Author Topic: Michael Burry (Big Short) thinks index investing is the next market bubble.  (Read 5168 times)

Buffalo Chip

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #50 on: September 13, 2019, 03:53:53 PM »
It sounds like everyone is shooting down the contrarian view here before itís had chance to breathe. Shouldnít we be a little less presumptuous and examine the debate with a bit more diligence? Surely this community, given the comparatively non-traditional life-choices weíre making, is one that should be more open to diverse opinion and alternative insights, not least because it may potentially aid us.


I read your post and thought ďwow, this is really a great post! Why donít I recall seeing this poster before?Ē And then I noticed that this was your very first post. welcome to the MMM forums.

Your post is far too detailed and content-rich to respond to at once so Iíll have to defer and respond over time. I hope thatís OK.

But I will answer your first question. My answer is yes. We are shooting down the contrarian view. Unfortunately thatís a pretty common reaction within the FI community in my experience. Still, youíll find some very sharp people with great and unique insights. Theyíre what keep me coming back for more.

Buffalo Chip

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #51 on: September 13, 2019, 05:32:51 PM »
The vast majority of passive trading is buying, not selling. So, with the latter, all the buying is simply pumping up the prices without any care for valuation. 

Totally agree. This is the most crucial piece right here.

Recently some underperforming mall REITs made news for how close they are to becoming majority passive owned. Who wants to own a company propped up by autopilot purchases? They're like Bernie, and passive inflows are like the bros having a weekend at Bernie's.

We might not be able to pick all the winners, but most of us probably would have avoided buying mall REITs 5 years ago if we were able to remove a few sectors from our indexes.

Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't. So why not grow a stable of your own buy and hold positions? Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.

Youíre absolutely correct. And thatís pretty much my strategy for equities going forward, although Iím a bit more methodical in my picking of stocks. I do indexes, but treat them as a somewhat necessary evil. Not what I aspire to.

Buffalo Chip

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #52 on: September 13, 2019, 05:43:02 PM »

Really? If it were that simple we would have a bunch of people beating the indices and beating the market. But that doesnít happen.

In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.

So this group of people who in general have far higher incomes, far higher savings rates, who have their financial lives down pat otherwise just sort of say ďwell gosh I canít do any better than average!Ē and go on their way.

I donít get it. I really donít.
« Last Edit: September 13, 2019, 05:46:32 PM by Buffalo Chip »

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #53 on: September 13, 2019, 05:54:53 PM »
Because ďaverageĒ in this case is market returns, which is much better than what the average bear gets, whether you are talking about stock pickers, professional or amateur, mutual fund managers, or what have you. There are plenty of studies published on this. You can search for Vanguard white papers on the benefits of index investing or how actively managed mutual funds tend to underperform. So by index investing an getting market returns you are already doing better than the vast majority of everyone else. If you think you can be in the 3 or 5% who can consistently beat everyone else in what you acknowledge is a zero sum game, best of luck to you. The odds are not on your side.

Personally I can reach my goals very nicely without taking on that additional risk, so I donít see a reason to try when the likelihood of success is so small.

chevy1956

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #54 on: September 13, 2019, 06:02:57 PM »
Because ďaverageĒ in this case is market returns, which is much better than what the average bear gets, whether you are talking about stock pickers, professional or amateur, mutual fund managers, or what have you. There are plenty of studies published on this. You can search for Vanguard white papers on the benefits of index investing or how actively managed mutual funds tend to underperform. So by index investing an getting market returns you are already doing better than the vast majority of everyone else. If you think you can be in the 3 or 5% who can consistently beat everyone else in what you acknowledge is a zero sum game, best of luck to you. The odds are not on your side.

Personally I can reach my goals very nicely without taking on that additional risk, so I donít see a reason to try when the likelihood of success is so small.

We can discuss all we want about why it's good to enable contrary opinions and how we are all different etc however the problem is that if you are an index investor statistically you will outperform the active investor. Why would you take on additional risk for a statistically lower rate of return.

I can't see index investing as being a bubble. It's the smart way to invest in stocks (or bonds or commodities or real estate).

grantmeaname

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #55 on: September 13, 2019, 06:54:38 PM »
Wow, magical thinking has really taken over this thread in the time between lunchtime and now.

bacchi

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #56 on: September 13, 2019, 07:17:54 PM »
Wow, magical thinking has really taken over this thread in the time between lunchtime and now.

Care to elaborate?

grantmeaname

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #57 on: September 13, 2019, 10:52:36 PM »
It sounds like everyone is shooting down the contrarian view here before itís had chance to breathe. Shouldnít we be a little less presumptuous and examine the debate with a bit more diligence?
Assuming that everyone who disagrees with you is just misinformed

Quote
But I also agree that itís very different when someone like Burry speaks up, given his rare credentials. (He seldom gives interviews so why heís chosen to come out about this right now Iím not sure. I see heís been pushing certain US and Japanese small cap stocks that heís recently heavily invested in so maybe itís linked to that??)
Appeal to authority

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The switch from active to passive has been dramatic in the last few years! As a result, value and price discovery - essential components of a well-functioning open financial market - are rapidly being disabled. Thatís not good.
An asinine argument that price discovery is somehow turned off when half of the assets in a system are managed passively, even though 1) something like 99% of the volume still comes from active market participants, 2) and academic work shows that you only need a tiny minority of active trading and a large following herd of passive traders to perform the price discovery function, and 3) as has been repeatedly stated in this thread, there is an elegant mechanism in the market by which price discovery becomes more profitable the more people doing them. And no, volume is not an inappropriate metric - transactions perform price discovery, not the stock of assets sitting on the sideline.

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The vast majority of passive trading is buying, not selling.
Unsubstantiated claim, which is obviously false on its face. Net passive inflows are something like 250b per year, vs 68T of trading volume in the equities market alone and many, many times that in bonds which suggests trillions of dollars of index trading volume per year. And that doesn't include the fact that 1) index funds can net contributions and redemptions to avoid trading at all, and that the funds can conduct a "basket trade" with another market participant in which it transfers shares of the fund in exchange for a specified basket of constituent securities, and that these are not counted in market volume statistics as they are non-exchange transactions.

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So, with the latter, all the buying is simply pumping up the prices without any care for valuation.
This is just a restatement of the idea that somehow you need much more than 99% of the market to be actively traded for the price discovery function to work, which is risible and has been repeatedly addressed in this thread.

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I donít think passive investors as a whole have the knowledge and acumen to sit tight if things get rocky... Institutional orgs and pension funds will also get spooked and go running
Unsubstantiated claim again. And, as discussed above, even a 'large' outflow from passive would be a tiny blip in total trading volume.

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4. The tipping point MAY not be far off. We simply donít know. The gap is closing fast between active and passive. And certain activity masks how close things really are... What even IS the 'tipping point'? Weíve never experienced this before! Whoís to say the prices arenít hugely inflated already and a bubble-burst is round the corner? We donít KNOW for certain.
Slippery slope fallacy

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to look only at the two ends of the spectrum - the 100% active scenario and the 100% passive scenario - as being workable is a mistake. Yes, both scenarios MAY function fine, but that doesnít mean every mix of the two along the spectrum would also work ok and not present problems.
Unsubstantiated claim. If peeing in 100% of your cheerios is a bad idea, and you argue that peeing in 0% of your cheerios is a good idea, it does not follow that there is some percentage of your cheerios strictly between 0% and 100% that is optimal to pee in.

Quote
We MAY end up realising in hindsight that current market valuations on big index firms are actually 30%+ over-priced right now and that they settle back down to that much lower true valuation after a bubble-burst.
Again presupposing price discovery has somehow been turned off with no evidence or logic to support that notion.

grantmeaname

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #58 on: September 13, 2019, 11:04:40 PM »
In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.
1) You suffer very high transaction costs as an institutional investor. Think of each trade you make at your discount brokerage like a hand of blackjack. There are both winners and losers, but in the long run Charles Schwab is going to come out ahead. You don't just need to be right 50.1% of the time, but far more often to pay the house their cut.
2) Here are some of the people that are winners. You will note that "random guy in a home office in Ypsilanti who thinks he knows better" is not likely to be right more than 50% of the time because he is across the table from:
- The company itself, repurchasing its own stock when it believes based on inside information that its shares are undervalued (this is legal, although regulated and disclosed after the fact)
- Executives, selling their shares when they believe based on inside information that they are overvalued and buying when they believe the shares are undervalued (also legal, also somewhat regulated and disclosed too late for you to know it's affecting your transaction price)
- people with undisclosed inside information for which regulators do not have the evidence or the resources to establish a case
- high frequency traders, who trade hundreds of times a second and put out "trip line" single lot bids and asks just to feel out other market participants, move the market against those participants, and then fill the orders at a less favorable price to the counterparty
- strategic investors who can take large volumes of stock and use it to earn an economic return far beyond what a small shareholder can - consortia, JVs, M&A proposals, activist investors
- institutions with the securities sitting on their balance sheet (dealers) or who have access to the security to become your counterparty through dark pools (brokers)
- well connected institutional investors, who may not have "inside information" in the SEC sense of the term but golf with the CFO and call around to middle managers of the company and competitors to stay better connected to the industry than the Motley Fools and Alpha Seekers.

Given all of these, why is it so hard to believe the giant corpus of evidence demonstrating that individual investors who take a more active role in their investments underperform those who do not?

grantmeaname

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #59 on: September 13, 2019, 11:18:10 PM »
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You absolutely can get whatever niche ETF you want.

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?

Telecaster

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #60 on: September 13, 2019, 11:39:53 PM »

In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.

So this group of people who in general have far higher incomes, far higher savings rates, who have their financial lives down pat otherwise just sort of say ďwell gosh I canít do any better than average!Ē and go on their way.

I donít get it. I really donít.

That's because by indexing you get by far better than average returns.  Average returns and worse are what active investors get.  I used this analogy before, but imagine if you could be in the top 15% of NBA basketball players, but without bothering to practice basketball.  Warren Buffett who is widely regarded as the greatest investor of all time has basically matched the index over the last 15 years.

I have no quibble with someone who wants to do something different than the index and wish them all the best.  I mean that sincerely.  But indexers are not average investors. They are among the elite performers. 


Buffalo Chip

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #61 on: September 14, 2019, 04:12:29 PM »
Donít get me wrong, I too am a massive advocate of passive index investing. I currently have 95%+ of my money invested that way and I have previously worked for a well-known UK version of Betterment, so I totally get the industry, the investment style and the historical landscape to active / passive.

I agree with the MMM blog post, of course, in that the financial media is full of irrelevant speculative guff, designed to baffle the punter and line the pockets of those in the industry. The old adage rings true - if these so-called experts really knew what was going to happen then they wouldnít be in mid-salary jobs writing about it, theyíd be retired on a beach somewhere enjoying the profits.

But I also agree that itís very different when someone like Burry speaks up, given his rare credentials. (He seldom gives interviews so why heís chosen to come out about this right now Iím not sure. I see heís been pushing certain US and Japanese small cap stocks that heís recently heavily invested in so maybe itís linked to that??)

Anyway, I think itís foolish to tear up Burryís assessment without full investigation and on reflection I believe he makes a lot of very salient pointsÖ


This is gonna take awhile.😁

I also have significant experience with index funds. I started with Vanguard back in the early 1990s. At the moment I am minimally exposed to index funds or passive equity funds. Particularly large caps. I am, however, slowly buying individual stocks that appeal to me. More as a hobby, but I anticipate that itíll be a significant part of my portfolio at some point. 

Large cap index funds are the sure thing now. Just like real estate was 15 years ago. What ever could go wrong?

Michael Burry weighing in is yet another piece in the puzzle. I doubt heís selling something. To what end? The guy made a humongous amount during the GFC. Assuming that he didnít completely screw up after that, heís probably a whole lot wealthier today. I would expect someone who is trying to market something to be a little more public with the message than sending an email. So I think weíre getting his sincere views. And given his history, his opinion should be listened to and carefully considered.

 And a lot of the FI community is invested in this idea that index funds are the holy grail of investment tools. From a historical perspective Iíd be the first to agree that theyíre correct. But as you will read on any investment prospectus, Past Performance is Not a Guarantee of Future Results.



Buffalo Chip

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #62 on: September 15, 2019, 11:24:45 AM »
In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.
1) You suffer very high transaction costs as an institutional investor. Think of each trade you make at your discount brokerage like a hand of blackjack. There are both winners and losers, but in the long run Charles Schwab is going to come out ahead. You don't just need to be right 50.1% of the time, but far more often to pay the house their cut.
2) Here are some of the people that are winners. You will note that "random guy in a home office in Ypsilanti who thinks he knows better" is not likely to be right more than 50% of the time because he is across the table from:
- The company itself, repurchasing its own stock when it believes based on inside information that its shares are undervalued (this is legal, although regulated and disclosed after the fact)
- Executives, selling their shares when they believe based on inside information that they are overvalued and buying when they believe the shares are undervalued (also legal, also somewhat regulated and disclosed too late for you to know it's affecting your transaction price)
- people with undisclosed inside information for which regulators do not have the evidence or the resources to establish a case
- high frequency traders, who trade hundreds of times a second and put out "trip line" single lot bids and asks just to feel out other market participants, move the market against those participants, and then fill the orders at a less favorable price to the counterparty
- strategic investors who can take large volumes of stock and use it to earn an economic return far beyond what a small shareholder can - consortia, JVs, M&A proposals, activist investors
- institutions with the securities sitting on their balance sheet (dealers) or who have access to the security to become your counterparty through dark pools (brokers)
- well connected institutional investors, who may not have "inside information" in the SEC sense of the term but golf with the CFO and call around to middle managers of the company and competitors to stay better connected to the industry than the Motley Fools and Alpha Seekers.

Given all of these, why is it so hard to believe the giant corpus of evidence demonstrating that individual investors who take a more active role in their investments underperform those who do not?

Interesting perspective and thanks for taking the time to type it out.

There seems to be this underlying assumption that individual investors will be frequently trading. Or otherwise completely taking leave of their senses. As far as Iím concerned, frequent trading or worse day trading is more akin to gambling than investing. And I have zero interest in trading more than I must. To quote an author Iím reading right now: ďthe perfect portfolio never needs a trade.Ē  The idea is to buy and hold. Which is a point that I think JL Collins makes very well. The disagreement is with (1) index funds which I do invest in, although less over time and (2) particularly large cap indexes which I generally donít.


grantmeaname

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #63 on: September 15, 2019, 11:39:17 AM »
ok, but even if you trade infrequently 1) why do you think that there is a persistent market anomaly that makes small caps likely to outperform over your investment horizon, if you think that on average the market is reasonably efficient? and 2) even if so, what makes you sure that your specific selections are going to outperform over your investment horizon vs a small cap index fund?

Buffalo Chip

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #64 on: September 15, 2019, 04:57:08 PM »
ok, but even if you trade infrequently 1) why do you think that there is a persistent market anomaly that makes small caps likely to outperform over your investment horizon, if you think that on average the market is reasonably efficient? and 2) even if so, what makes you sure that your specific selections are going to outperform over your investment horizon vs a small cap index fund?

1. Itís more a case of what I dislike less. Iím more attracted to international and small and mid cap value right now when it comes to index funds.

As for US large cap versus small cap question,  the point that MB is making I think is salient. Large caps are getting a whole lot of the passive investment pie. Worse, itís being allocated for the most part on a existing cap basis. To me itís something of a circular argument. Indexes disproportionately invest in companies 1-50 because of their relative market cap but the underlying reason theyíre in that 1-50 is because indexes (in part) are investing in them based on their relative market cap.

As for the Efficient Market theory, I disagree with it at least in the short term. In the long term I think thereís something to it, at least in the weak form.

2. Iím not sure. Not at all. No such thing as guarantees here. However Iím willing to give it a try and in the end Iím probably not going to do all that much worse than the market in the long run so long as I avoid the things that usually kill individual investors such as trading too frequently or bailing out at the bottom of the market.

Daisy

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #65 on: September 16, 2019, 02:11:11 PM »
In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.
1) You suffer very high transaction costs as an institutional investor. Think of each trade you make at your discount brokerage like a hand of blackjack. There are both winners and losers, but in the long run Charles Schwab is going to come out ahead. You don't just need to be right 50.1% of the time, but far more often to pay the house their cut.
2) Here are some of the people that are winners. You will note that "random guy in a home office in Ypsilanti who thinks he knows better" is not likely to be right more than 50% of the time because he is across the table from:
- The company itself, repurchasing its own stock when it believes based on inside information that its shares are undervalued (this is legal, although regulated and disclosed after the fact)
- Executives, selling their shares when they believe based on inside information that they are overvalued and buying when they believe the shares are undervalued (also legal, also somewhat regulated and disclosed too late for you to know it's affecting your transaction price)
- people with undisclosed inside information for which regulators do not have the evidence or the resources to establish a case
- high frequency traders, who trade hundreds of times a second and put out "trip line" single lot bids and asks just to feel out other market participants, move the market against those participants, and then fill the orders at a less favorable price to the counterparty
- strategic investors who can take large volumes of stock and use it to earn an economic return far beyond what a small shareholder can - consortia, JVs, M&A proposals, activist investors
- institutions with the securities sitting on their balance sheet (dealers) or who have access to the security to become your counterparty through dark pools (brokers)
- well connected institutional investors, who may not have "inside information" in the SEC sense of the term but golf with the CFO and call around to middle managers of the company and competitors to stay better connected to the industry than the Motley Fools and Alpha Seekers.

Given all of these, why is it so hard to believe the giant corpus of evidence demonstrating that individual investors who take a more active role in their investments underperform those who do not?

Oh my, @grantmeaname is on fire (or FIRE?) on this thread. This is what he presented at CMTO last year.

I am again reassured by his thoughtful analysis. So much so, that he doesn't have to avoid me at camp this year because I am satisfied with his answer (again).

Now we can share maple fluff and talk about other things at camp. :)

J Boogie

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #66 on: September 17, 2019, 10:38:14 AM »
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You absolutely can get whatever niche ETF you want.

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?

Shorting is not easy peasy. You have to open a margin account and make a bunch of decisions regarding price and timing. And of course there is always the risk of a short squeeze and regardless of how bad the fundamentals are, the classic Keynes quote "the market can remain irrational longer than you can remain solvent" applies here.

Regarding my comment about the companies we use personally, just imagine a stereotypical millennial. They're scrolling IG on their Iphone, they're buying IPAs at the brewery that uses Square chip readers that they put their Visa cards into, they use venmo to pay their friends back, at work they use Excel spreadsheets and Outlook inboxes, though they personally have gmail addresses, they're prime members with a netflix subscription too, drinking starbucks lattes and so on and so forth.

This stable of stocks behind those companies/products has totally crushed the S&P over the past decade and it's not even close. I didn't even try to select winners, just ones that millenials like. But pretty much every single one of those companies handily beat the S&P over the past 10 years. The point is when we notice how likely we ourselves as well as our peers are to choose one company's products/service that gives a good indication the companies are crushing it. It's basically the Jeff Bezos advice that you should invest in companies that change the way you live your life.






matchewed

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #67 on: September 17, 2019, 10:51:55 AM »
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You absolutely can get whatever niche ETF you want.

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?

Shorting is not easy peasy. You have to open a margin account and make a bunch of decisions regarding price and timing. And of course there is always the risk of a short squeeze and regardless of how bad the fundamentals are, the classic Keynes quote "the market can remain irrational longer than you can remain solvent" applies here.

Regarding my comment about the companies we use personally, just imagine a stereotypical millennial. They're scrolling IG on their Iphone, they're buying IPAs at the brewery that uses Square chip readers that they put their Visa cards into, they use venmo to pay their friends back, at work they use Excel spreadsheets and Outlook inboxes, though they personally have gmail addresses, they're prime members with a netflix subscription too, drinking starbucks lattes and so on and so forth.

This stable of stocks behind those companies/products has totally crushed the S&P over the past decade and it's not even close. I didn't even try to select winners, just ones that millenials like. But pretty much every single one of those companies handily beat the S&P over the past 10 years. The point is when we notice how likely we ourselves as well as our peers are to choose one company's products/service that gives a good indication the companies are crushing it. It's basically the Jeff Bezos advice that you should invest in companies that change the way you live your life.

I mean you do realize why they beat the S&P 500 right? New technology and new businesses will generally outperform old businesses with established technologies. The trick in your case is guessing who is the next business. As those companies you see mature their ability to outperform the S&P 500 will fade, and they will be just another 3% a year business (or whatever number).

IMO it is not so easy as to just look around and see what those crazy millennials are doing. Don't they also buy pants? Why haven't you included the pants manufacturers? Do they not eat food, how about grocery stores? Also scrolling IG on their iPhone (I'm legitimately confused as to what this is, rather I know what an iPhone is but what is scrolling IG)?

I think you may be oversimplifying how easy it is to select a company to outperform the S&P 500. Uber anyone? All my friends use it and I think it's a poop bucket of a company to invest in.

grantmeaname

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #68 on: September 17, 2019, 12:33:26 PM »
Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #69 on: September 17, 2019, 01:20:01 PM »
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You absolutely can get whatever niche ETF you want.

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?

Shorting is not easy peasy. You have to open a margin account and make a bunch of decisions regarding price and timing. And of course there is always the risk of a short squeeze and regardless of how bad the fundamentals are, the classic Keynes quote "the market can remain irrational longer than you can remain solvent" applies here.

Regarding my comment about the companies we use personally, just imagine a stereotypical millennial. They're scrolling IG on their Iphone, they're buying IPAs at the brewery that uses Square chip readers that they put their Visa cards into, they use venmo to pay their friends back, at work they use Excel spreadsheets and Outlook inboxes, though they personally have gmail addresses, they're prime members with a netflix subscription too, drinking starbucks lattes and so on and so forth.

This stable of stocks behind those companies/products has totally crushed the S&P over the past decade and it's not even close. I didn't even try to select winners, just ones that millenials like. But pretty much every single one of those companies handily beat the S&P over the past 10 years. The point is when we notice how likely we ourselves as well as our peers are to choose one company's products/service that gives a good indication the companies are crushing it. It's basically the Jeff Bezos advice that you should invest in companies that change the way you live your life.

I mean you do realize why they beat the S&P 500 right? New technology and new businesses will generally outperform old businesses with established technologies. The trick in your case is guessing who is the next business. As those companies you see mature their ability to outperform the S&P 500 will fade, and they will be just another 3% a year business (or whatever number).

IMO it is not so easy as to just look around and see what those crazy millennials are doing. Don't they also buy pants? Why haven't you included the pants manufacturers? Do they not eat food, how about grocery stores? Also scrolling IG on their iPhone (I'm legitimately confused as to what this is, rather I know what an iPhone is but what is scrolling IG)?

I think you may be oversimplifying how easy it is to select a company to outperform the S&P 500. Uber anyone? All my friends use it and I think it's a poop bucket of a company to invest in.

I don't think I am. Thanks for mentioning Uber. I did not leave it out intentionally. Anyways, you'd be down about 10% on that one. More than made up for by all of the massive wins from the other companies I mentioned.

Regarding pants and grocery stores, I am more referencing the things they do that are different than previous generations did when they were that age. But yes, food & clothing preferences - Chipotle, Panera Bread (no longer publicly traded), both have beat the S&P. Zara isn't publicly traded, not aware of many other millennial favorites for clothing especially ones that are publicly traded.

BTW by scrolling IG I meant Instagram, owned by facebook.

Besides Uber/Lyft, can anyone thinking of more companies beloved by millennials that could bring down this little S&P besting millenial faves index I'm creating here?

Yeah, I get that many of these companies are new. But many are not. Microsoft and starbucks and visa for example, all of which have completely shredded the S&P over the past decade.


J Boogie

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #70 on: September 17, 2019, 01:28:32 PM »
Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.

I'm referring to the things that are more unique to new generation that previous generations weren't known for as much.

So even for the more mature companies I just named, V and MSFT and SBUX, millennials are more likely to have a college degree and work at a computer, buy lattes, and use plastic to pay than previous generations.

Millenials are not more likely to own cars, and live in houses than previous generations. But they probably are more likely to have mental health problems than previous generations for various reasons which are completely tangential. The point is that it's common sense investing to bet on companies that are more popular with younger earners.

So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.

matchewed

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #71 on: September 17, 2019, 01:43:53 PM »
Wait there is a whole generation of avacado toast eating homeless people using excel?

Oh the humanity.

Sounds like a decent horror movie plot.

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #72 on: September 17, 2019, 02:14:09 PM »
Silly goose, they are using Google Sheets, not Excel. ;-)

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #73 on: September 17, 2019, 02:31:30 PM »
So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.

What time frame? You mentioned 10 years but were millenials buying a lot of stock in 2009?

Chipotle, Uber, Subaru, Samsung, Amazon, and even Apple don't do as well as SPY over one or more of the 1/2/5 year time frames. Google and Starbucks are the only consistent top performers. And Target, if that's a millenial brand.

Of course, the big question is: when do these smarter-than-professional millenial stock pickers sell? Have they already sold their Uber stock at a loss? Did they sell their Chipotle stock in 2017 when the sickness problems were happening? Did they dump their Subaru stock when they realized that their Subie burned oil even under warranty? Are they still holding their Tesla stock because Tesla will change the world?

J Boogie

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #74 on: September 17, 2019, 03:44:55 PM »
So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.

What time frame? You mentioned 10 years but were millenials buying a lot of stock in 2009?

Chipotle, Uber, Subaru, Samsung, Amazon, and even Apple don't do as well as SPY over one or more of the 1/2/5 year time frames. Google and Starbucks are the only consistent top performers. And Target, if that's a millenial brand.

Of course, the big question is: when do these smarter-than-professional millenial stock pickers sell? Have they already sold their Uber stock at a loss? Did they sell their Chipotle stock in 2017 when the sickness problems were happening? Did they dump their Subaru stock when they realized that their Subie burned oil even under warranty? Are they still holding their Tesla stock because Tesla will change the world?

I think I'll try to sharpen my casual theory into a something that closer resembles the description of a fund. I'll it CurrentGen trading as CTGN.

We only own stock in companies that the youngest cohort of FT workers patronize in greater numbers per capita than previous generations.

They are not necessarily the companies that youngest earners invest in.

We initiate the position as soon as the relevant data is available. If the youngest cohort loses interest in the company, we trim our position accordingly. Positions are weighted by whose customer/user bases have the greatest volume and concentration of the youngest cohort.


To respond more directly, I'd question the assumption that millenials buy more subarus, teslas, and samsung gear per capita than gen xers and boomers. Millenials are buying less vehicles per capita than previous generations did, and Teslas are out of reach for most millenials. Median age of a Tesla owner is 52-54.

https://hedgescompany.com/blog/2018/11/tesla-owner-demographics/







J Boogie

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #75 on: September 17, 2019, 03:50:59 PM »
Silly goose, they are using Google Sheets, not Excel. ;-)

Ha! Maybe the ones freelancing on their AAPL device from a SBUX that they UBERed to in a TSLA.

I mainly mention it because in my office all of the millenials breeze through excel while everyone older seems to struggle and need refreshers on vlookups and pivot tables. Same with outlook and sharepoint. Though MSFT is an older company, I find younger people are far more comfortable in the office/sharepoint environment than boomers. Gen Xers are probably the most seasoned MSFT users though.

grantmeaname

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #76 on: September 17, 2019, 04:09:21 PM »
All you're doing is demonstrating survivorship bias. Of course all the risky growth companies from 10 years ago that are still around earned handsome returns.

But wework isn't working. Moviepass is bankrupt. Millennials used a lot of Napster on their Compaqs a generation ago.

That's why growth companies are growth companies.

matchewed

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #77 on: September 17, 2019, 04:15:19 PM »
Millennials used a lot of Napster on their Compaqs a generation ago.



https://www.youtube.com/watch?v=LeKX2bNP7QM

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #78 on: September 17, 2019, 06:16:56 PM »



We initiate the position as soon as the relevant data is available. If the youngest cohort loses interest in the company, we trim our position accordingly. Positions are weighted by whose customer/user bases have the greatest volume and concentration of the youngest cohort.



By the time this trend-setting data is available, how much growth is remaining to exploit?  If you begin with four companies competing for this next-gen space in the economy, what's to say the winning one or two don't just plateau which coincides with your demographic data becoming available?
« Last Edit: September 17, 2019, 08:18:27 PM by Travis »

Radagast

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Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
« Reply #79 on: September 17, 2019, 08:13:27 PM »
Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.

I'm referring to the things that are more unique to new generation that previous generations weren't known for as much.

So even for the more mature companies I just named, V and MSFT and SBUX, millennials are more likely to have a college degree and work at a computer, buy lattes, and use plastic to pay than previous generations.

Millenials are not more likely to own cars, and live in houses than previous generations. But they probably are more likely to have mental health problems than previous generations for various reasons which are completely tangential. The point is that it's common sense investing to bet on companies that are more popular with younger earners.

So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.
Off hand I can't think of any. Perhaps that might be a reasonable strategy: buy a share of whatever company every time you buy their product.

But this seems like it might be more obvious in hindsight. Can you give a list of ten companies meeting your criteria so we can experiment going forward? If they add up to less than about $210 I will even sell my share of BRK.B and buy them in Robinhood so I can both track and benefit from the profits!

J Boogie

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Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.

I'm referring to the things that are more unique to new generation that previous generations weren't known for as much.

So even for the more mature companies I just named, V and MSFT and SBUX, millennials are more likely to have a college degree and work at a computer, buy lattes, and use plastic to pay than previous generations.

Millenials are not more likely to own cars, and live in houses than previous generations. But they probably are more likely to have mental health problems than previous generations for various reasons which are completely tangential. The point is that it's common sense investing to bet on companies that are more popular with younger earners.

So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.
Off hand I can't think of any. Perhaps that might be a reasonable strategy: buy a share of whatever company every time you buy their product.

But this seems like it might be more obvious in hindsight. Can you give a list of ten companies meeting your criteria so we can experiment going forward? If they add up to less than about $210 I will even sell my share of BRK.B and buy them in Robinhood so I can both track and benefit from the profits!

SQ, PYPL, V, AMZN, FB, GOOGL, MA, AAPL, SBUX, MSFT

That's gonna be about 15 times more than a share of BRK.B :(

J Boogie

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We initiate the position as soon as the relevant data is available. If the youngest cohort loses interest in the company, we trim our position accordingly. Positions are weighted by whose customer/user bases have the greatest volume and concentration of the youngest cohort.



By the time this trend-setting data is available, how much growth is remaining to exploit?  If you begin with four companies competing for this next-gen space in the economy, what's to say the winning one or two don't just plateau which coincides with your demographic data becoming available?

Plenty of growth remaining, as long as you are flexible about the data you're willing to use. Companies share plenty of meaningful data on earnings calls.


J Boogie

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All you're doing is demonstrating survivorship bias. Of course all the risky growth companies from 10 years ago that are still around earned handsome returns.

But wework isn't working. Moviepass is bankrupt. Millennials used a lot of Napster on their Compaqs a generation ago.

That's why growth companies are growth companies.

Fair point, but there is a point of distinction. Companies that are popular among the youngest earning cohort (YEC) are not the same as pre-earnings style growth companies. Uber would be a great example of a stock that is both, as would Square, though Square differs in that it has a clear path to profitability and is investing revenue in rapid growth.

At this point I should mention my fund does not simply consider popularity among the YEC, but considers fundamentals, industry trajectory, valuation, etc.






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SQ, PYPL, V, AMZN, FB, GOOGL, MA, AAPL, SBUX, MSFT

That's gonna be about 15 times more than a share of BRK.B :(

Devils advocate? Iím your huckleberry 😁

Iím extremely loathe to criticize alternative investment strategies. So individual stocks? Great! Derivatives?  Awesome! Commodities? So long as it works for you!

Digging deeper, I do see some trouble in River City! Thatís Trouble with a T, and that rhymes with P, and that stands for Price Earnings ratios!

Taking a look at these stocks, I think I saw a grand total of one with a PE ratio less than the SP average. The rest of these stocks, excluding one of which isnít profitable, are at very high PEs. Iím old fashioned. I view stock value as a function of its current and anticipated earnings. By having nosebleed PE ratios I gotta ask if there is any further room for growth that justifies the price? The market seems to think so. And as usual, I think the market needs to put down the pipe.

For most of these I really donít see the upside potential.  Does SBUX really have the potential to open up more stores across the world for people who will line up to buy $5 FrappaCaffeMochaliciousSomethingorothers? Is AMZN really going to take over the retail world before getting split up in an antitrust action?  Not seeing the upside potential with this portfolio.