pick amount your willing to lose and learn.   Note you may or may not lose it pending your research and particular branch of stock picking you choose, though I recommend Buffets brand, Value stocks.
It will take time to figure out your set of rules and yes, I said rules, and you'll be fine.  Your rules will become a part of your IPS and you WILL stick with them, though they might evolve over time as you learn.  It's just the nature of the game.

So I ask again, if your comfortable with indexing, why pick stocks?

Travis

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #8 on: February 05, 2019, 11:34:19 AM »

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.


Why is this logical?

BicycleB

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #9 on: February 05, 2019, 12:03:52 PM »
I can follow the logic that if enough investors invest blindly, the market's efficiency at ensuring reasonable capital allocation could decline. I can get that individual stock picking could offer an advantage in that case. But will it make enough difference to be worth the time spent?

I read the Jack Bogle speculated shortly before he died that the tipping point would be around 70%. Up to that level, he thought the market would be reliable. I don't expect to change anything until at least that point. As a 50something, that means probably never.

Probably.
« Last Edit: February 05, 2019, 12:06:17 PM by BicycleB »

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #10 on: February 05, 2019, 01:17:03 PM »
I'd say what ever percentage you feel comfortable with up to and including never.

TLDR: Stick with indexing, unless you really want to take you time to learn stock picking.

I personally invest in individual stocks AND in ETFs.  So I put my money where my mouth is.

Personally whenever a question like this comes up, I have to ask why?   If you are comfortable with investing in indexes, why do you want to figure out stock picking?   Don't get me wrong I've done my time, I've learned lots (and lost some here and there as a reminder) and I enjoy still it but I would rarely recommend that people do it.

If you want to learn, pick amount your willing to lose and learn.   Note you may or may not lose it pending your research and particular branch of stock picking you choose, though I recommend Buffets brand, Value stocks.
It will take time to figure out your set of rules and yes, I said rules, and you'll be fine.  Your rules will become a part of your IPS and you WILL stick with them, though they might evolve over time as you learn.  It's just the nature of the game.

So I ask again, if your comfortable with indexing, why pick stocks?

Thanks for asking!

I have become less and less comfortable with indexing because I don't want to invest in subpar companies whose prices have been driven up by monetary policy.

An economic downturn separates the wheat from the chaff. I want to develop an IPS to be able to withstand and even thrive during an economic downturn.

I don't take it for granted that "the stock market always goes up." This phrase was coined long before the Fed's balance sheet had 4 trillion dollars on it. I think "past results do not guarantee future performance" is a better saying to keep in mind.

Even great investing minds like Bogle have mentioned that we should expect returns of around 4%. I'm not excited about 4% and I am happy to do research and invest in companies with far more upside on a buy and hold basis.



J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #11 on: February 05, 2019, 01:32:20 PM »

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.


Why is this logical?


There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #12 on: February 05, 2019, 02:20:39 PM »

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.


Why is this logical?


There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

I disagree with this premise - here's why.
Even if 80% of all the money in the market were held in index funds, that would leave 20% that's actively managed, or roughly $1T in the NYSE alone.  That's a crap ton of money.  If a large company like Amazon (or really anything on the SP500) isn't priced appropriately the hedge-fund managers that are still around will exploit that, and the edge will soon evaporate.  They'll buy on margin and have an oversized effect on setting prices. In other words, market efficiencies will remain because there's still a huge amount of money involved.

fattest_foot

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #13 on: February 05, 2019, 02:29:25 PM »
There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

This is the same flawed logic of why we need to tax the rich more because they're screwing the rest of us. But it misses that one of the biggest advantages of capitalism is that as the rich get richer, so too do the middle class and poor.

The financial world is not a zero sum game. There isn't one pie of finite pieces.
« Last Edit: February 05, 2019, 04:19:52 PM by fattest_foot »

Travis

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #14 on: February 05, 2019, 02:51:50 PM »

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.


Why is this logical?

There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

I disagree with most of it.  If anything, our system has shown it will never allow itself to run out of liquidity.  As far as indexing affecting stock prices, has there been any indication that one affects the other?  Index investing is steadily growing, but P/Es have been on the rise just the same.  I agree that somebody on the active institutional investor side would continue to be the main price-setter for a stock, but unless you're arguing the market is speculating the hell out of companies I don't see how a mass of index investors are going to depress prices.  The stock is still getting bought and sold.  If you've got data saying otherwise I'd be happy to read it.

Eric

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #15 on: February 05, 2019, 03:58:50 PM »
There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

This is the same flawed logic of why we need to tax the rich more because they're screwing the rest of us. But it misses that one of the biggest advantages of capitalism that that as the rich get rich, so too do the middle class and poor.

You still believe in trickle-down economics?  It hasn't worked for many decades now, why would it start working going forward?  If that *actually* worked, these super low tax rates should've been the tide to "lift all boats".  Instead, wealth concentration continues to pool at the top in the US.  The idea that the money trickles down when taxes are low has no basis in reality.  None.  We have the lowest tax rates and also the greatest disparity in wealth in the developed world.  It's not a coincidence.  I have no idea how anyone could believe in this, except because it personally benefits them.  So at least be honest about it.  You don't want higher taxes because it will personally affect you.  That's fine, but don't pretend like super low tax rates help the poor or middle class, because all evidence points to the contrary. 

nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #16 on: February 05, 2019, 04:11:47 PM »
There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

This is the same flawed logic of why we need to tax the rich more because they're screwing the rest of us. But it misses that one of the biggest advantages of capitalism that that as the rich get rich, so too do the middle class and poor.

You still believe in trickle-down economics?  It hasn't worked for many decades now, why would it start working going forward?  If that *actually* worked, these super low tax rates should've been the tide to "lift all boats".  Instead, wealth concentration continues to pool at the top in the US.  The idea that the money trickles down when taxes are low has no basis in reality.  None.  We have the lowest tax rates and also the greatest disparity in wealth in the developed world.  It's not a coincidence.  I have no idea how anyone could believe in this, except because it personally benefits them.  So at least be honest about it.  You don't want higher taxes because it will personally affect you.  That's fine, but don't pretend like super low tax rates help the poor or middle class, because all evidence points to the contrary.
It's also worth noting that money payed out in taxes also doesn't 'disappear,' which is a key underpinning of the lower-taxes argument, second only to the mantra of 'transfer of wealth!'

ChpBstrd

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #17 on: February 05, 2019, 04:11:57 PM »
As a thought experiment, if 100% of the stock market was owned by total market index funds (or there was a law saying this was the only investment allowed), there would be no volatility between shares. E.g. if Apple went up 1%, GM would also go up exactly 1%. If TSLA fell 0.5%, the whole market would be down 0.5%. All shares would have a beta of one. This is because inflows and outflows could only occur within the entire block of the total market index. Also, the relative weighting of any given company within the index could never change. Microsoft would always be X% of the size of Exxon no matter what happened in their futures. Without a market for individual stocks, there would be no way for their prices to deviate from each other as people preferred to own one or the other. They would forever be equal weighted, aside from splits and new issues.

Drop that percentage to 99% and see what happens. A tiny marketplace emerges, perhaps as big as the stock market decades ago.

People start trading Microsoft and Exxon against each other after earnings or news are announced, easily taking piles of cash from index investors until an equilibrium is reached whereby the individual traders account for enough trading volume to move the price. At that equilibrium, the benefits of stock picking equals the cost of asystematic risk, and stock picking has the same yield as index investing. When trades by active investors exceed the threshold, the index investors start taking piles of cash from active traders, on net. This second scenario is what has been happening for the last few decades, and I suspect the threshold exists at a very very low volume of active trading. So 99% should have been an option.

fattest_foot

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #18 on: February 05, 2019, 04:23:34 PM »
You still believe in trickle-down economics?  It hasn't worked for many decades now, why would it start working going forward?  If that *actually* worked, these super low tax rates should've been the tide to "lift all boats".  Instead, wealth concentration continues to pool at the top in the US.  The idea that the money trickles down when taxes are low has no basis in reality.  None.  We have the lowest tax rates and also the greatest disparity in wealth in the developed world.  It's not a coincidence.  I have no idea how anyone could believe in this, except because it personally benefits them.  So at least be honest about it.  You don't want higher taxes because it will personally affect you.  That's fine, but don't pretend like super low tax rates help the poor or middle class, because all evidence points to the contrary.

I'm not talking about trickle down economics, I'm talking about capitalism. Capitalism has raised the rest of the world out of poverty.

Yes, the rich are getting richer. But because it's not a zero sum game, everyone else is getting rich along with them.


nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #19 on: February 05, 2019, 04:28:59 PM »
You still believe in trickle-down economics?  It hasn't worked for many decades now, why would it start working going forward?  If that *actually* worked, these super low tax rates should've been the tide to "lift all boats".  Instead, wealth concentration continues to pool at the top in the US.  The idea that the money trickles down when taxes are low has no basis in reality.  None.  We have the lowest tax rates and also the greatest disparity in wealth in the developed world.  It's not a coincidence.  I have no idea how anyone could believe in this, except because it personally benefits them.  So at least be honest about it.  You don't want higher taxes because it will personally affect you.  That's fine, but don't pretend like super low tax rates help the poor or middle class, because all evidence points to the contrary.

I'm not talking about trickle down economics, I'm talking about capitalism. Capitalism has raised the rest of the world out of poverty.

Yes, the rich are getting richer. But because it's not a zero sum game, everyone else is getting rich along with them.

...and yet taxation has co-existed with democracy and capitalism for over two centuries.  So... what's your point?

Travis

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #20 on: February 05, 2019, 05:29:22 PM »
You still believe in trickle-down economics?  It hasn't worked for many decades now, why would it start working going forward?  If that *actually* worked, these super low tax rates should've been the tide to "lift all boats".  Instead, wealth concentration continues to pool at the top in the US.  The idea that the money trickles down when taxes are low has no basis in reality.  None.  We have the lowest tax rates and also the greatest disparity in wealth in the developed world.  It's not a coincidence.  I have no idea how anyone could believe in this, except because it personally benefits them.  So at least be honest about it.  You don't want higher taxes because it will personally affect you.  That's fine, but don't pretend like super low tax rates help the poor or middle class, because all evidence points to the contrary.

I'm not talking about trickle down economics, I'm talking about capitalism. Capitalism has raised the rest of the world out of poverty.

Yes, the rich are getting richer. But because it's not a zero sum game, everyone else is getting rich along with them.

...and yet taxation has co-existed with democracy and capitalism for over two centuries.  So... what's your point?

The financial world is not a zero sum game. There isn't one pie of finite pieces.

The OP's thesis assumed there is finite money in the world.

BicycleB

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #21 on: February 05, 2019, 07:57:28 PM »

The OP's thesis assumed there is finite money in the world.

I think the OP's thesis assumed that investment opportunities occur when too low a % of investors distinguish between high and low quality stocks by investing actively. I don't think that necessarily requires finite money.

Classical_Liberal

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #22 on: February 06, 2019, 03:09:40 AM »
There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

This is the same flawed logic of why we need to tax the rich more because they're screwing the rest of us. But it misses that one of the biggest advantages of capitalism that that as the rich get rich, so too do the middle class and poor.

You still believe in trickle-down economics?  It hasn't worked for many decades now, why would it start working going forward?  If that *actually* worked, these super low tax rates should've been the tide to "lift all boats".  Instead, wealth concentration continues to pool at the top in the US.  The idea that the money trickles down when taxes are low has no basis in reality.  None.  We have the lowest tax rates and also the greatest disparity in wealth in the developed world.  It's not a coincidence.  I have no idea how anyone could believe in this, except because it personally benefits them.  So at least be honest about it.  You don't want higher taxes because it will personally affect you.  That's fine, but don't pretend like super low tax rates help the poor or middle class, because all evidence points to the contrary.

I don't believe it's only tax policy.  Correlation is not causation.  For example, the immense amount of currency the Fed dumped into the economy Post 2008 hasn't cause price inflation of products or services.  This money ended up inflating asset prices.  Those who owned assets already (rich people) have seen the greatest gain from their inflation. Wealth disparity is also logically  highly linked to income disparity.  Globalization has caused the US economy to evolve into  high tech service based.  This has caused a huge income disparity between elite tech workers (most on this board) and production workers.  Both of these issues have nothing to do with tax rates and are arguable much larger factors in the wealth disparity in the US.

Classical_Liberal

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #23 on: February 06, 2019, 03:13:43 AM »
As a thought experiment, if 100% of the stock market was owned by total market index funds (or there was a law saying this was the only investment allowed), there would be no volatility between shares. E.g. if Apple went up 1%, GM would also go up exactly 1%. If TSLA fell 0.5%, the whole market would be down 0.5%. All shares would have a beta of one. This is because inflows and outflows could only occur within the entire block of the total market index. Also, the relative weighting of any given company within the index could never change. Microsoft would always be X% of the size of Exxon no matter what happened in their futures. Without a market for individual stocks, there would be no way for their prices to deviate from each other as people preferred to own one or the other. They would forever be equal weighted, aside from splits and new issues.

Drop that percentage to 99% and see what happens. A tiny marketplace emerges, perhaps as big as the stock market decades ago.

People start trading Microsoft and Exxon against each other after earnings or news are announced, easily taking piles of cash from index investors until an equilibrium is reached whereby the individual traders account for enough trading volume to move the price. At that equilibrium, the benefits of stock picking equals the cost of asystematic risk, and stock picking has the same yield as index investing. When trades by active investors exceed the threshold, the index investors start taking piles of cash from active traders, on net. This second scenario is what has been happening for the last few decades, and I suspect the threshold exists at a very very low volume of active trading. So 99% should have been an option.

Except that not all companies are in the index, and some are in more indices than others. Increased indexing means those companies outside of the largest held indices may have more potential value... No?

Classical_Liberal

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #24 on: February 06, 2019, 03:16:02 AM »
An economic downturn separates the wheat from the chaff. I want to develop an IPS to be able to withstand and even thrive during an economic downturn.
Would you be interested in investing in noncorrelating assets classes and or equities with index investing?

MustacheAndaHalf

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #25 on: February 06, 2019, 09:17:45 AM »
An economic downturn separates the wheat from the chaff. I want to develop an IPS to be able to withstand and even thrive during an economic downturn.
Would you be interested in investing in noncorrelating assets classes and or equities with index investing?
With several qualifications that rule almost everyone out, gold could be considered as an asset that has low (or negative) correlations with stocks and even bonds during crashes.  But now back to the qualifications:
1. people saving for retirement are better off without it.  If stocks drop in a crash... buy more.  Until you've saved enough, protecting what you have severely limits it's growth (since gold grows much slower than diversified stock portfolios). 
2. gold as a non-correlating asset requires going beyond "stocks and bonds", and paying enough attention to correlation to form a different portfolio based on it.  Some years ago I went through past crashes and observed how gold performed against stocks and bonds.  That at least made it interesting: gold tended to move up when stocks crashed.  Gold could be used to decrease the volatility of a portfolio: you could sell gold to pay for living expenses, or rebalance into stocks.  I don't think most people pay attention to correlation, but performance.
3. gold's performance isn't as good as a diversified portfolio of stocks, so the opportunity cost is high.  An allocation to gold means a chunk of a portfolio not allocated to stocks, which brings down performance long-term.  For those in retirement with very low withdrawal rates, maybe avoiding drops in portfolio value matters more than a hit to performance.

So for the most part, I don't see people come close to meeting those qualifications, so I don't recommend it.

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #26 on: February 06, 2019, 10:28:21 AM »
An economic downturn separates the wheat from the chaff. I want to develop an IPS to be able to withstand and even thrive during an economic downturn.
Would you be interested in investing in noncorrelating assets classes and or equities with index investing?

Probably not. In addition to a decent return during a recession, I am also uncomfortable with the reasons we embrace indexing.

We don't really use any solid logical justification as to why it is better, we tend to use the same logic as the older employees in the companies we work at - We do it this way because this way has always been superior no matter what any fancy new person says. It just works. This type of thinking always holds up until it doesn't. We're not in the same financial world anymore, so I'm not willing to take these platitudes for granted anymore.

If you don't take the time to think about why your strategy works now and why it will work in the future, you don't have a good plan. I'm trying to come up with a plan that logically rather than historically has a very good chance at 6%+ annual returns, and hopefully be able to achieve limited loss during recessions.

My issue with index investing as a philosophy is that assumes too many things. I don't completely disagree with the assumptions that the stock market always goes up and that it can be very risky to pick individual stocks, but I certainly don't hold them as gospel and as a thought experiment I want to come up with some conditions that could falsify these assumptions.

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #27 on: February 06, 2019, 10:39:07 AM »
An economic downturn separates the wheat from the chaff. I want to develop an IPS to be able to withstand and even thrive during an economic downturn.
Would you be interested in investing in noncorrelating assets classes and or equities with index investing?
With several qualifications that rule almost everyone out, gold could be considered as an asset that has low (or negative) correlations with stocks and even bonds during crashes.

I didn't suss out that you might be thinking of precious metals, but if that's what you were thinking of, my answer is no.

I don't like gold. Just because other people want it when shit hits the fan doesn't mean I do. It's one thing to pay a premium for a company that shows it might generate fantastic returns in the future; it's entirely another to pay far beyond the industrial value of a commodity simply because others do. If the system crashes, I'd rather own shares of a forest or lumber mill or a bunch of lumber in a shed in my yard. What can I say, wood is an honest material and it makes me happy.

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #28 on: February 06, 2019, 10:43:51 AM »

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.


Why is this logical?


There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

I disagree with this premise - here's why.
Even if 80% of all the money in the market were held in index funds, that would leave 20% that's actively managed, or roughly $1T in the NYSE alone.  That's a crap ton of money.  If a large company like Amazon (or really anything on the SP500) isn't priced appropriately the hedge-fund managers that are still around will exploit that, and the edge will soon evaporate.  They'll buy on margin and have an oversized effect on setting prices. In other words, market efficiencies will remain because there's still a huge amount of money involved.

But you agree with the premise that there is *less* efficiency when a greater share of the market is held in index funds, right?

I get that there's still a ton of active $ left to pick stocks even at 80% passive. But the fact that there's less should correlate to less efficiency, right?

I think margin buying will begin to lower as regulation gets passed forcing these banks and their principals to suffer the 100% of the impact from the losses they incur via margin trading.

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #29 on: February 06, 2019, 10:50:06 AM »

Logically we can infer that more stock picking opportunities will arise as more investors move their assets into passive funds.


Why is this logical?

There's a finite amount of money available to be invested. If nearly all of this money is funneled through indexes, stock pickers will be able to invest in companies like Amazon without having to pay the high price we see these days. That high price is mostly due to the demand of active investors who believe it is worth more than Sears. The more Sears and Amazon both receive investment inflows on an automatic rather than discriminating basis, the more of a bargain winners like Amazon will be.

Do you disagree with this premise?

I disagree with most of it.  If anything, our system has shown it will never allow itself to run out of liquidity.  As far as indexing affecting stock prices, has there been any indication that one affects the other?  Index investing is steadily growing, but P/Es have been on the rise just the same.  I agree that somebody on the active institutional investor side would continue to be the main price-setter for a stock, but unless you're arguing the market is speculating the hell out of companies I don't see how a mass of index investors are going to depress prices.  The stock is still getting bought and sold.  If you've got data saying otherwise I'd be happy to read it.

I think there is a finite amount of money able to be invested. Yes, the Fed flooded the markets with liquidity and can do so at anytime - but they won't. The Fed can do some impressive shit to smooth things out, but they can't do magic. There does exist a point in time where they don't have a trick up their sleeve. They can only print as much money as is responsible. Just because that's a fudgable number doesn't mean it's not finite.




J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #30 on: February 06, 2019, 10:58:01 AM »
As a thought experiment, if 100% of the stock market was owned by total market index funds (or there was a law saying this was the only investment allowed), there would be no volatility between shares. E.g. if Apple went up 1%, GM would also go up exactly 1%. If TSLA fell 0.5%, the whole market would be down 0.5%. All shares would have a beta of one. This is because inflows and outflows could only occur within the entire block of the total market index. Also, the relative weighting of any given company within the index could never change. Microsoft would always be X% of the size of Exxon no matter what happened in their futures. Without a market for individual stocks, there would be no way for their prices to deviate from each other as people preferred to own one or the other. They would forever be equal weighted, aside from splits and new issues.

Drop that percentage to 99% and see what happens. A tiny marketplace emerges, perhaps as big as the stock market decades ago.

People start trading Microsoft and Exxon against each other after earnings or news are announced, easily taking piles of cash from index investors until an equilibrium is reached whereby the individual traders account for enough trading volume to move the price. At that equilibrium, the benefits of stock picking equals the cost of asystematic risk, and stock picking has the same yield as index investing. When trades by active investors exceed the threshold, the index investors start taking piles of cash from active traders, on net. This second scenario is what has been happening for the last few decades, and I suspect the threshold exists at a very very low volume of active trading. So 99% should have been an option.

Interesting take. Thanks for providing this breakdown and engaging in this thought experiment with me.

It seems you and most others share the view that the threshold exists at a very very low volume of active trading.

To be honest, I have a tough time following your logic (I don't mean this to insinuate you're wrong, this is just abstract stuff that can be tough to fully grasp).

Can someone explain why they believe a dramatic increase in the ratio of passive investing vs active would not affect the efficiency of the stock market very much? Why is the threshold at 99%?








ChpBstrd

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #31 on: February 06, 2019, 11:34:08 AM »
Quote
3. gold's performance isn't as good as a diversified portfolio of stocks, so the opportunity cost is high.  An allocation to gold means a chunk of a portfolio not allocated to stocks, which brings down performance long-term.  For those in retirement with very low withdrawal rates, maybe avoiding drops in portfolio value matters more than a hit to performance.
The Trinity study and most other withdraw rate studies did not simulate portfolios with a PM allocation. PMs earn zero, and decades of earnings are what retirees eventually need to survive. Therefore, if a person wanted a 10% PM allocation, for example, I'd suggest the remaining 90% of their portfolio which is allocated to stocks and bonds should cover at least 25x expenses. I'd suggest the same if they insisted on a large cash-in-mattress allocation, or a large art allocation, recreational acreage, whole life policies, etc.

The PM allocation would reduce volatility, but so what? By wanting that lower volatility, IMO you've created the requirement that your portfolio be 10% larger. So for a retiree who needs a $40k income, your minimum required FIRE portfolio just grew from $1,000,000 to $1,100,000. Would you be willing to sacrifice an extra two years of your life earning that extra $100k just to have coins in a safe or GLD in your brokerage account? Just to reduce the size of the zig zags you see on Mint.com's net worth graph? I'll take my chances but YMMV.

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #32 on: February 06, 2019, 11:48:43 AM »
You still believe in trickle-down economics?  It hasn't worked for many decades now, why would it start working going forward?  If that *actually* worked, these super low tax rates should've been the tide to "lift all boats".  Instead, wealth concentration continues to pool at the top in the US.  The idea that the money trickles down when taxes are low has no basis in reality.  None.  We have the lowest tax rates and also the greatest disparity in wealth in the developed world.  It's not a coincidence.  I have no idea how anyone could believe in this, except because it personally benefits them.  So at least be honest about it.  You don't want higher taxes because it will personally affect you.  That's fine, but don't pretend like super low tax rates help the poor or middle class, because all evidence points to the contrary.

I'm not talking about trickle down economics, I'm talking about capitalism. Capitalism has raised the rest of the world out of poverty.

Yes, the rich are getting richer. But because it's not a zero sum game, everyone else is getting rich along with them.

...and yet taxation has co-existed with democracy and capitalism for over two centuries.  So... what's your point?

The financial world is not a zero sum game. There isn't one pie of finite pieces.

The OP's thesis assumed there is finite money in the world.

There is. In Econ 101 we learn that the we are studying the relationship between limited resources and unlimited demand.

Yes, money can always be printed. But when that power is abused, the money ceases to be valuable. Many nations experience this and quickly realize they don't have unlimited money even if it looks like they do on paper.

« Last Edit: February 06, 2019, 11:52:32 AM by J Boogie »

BicycleB

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #33 on: February 06, 2019, 12:56:33 PM »
Can someone explain why they believe a dramatic increase in the ratio of passive investing vs active would not affect the efficiency of the stock market very much?

Because by definition, passive investing doesn't change the price of any particular stock. Therefore the price of individual stocks is affected by the active investors, even if only a small % of the investors are active.

Presumably the active investors will work out among themselves what a reasonable price for each particular stock is. Therefore the market as a whole will be reasonably balanced among the various component stocks. In other words, the active investors still bring knowledge to the table, and the sum of that knowledge is reflected in the relative price of the stocks. That is basically the definition of an efficient stock market.

https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
« Last Edit: February 06, 2019, 12:59:05 PM by BicycleB »

Car Jack

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #34 on: February 06, 2019, 01:07:16 PM »
Never.

Here's the thing......if most everyone indexed, then if we go on a limb and say that active traders could take advantage of inefficiencies, guess what?  The guys with supercomputers and nanosecond trading times will take your lunch money.  You'll be there thinking....hmmm, do I like Amazon or microsoft today.  You make the trade and you're wrong because the guy on the other side of the trade has a $100M computer with a better algorithm than your gut and you lose.  Then you decide to get out of this and put money in Tesla instead and that machine eats your lunch and kicks you in the groin just for the fun of it.  You lose.

I don't kid myself that I could ever beat the market.  The end.

nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #35 on: February 06, 2019, 01:11:28 PM »

But you agree with the premise that there is *less* efficiency when a greater share of the market is held in index funds, right?

No, I don't.  As long as there's a great deal of actively managed money in equities I do not believe the efficiency will change much, if at all.  As ChpBastard said, we'd probably need to be somewhere in the upper-90-percentiles before this became an issue

I get that there's still a ton of active $ left to pick stocks even at 80% passive. But the fact that there's less should correlate to less efficiency, right?
Again, no.  the actively traded stocks is going to have an outsized effect on stock prices, which actively trading managers will take advantage of if and when they can. We're already well past the point where the passively invested money-dumps into the market (e.g. every Friday deducted from people's payroll) can be visually spotted in volume trading - yet that hasn't increased the advantage of active stock pickers, because it's known, expected and already priced in.


I think margin buying will begin to lower as regulation gets passed forcing these banks and their principals to suffer the 100% of the impact from the losses they incur via margin trading.
I see the contrary - after some brief tightening of financial regulations following the 'Great Recession' we've largely relaxed these more stringent standards.  I see very little chance of the kind of legislation you are talking about - the banks that were too big to fail are even bigger now.  Particularly right now the drumbeat is eliminate regulation (it limits profits!) At the same time people continue to get creative in finding new ways of leveraging their investments.

We don't really use any solid logical justification as to why it is better, we tend to use the same logic as the older employees in the companies we work at - We do it this way because this way has always been superior no matter what any fancy new person says. It just works. This type of thinking always holds up until it doesn't. We're not in the same financial world anymore, so I'm not willing to take these platitudes for granted anymore.

If you don't take the time to think about why your strategy works now and why it will work in the future, you don't have a good plan. I'm trying to come up with a plan that logically rather than historically has a very good chance at 6%+ annual returns, and hopefully be able to achieve limited loss during recessions.

My issue with index investing as a philosophy is that assumes too many things. I don't completely disagree with the assumptions that the stock market always goes up and that it can be very risky to pick individual stocks, but I certainly don't hold them as gospel and as a thought experiment I want to come up with some conditions that could falsify these assumptions.
That is not the logic I am using, and I have an continue to question the underlying arguments for index investing.  To date the conclusion I've always arrive at is that - for me - indexing is the optimal strategy.

YttriumNitrate

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #36 on: February 06, 2019, 01:13:40 PM »
It wasn't an option, but my % number would be in the mid to high 90s. Alternatively, if I had access to information that was just-this-side-of-legal insider information, my percentage number would be much, much lower.

frugalnacho

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #37 on: February 06, 2019, 01:31:35 PM »
An economic downturn separates the wheat from the chaff. I want to develop an IPS to be able to withstand and even thrive during an economic downturn.
Would you be interested in investing in noncorrelating assets classes and or equities with index investing?

Probably not. In addition to a decent return during a recession, I am also uncomfortable with the reasons we embrace indexing.

We don't really use any solid logical justification as to why it is better, we tend to use the same logic as the older employees in the companies we work at - We do it this way because this way has always been superior no matter what any fancy new person says. It just works. This type of thinking always holds up until it doesn't. We're not in the same financial world anymore, so I'm not willing to take these platitudes for granted anymore.

If you don't take the time to think about why your strategy works now and why it will work in the future, you don't have a good plan. I'm trying to come up with a plan that logically rather than historically has a very good chance at 6%+ annual returns, and hopefully be able to achieve limited loss during recessions.

My issue with index investing as a philosophy is that assumes too many things. I don't completely disagree with the assumptions that the stock market always goes up and that it can be very risky to pick individual stocks, but I certainly don't hold them as gospel and as a thought experiment I want to come up with some conditions that could falsify these assumptions.

Indexing works for several reasons.  First, you are broadly diversified.  I own thousands and thousands of companies (VTSAX has 3508 and VTIAX has 6374).  If you don't disagree that the stock market always goes up, how could you possibly lose out by holding so many different companies?  These index funds are the market.  Second, indexing is low cost. Compounded over the multi-decade periods this translates to significantly higher performance compared to active management.  Third, it's dead nuts simple and scalable.  With practically no effort you can devise an investment plan and portfolio that is ridiculously easy to implement and can accommodate as much money as you can throw at it, be it thousands, hundreds of thousands, or millions of dollars.


frugalnacho

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #38 on: February 06, 2019, 01:45:01 PM »
And I agree with the general sentiment others have posted that it would have to be a very high percentage of index fund investing to break the efficiency of the market, but we would never get to that point.  As passive investing grows and creates imbalances and inefficiencies with prices, someone will come along and arbitrage that away.

So my cutoff would probably be somewhere above 90-95% before I started actively picking stocks.  I have my doubts it could ever get that high though. 

Blueberries

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #39 on: February 06, 2019, 01:45:49 PM »
Bogle's take:

“If everybody indexed, the only word you could use is chaos, catastrophe,” he said in an interview with Yahoo! Finance Saturday. “There would be no trading, there would be no way to convert a stream of income into a pile of capital or a pile of capital into a stream of income. The markets would fail.

Bogle noted that trading would dry up if the stock market comprised only indexers and there were no active investors setting prices on individual issues. Everyone would just buy or sell the market.

The market is not entirely owned by indexers, of course, and it never will be, and Bogle pointed out that as indexing increases to a certain point, it opens opportunities for active investors to exploit inefficiencies in the pricing of some stocks. But past that point, wherever it might be — somewhere beyond 75%, in his view — the market could become a dangerous place....

Bogle stressed that there is a long way to go before indexing reaches a level at which market stability begins to crumble."

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #40 on: February 06, 2019, 02:06:48 PM »
Never.

Here's the thing......if most everyone indexed, then if we go on a limb and say that active traders could take advantage of inefficiencies, guess what?  The guys with supercomputers and nanosecond trading times will take your lunch money.  You'll be there thinking....hmmm, do I like Amazon or microsoft today.  You make the trade and you're wrong because the guy on the other side of the trade has a $100M computer with a better algorithm than your gut and you lose.  Then you decide to get out of this and put money in Tesla instead and that machine eats your lunch and kicks you in the groin just for the fun of it.  You lose.

I don't kid myself that I could ever beat the market.  The end.

I think computer power is a red herring in this instance. I'm talking about Buffet style buy and hold, not day trading. Algorithms are effective at what they do but ultimately limited when compared to the human mind. An algorithm cannot differentiate between a good forward looking strategy and bad one. It might take the numbers of an acquisition into account, but can it assess that, for example, an acquisition of a dog might have been made to obtain IP to save the company years in R&D? I don't know. But a human can do this quite well. And as much as we sell ourselves short, the vast majority of us understand how corporations work and can ascertain whether their fundamentals and strategy will bring them success.



nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #41 on: February 06, 2019, 02:20:31 PM »
Never.

Here's the thing......if most everyone indexed, then if we go on a limb and say that active traders could take advantage of inefficiencies, guess what?  The guys with supercomputers and nanosecond trading times will take your lunch money.  You'll be there thinking....hmmm, do I like Amazon or microsoft today.  You make the trade and you're wrong because the guy on the other side of the trade has a $100M computer with a better algorithm than your gut and you lose.  Then you decide to get out of this and put money in Tesla instead and that machine eats your lunch and kicks you in the groin just for the fun of it.  You lose.

I don't kid myself that I could ever beat the market.  The end.

I think computer power is a red herring in this instance. I'm talking about Buffet style buy and hold, not day trading. Algorithms are effective at what they do but ultimately limited when compared to the human mind. An algorithm cannot differentiate between a good forward looking strategy and bad one. It might take the numbers of an acquisition into account, but can it assess that, for example, an acquisition of a dog might have been made to obtain IP to save the company years in R&D? I don't know. But a human can do this quite well. And as much as we sell ourselves short, the vast majority of us understand how corporations work and can ascertain whether their fundamentals and strategy will bring them success.
What?  Algorithms do what human minds tell them to do.  If a person can decide which metrics to use to evaluate a company's potential for success, a person can write an algorithm to do the same thing.  Unless you are saying a person who evaluates companies based on 'feelings' as opposed to objective metrics, in which case the world is filled with stories of these sorts of sots going bankrupt.

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #42 on: February 06, 2019, 03:06:21 PM »
Never.

Here's the thing......if most everyone indexed, then if we go on a limb and say that active traders could take advantage of inefficiencies, guess what?  The guys with supercomputers and nanosecond trading times will take your lunch money.  You'll be there thinking....hmmm, do I like Amazon or microsoft today.  You make the trade and you're wrong because the guy on the other side of the trade has a $100M computer with a better algorithm than your gut and you lose.  Then you decide to get out of this and put money in Tesla instead and that machine eats your lunch and kicks you in the groin just for the fun of it.  You lose.

I don't kid myself that I could ever beat the market.  The end.

I think computer power is a red herring in this instance. I'm talking about Buffet style buy and hold, not day trading. Algorithms are effective at what they do but ultimately limited when compared to the human mind. An algorithm cannot differentiate between a good forward looking strategy and bad one. It might take the numbers of an acquisition into account, but can it assess that, for example, an acquisition of a dog might have been made to obtain IP to save the company years in R&D? I don't know. But a human can do this quite well. And as much as we sell ourselves short, the vast majority of us understand how corporations work and can ascertain whether their fundamentals and strategy will bring them success.
What?  Algorithms do what human minds tell them to do.  If a person can decide which metrics to use to evaluate a company's potential for success, a person can write an algorithm to do the same thing.  Unless you are saying a person who evaluates companies based on 'feelings' as opposed to objective metrics, in which case the world is filled with stories of these sorts of sots going bankrupt.

The whole point I was making is that metrics are not the only thing a human can use to evaluate a company.  By the time a forward looking strategy's success is showing in their metrics, all the humans will have already invested and the robots will have missed out because they were assessing metrics and not analyzing a strategy.

Also, since robots tend to evaluate metrics nearly perfectly in similar fashions, there will be very little inefficiency for other robots to exploit. Whereas humans tend to evaluate things imperfectly and leave plenty of inefficiency for smarter humans to exploit.

My goal is not to find incredible glitches in the market; and I don't think we can all identify the next FAANGs, but I think we all knew that Sears was gonna die. Personally speaking my plan is to invest in a dozen or so Dividend Aristocrats, avoiding the ones whose dusty business plans require serious pivoting to ensure future earnings.

SwordGuy

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #43 on: February 06, 2019, 03:16:35 PM »
I expect that I will be as ignorant about investing in individual stocks in the future as I am today.

How other folks are investing is unlikely to change that.

nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #44 on: February 06, 2019, 03:37:07 PM »
Robots?  When did we get robots in this discussion??

J Boogie

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #45 on: February 06, 2019, 03:44:40 PM »
Robots?  When did we get robots in this discussion??

I am using robots as shorthand for the programs running on the supercomputers you mentioned that execute the algorithms. I also suspect there are plenty of trading firms testing out/utilizing machine learning or AI developed algorithms.

ILikeDividends

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #46 on: February 06, 2019, 04:01:47 PM »
I expect that I will be as ignorant about investing in individual stocks in the future as I am today.

I count myself among the same group of investors that you do.

I think this is a key point that the whole discussion might be overlooking.  Whether passive investors are 70% or 80% or 90% shouldn't really matter.  There will always be a small cohort of investors who are better than the vast majority at stock picking, and they will never become passive investors.

Those of us who are die-hard passive investors would only contribute random noise to the price discovery mechanisms if we were forced to pick stocks.  Likewise, we will never become stock pickers if there is a passive option available.

"Everyone" never does the same thing, given an identical set of circumstances.  You need look no further than the results of this survey for evidence of that.  This goes as much for choice of investing methodology is it does for career choice.  I think it's a safe assumption that the world will never become 100% passive investor advocates.  To suppose otherwise is a hypothetical that requires a suspension of belief in human nature.

What if everyone wanted to go into law enforcement?  Well, I guess you wouldn't actually need any police, in that case, just for instance.  But yeah, that's never going to happen either.
« Last Edit: February 06, 2019, 08:23:42 PM by ILikeDividends »

YttriumNitrate

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #47 on: February 06, 2019, 04:26:32 PM »
My goal is not to find incredible glitches in the market; and I don't think we can all identify the next FAANGs, but I think we all knew that Sears was gonna die.
Indeed, but at the same time I thought Apple was gonna die back in 2000. For goodness sake, their main selling point was that their computer was blue and their mouse looked like urinal soap ...

fattest_foot

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #48 on: February 06, 2019, 04:28:36 PM »
Probably not. In addition to a decent return during a recession, I am also uncomfortable with the reasons we embrace indexing.

We don't really use any solid logical justification as to why it is better, we tend to use the same logic as the older employees in the companies we work at - We do it this way because this way has always been superior no matter what any fancy new person says. It just works. This type of thinking always holds up until it doesn't. We're not in the same financial world anymore, so I'm not willing to take these platitudes for granted anymore.

If you don't take the time to think about why your strategy works now and why it will work in the future, you don't have a good plan. I'm trying to come up with a plan that logically rather than historically has a very good chance at 6%+ annual returns, and hopefully be able to achieve limited loss during recessions.

My issue with index investing as a philosophy is that assumes too many things. I don't completely disagree with the assumptions that the stock market always goes up and that it can be very risky to pick individual stocks, but I certainly don't hold them as gospel and as a thought experiment I want to come up with some conditions that could falsify these assumptions.

I feel like you really need to sit down and read JLCollins' Stock Series.

The reasons you think everyone suggests investing in index funds are addressed by him in a better way than I ever could.

nereo

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Re: At what % of passive market ownership would you start picking stocks?
« Reply #49 on: February 06, 2019, 04:58:22 PM »
Robots?  When did we get robots in this discussion??

I am using robots as shorthand for the programs running on the supercomputers you mentioned that execute the algorithms. I also suspect there are plenty of trading firms testing out/utilizing machine learning or AI developed algorithms.
ok.  That's not what a robot is.  An algorithm ≠ a robot.   An algorithm is just a set of operations that someone wrote. 
Here's a simple example: select companies >= $1B, filter out those with new management, declining cashflow or P/E >the 1.5x mean for that sector.  Sort by increasing net profits.
It's the same whether you do it by hand, via an excel spreadsheet or if you write a script.  Of course utilizing a computer is faster.
Saying that computers are limited compared to the human mind is like saying a hammer is limited compared to the carpenter.  One is a tool - the other is the operator. The carpenter isn't going to toss out the hammer, nor is the active manager going to throw out computers. Saying robots algorithms evaluate metrics nearly perfectly misses the whole point.  A 'smarter human' can write a better algorithm, and s/he will thereby get an advantage.