Author Topic: Ready for a Correction  (Read 89781 times)

milesdividendmd

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Ready for a Correction
« Reply #300 on: September 10, 2015, 09:23:59 AM »
"More people adopting momentum strategies positively reinforces their returns just like it does for the buy and hold strategy.  We've already been over this.  Markets respond to groupthink."

This conveniently ignores that the most likely thing to happen when people crowd into an investment strategy is for the outperformance to be arbitraged away. Buy and hold is the exception to the rule. So in order to be internally consistent you shouldn't you include a disclosure that you employ that strategy before each of your posts?

  "DM is just a better diversified and slower rolling version of HFT or other kinds of market timing shenanigans."

No it's not. This statement highlights how poor your understanding of DM is. You make a very specific (and obviously false) claim here that you provide no evidence for.  If you believe this to be the case why not provide one shred of evidence?

"I'll continue to ignore the personal attacks like "stunningly ignorant" here, as I did in the DM thread, as I don't feel like wallowing in that pond with you.  You've got a mean streak, brother."

Before we start worrying about personal attacks, "mean streaks" and wallowing, let's remind ourselves that this entire interchange began with you leveling a personal attack on my credibility by implying that I had failed to disclose a conflict of interest which clearly does not exist. The fact that you repeatedly ignore this, strongly suggests that you know this to be the case. If defending myself constitutes a mean streak, then how would you define your own aloof grenade Lobbing?

ShoulderThingThatGoesUp

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Re: Ready for a Correction
« Reply #301 on: September 10, 2015, 09:32:10 AM »
Yeah but oil is basically an oligopoly where few control supply

What? There are thousands of players of every size who are not all aligned and who can alter the supply of crude oil at a whim.

brooklynguy

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Re: Ready for a Correction
« Reply #302 on: September 10, 2015, 10:49:56 AM »
Miles, at this point I think sol brings up this issue only to tease out a certain reaction from you, and you make it too easy for him.  You keep answering his mischievous button-pushing with the same exaggerated fight response.  Take a step back and reread what sol actually wrote within the confines of this thread (which was unassailably true).  I understand that you were responding within the context of the broader background, but in general it might serve you better to excise emotions from your posts.  Sol's posts may be pushing buttons, but they're doing so dispassionately.

sol

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Re: Ready for a Correction
« Reply #303 on: September 10, 2015, 10:54:55 AM »
in order to be internally consistent you shouldn't you include a disclosure that you employ that strategy before each of your posts?

Only if the post is about the relative merits of trading strategies.  If you're going to tout a strategy that you use, shouldn't you disclose that you use it and stand to gain from being right, rather than presenting your advice as impartial analysis?

Quote
why not provide one shred of evidence?

How about we keep the DM discussion in the DM thread?  I think it's sufficient to say you're comfortable weathering the correction because you sold into cash last week, without anyone having to argue why that was or was not a good decision.

Quote
this entire interchange began with you leveling a personal attack on my credibility

Relax, I didn't mean to question your credibility, just to disagree with your chosen strategy.  You expressed support, I expressed resistance, this is how conversations work.  It's not about you.

Quote
how would you define your own aloof grenade Lobbing?

Charming and whimsical?

milesdividendmd

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Re: Ready for a Correction
« Reply #304 on: September 10, 2015, 10:58:04 AM »
Miles, at this point I think sol brings up this issue only to tease out a certain reaction from you, and you make it too easy for him.  You keep answering his mischievous button-pushing with the same exaggerated fight response.  Take a step back and reread what sol actually wrote within the confines of this thread (which was unassailably true).  I understand that you were responding within the context of the broader background, but in general it might serve you better to excise emotions from your posts.  Sol's posts may be pushing buttons, but they're doing so dispassionately.

You seem to be saying that Sol is trolling (mischievous button pushing you generously call it ) here.  So the obvious question: Why give Sol a pass on trolling, Brooklyn? 

It seems to me that the obvious advice for you to dispense would be for Sol to not troll.  Whether he is passionate or dispassionate about his trolling is immaterial.

If someone questions my integrity I take it seriously and I call them out, particularly when the argument is so sloppily made. 

Perhaps you should ignore for a moment that we disagree about DM, and consider your own advice more carefully.
« Last Edit: September 10, 2015, 11:01:56 AM by milesdividendmd »

brooklynguy

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Re: Ready for a Correction
« Reply #305 on: September 10, 2015, 11:12:42 AM »
You seem to be saying that Sol is trolling (mischievous button pushing you generously call it ) here.  So the obvious question: Why give Sol a pass on trolling, Brooklyn? 

That's a fair question.  I suppose there's a fine line between value-adding provocativeness and value-detracting trolling, but I'm not a moderator so thankfully I don't have to make those judgment calls.  Sol never denies that he can be deliberately inflammatory, which is part of the reason his posts are so well-loved by many (and so hated by others).  The same is true of MMM's posts on the main site.

milesdividendmd

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Re: Ready for a Correction
« Reply #306 on: September 10, 2015, 11:25:27 AM »
Let's be clear:  I'm not asking for censorship.  I'm just looking for intelligent arguments.  And when poorly defended provocative accusations are leveled my way, I will continue to point out that they are:

1.  Poorly thought out.
2.  Unsubstantiated.
3.  Revealing of a very poor understanding of the subject at hand.
4.  Sloppily constructed.
 

Seppia

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Re: Ready for a Correction
« Reply #307 on: September 10, 2015, 11:37:06 AM »

Yeah but oil is basically an oligopoly where few control supply

What? There are thousands of players of every size who are not all aligned and who can alter the supply of crude oil at a whim.

?
OPEC?

Mr. Green

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Re: Ready for a Correction
« Reply #308 on: September 10, 2015, 11:57:02 AM »

Yeah but oil is basically an oligopoly where few control supply

What? There are thousands of players of every size who are not all aligned and who can alter the supply of crude oil at a whim.

?
OPEC?
Agreed. You could count the players that can actually cause a ripple in the oil market on two hands (assuming you consider OPEC a single entity).

nobodyspecial

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Re: Ready for a Correction
« Reply #309 on: September 10, 2015, 12:27:56 PM »

What? There are thousands of players of every size who are not all aligned and who can alter the supply of crude oil at a whim.
OPEC?
Agreed. You could count the players that can actually cause a ripple in the oil market on two hands (assuming you consider OPEC a single entity).

Probably the only ones with enough capacity, low enough production costs and political will to affect the market are OPEC and the USA.
But US producers aren't allowed to export, Venezuela probably couldn't extract or ship enough to matter and everyone else is too expensive to flood the market at <$40.

forummm

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Re: Ready for a Correction
« Reply #310 on: September 10, 2015, 12:56:27 PM »
The Chinese government officials are hardcore Bogleheads:

Quote
Police officers have downloaded extensive trading data and asked fund managers why they sold shares when the market was going down, prompting discussions about basic investment strategy. Officers have bluntly told some fund managers to just stop selling.

http://www.nytimes.com/2015/09/10/world/asia/in-china-a-forceful-crackdown-in-response-to-stock-market-crisis.html

Left

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Re: Ready for a Correction
« Reply #311 on: September 10, 2015, 01:29:45 PM »
The Chinese government officials are hardcore Bogleheads:

Quote
Police officers have downloaded extensive trading data and asked fund managers why they sold shares when the market was going down, prompting discussions about basic investment strategy. Officers have bluntly told some fund managers to just stop selling.

http://www.nytimes.com/2015/09/10/world/asia/in-china-a-forceful-crackdown-in-response-to-stock-market-crisis.html
if they don't sell, how else will the fund managers get their pay? :D

Chuck

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Re: Ready for a Correction
« Reply #312 on: September 10, 2015, 02:34:42 PM »
The Chinese government officials are hardcore Bogleheads:

Quote
Police officers have downloaded extensive trading data and asked fund managers why they sold shares when the market was going down, prompting discussions about basic investment strategy. Officers have bluntly told some fund managers to just stop selling.

http://www.nytimes.com/2015/09/10/world/asia/in-china-a-forceful-crackdown-in-response-to-stock-market-crisis.html
if they don't sell, how else will the fund managers get their pay? :D
By buying moar

sirdoug007

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Re: Ready for a Correction
« Reply #313 on: September 10, 2015, 02:51:24 PM »
The Chinese government officials are hardcore Bogleheads:

Quote
Police officers have downloaded extensive trading data and asked fund managers why they sold shares when the market was going down, prompting discussions about basic investment strategy. Officers have bluntly told some fund managers to just stop selling.

http://www.nytimes.com/2015/09/10/world/asia/in-china-a-forceful-crackdown-in-response-to-stock-market-crisis.html

Sell your stocks?  Go to jail! (and do not collect $200!)

Wow!  Just a taste of the manipulation in the Chinese stock market.  They also recently arrested around 200 journalists for covering the stock market slide and lower growth.

http://money.cnn.com/2015/08/31/investing/china-arrests-markets-crash/

Mr. Green

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Re: Ready for a Correction
« Reply #314 on: September 10, 2015, 03:31:11 PM »
The Chinese government officials are hardcore Bogleheads:

Quote
Police officers have downloaded extensive trading data and asked fund managers why they sold shares when the market was going down, prompting discussions about basic investment strategy. Officers have bluntly told some fund managers to just stop selling.

http://www.nytimes.com/2015/09/10/world/asia/in-china-a-forceful-crackdown-in-response-to-stock-market-crisis.html

Sell your stocks?  Go to jail! (and do not collect $200!)

Wow!  Just a taste of the manipulation in the Chinese stock market.  They also recently arrested around 200 journalists for covering the stock market slide and lower growth.

http://money.cnn.com/2015/08/31/investing/china-arrests-markets-crash/
That stuff blows my mind man. Totally thankful I wasn't born in a communist country!

milesdividendmd

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Re: Ready for a Correction
« Reply #315 on: September 10, 2015, 03:44:57 PM »
The Chinese government officials are hardcore Bogleheads:

Quote
Police officers have downloaded extensive trading data and asked fund managers why they sold shares when the market was going down, prompting discussions about basic investment strategy. Officers have bluntly told some fund managers to just stop selling.

http://www.nytimes.com/2015/09/10/world/asia/in-china-a-forceful-crackdown-in-response-to-stock-market-crisis.html

Sell your stocks?  Go to jail! (and do not collect $200!)

Wow!  Just a taste of the manipulation in the Chinese stock market.  They also recently arrested around 200 journalists for covering the stock market slide and lower growth.

http://money.cnn.com/2015/08/31/investing/china-arrests-markets-crash/
That stuff blows my mind man. Totally thankful I wasn't born in a communist country!

 It's horrible, but communism is not the issue.  Totalitarianism is.
« Last Edit: September 10, 2015, 06:04:38 PM by milesdividendmd »

Seppia

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Re: Ready for a Correction
« Reply #316 on: September 10, 2015, 04:13:22 PM »
Well communism is one of the textbook forms of totalitarian government, so...
:)

nobodyspecial

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Re: Ready for a Correction
« Reply #317 on: September 10, 2015, 05:33:00 PM »
That stuff blows my mind man. Totally thankful I wasn't born in a communist country!
Idiots, don't they know that if you want to restore public faith in the markets you print a few $100Bn of public money to give to any institutions that made a bad bet so they can pay bonuses.

wienerdog

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Re: Ready for a Correction
« Reply #318 on: September 10, 2015, 05:55:50 PM »
That stuff blows my mind man. Totally thankful I wasn't born in a communist country!
Idiots, don't they know that if you want to restore public faith in the markets you print a few $100Bn of public money to give to any institutions that made a bad bet so they can pay bonuses.

QE4 to save the day!

sol

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Re: Ready for a Correction
« Reply #319 on: September 10, 2015, 06:04:39 PM »
Can we just make QEX a permanent part of the US economy?  As long as inflation isn't a problem, is there a downside to just perpetually printing money that is essentially turned into instantly rising corporate valuations?  Seems like it's only a problem if they shut it off, but that's true of most government programs.

wienerdog

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Re: Ready for a Correction
« Reply #320 on: September 10, 2015, 06:27:08 PM »
Can we just make QEX a permanent part of the US economy?  As long as inflation isn't a problem, is there a downside to just perpetually printing money that is essentially turned into instantly rising corporate valuations?

As long as the rest of the world buys it there really shouldn't be a problem....

Shor

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Re: Ready for a Correction
« Reply #321 on: September 10, 2015, 06:36:35 PM »
Can we just make QEX a permanent part of the US economy?  As long as inflation isn't a problem, is there a downside to just perpetually printing money that is essentially turned into instantly rising corporate valuations?  Seems like it's only a problem if they shut it off, but that's true of most government programs.
I think the reason they really don't want to is because inflation is a multi-fauceted problem.
For example, if they keep printing until inflation does start edging upward, then eventually anyone the US government already owes debt to starts to see a very real valuation decrease in their holdings.
 Now, investors/other governments do not operate on the concept of "so long as dollar inflation is down right now my holdings are still good". They act upon the, "What did they do right now which might impact me for the next 5-10-15 years?"
If the US comes out and announces that we will just keep on printing so long as people keep hoarding dollars, that alone can trigger a flush of dollar debt so that the investor avoids getting caught in the eventual future pinch of debt eroding with inflation.
And that flush would also impact current inflation, and a bit of self-fulfilling prophecy happens and people panic, and so on.

On a related note, I believe the Feds' current stance on relieving itself from its QE collected assets is to allow the debt to mature naturally rather than reselling it on the secondary market. If they try to sell their substantial amount of debt assets to quickly, it floods the market which can again trigger an inflation slide if the economy can't proportionally keep up with the transfer of money.

I don't think there is a lot of historical situations with a similar enough setup in globalized debt ownership with multiple, inter-connected fiat currency systems all being used at once to really give us a good idea on what would happen. And of course, this is all theoretical smoke. The actual market reaction can turn the "theory" all up on its head and leave everyone wondering wtf happened, and then why, and then "Oh! Why didn't i obviously see that coming?".

ender

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Re: Ready for a Correction
« Reply #322 on: September 10, 2015, 07:03:06 PM »
cannot understand how a very rational member like sol can actually believe the posts of another member can possibly have even the most insignificant influence on the markets.

I wasn't suggesting that any one person could move the markets, but that one particular strategy, widely adopted by millions of market participants, could move markets.

I was thinking about this today, specifically about how significantly speculation can increase the prices of single companies (or entire industries).

At some level it's a ponzi scheme - if I can convince enough people that a company (or commodity...) is "only going up" then they eventually might buy it. If they begin convincing other people the same, it eventually results in a situation that it can be in your best interests to convince others that stock (or gold commodity) is great, too.

But the flip side is that this is nearly exactly how the entire market works, just to varying levels.


Which when you think about it is rather frightening.

sol

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Re: Ready for a Correction
« Reply #323 on: September 10, 2015, 07:19:02 PM »
I was thinking about this today, specifically about how significantly speculation can increase the prices of single companies (or entire industries).

This forum has repeatedly linked to studies that show that companies that Kramer features on his program as great buys experience a temporary price bump.  It's consistent and repeatable, and probably worth millions to the savvy market timer. 

wienerdog

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Re: Ready for a Correction
« Reply #324 on: September 10, 2015, 07:19:33 PM »

I was thinking about this today, specifically about how significantly speculation can increase the prices of single companies (or entire industries).


It has been happening for a very long time. 

http://www.library.hbs.edu/hc/ssb/history.html

MoonShadow

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Re: Ready for a Correction
« Reply #325 on: September 10, 2015, 07:25:00 PM »
cannot understand how a very rational member like sol can actually believe the posts of another member can possibly have even the most insignificant influence on the markets.

I wasn't suggesting that any one person could move the markets, but that one particular strategy, widely adopted by millions of market participants, could move markets. 

Imagine what the market fluctuations would look like if every investor was a momentum trader; every random motion would be instantly translated into a race to zero or infinity.  Now imagine half of investors are momentum traders, and otherwise normal fluctuations would be greatly amplified by the market timers trying to catch every little wave.  At some smaller percentage of momentum traders the effect must diminish, but I think that current market gyrations make a lot more sense once you recognize that there are momentum traders out there right now, piling on to every price swing in the pursuit of short term profit.

Momentum trading strategies amplify market volatility.  They are a counterproductive force in the markets, rational actors who seek personal advantage by disrupting the market for everyone else.  I'm not a fan, just on philosophical ground.

I have the same opinion about index fund investing.  If a significant majority of investment funds are just automatic systems tracking an index, and the index itself is a representation of a very recent snapshot of the state of the market being tracked; then there is a tipping point at which the 'feedback loop' created by automated index fund investing becomes unstable.  Once index investing becomes large enough to influence the index itself, an aware market mover can deliberately game the index.  Like a finger flicking the first domino that each domino is 1% larger than the last.  I have no idea if this has already happened, or if it ever will, but the thought has concerned me in the past considering the magnitude of funds invested in this manner.

MoonShadow

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Re: Ready for a Correction
« Reply #326 on: September 10, 2015, 07:30:35 PM »
I was thinking about this today, specifically about how significantly speculation can increase the prices of single companies (or entire industries).

This forum has repeatedly linked to studies that show that companies that Kramer features on his program as great buys experience a temporary price bump. It's consistent and repeatable, and probably worth millions to the savvy market timer.

But probably only to the market timer that knows the content of the latest show before it airs.  If Kramer himself did this, it would be against the law; but what if his camera man or 'grip boy' was doing this just following the taping of the show?  Would that be insider trading?  How would anyone catch it?

milesdividendmd

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Re: Ready for a Correction
« Reply #327 on: September 10, 2015, 07:39:16 PM »
Not sure opinion rises to the level of insider trading. I'm pretty sure it doesn't.

MoonShadow

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Re: Ready for a Correction
« Reply #328 on: September 10, 2015, 07:45:04 PM »
Not sure opinion rises to the level of insider trading. I'm pretty sure it doesn't.

Hard to say.  But I would think that it would be very difficult to spot, until the cameraman was making more on trades than by controlling a camera.

brooklynguy

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Re: Ready for a Correction
« Reply #329 on: September 10, 2015, 07:48:05 PM »
I have the same opinion about index fund investing.  If a significant majority of investment funds are just automatic systems tracking an index, and the index itself is a representation of a very recent snapshot of the state of the market being tracked; then there is a tipping point at which the 'feedback loop' created by automated index fund investing becomes unstable.  Once index investing becomes large enough to influence the index itself, an aware market mover can deliberately game the index.  Like a finger flicking the first domino that each domino is 1% larger than the last.  I have no idea if this has already happened, or if it ever will, but the thought has concerned me in the past considering the magnitude of funds invested in this manner.

This issue has been discussed at length in various "what if everyone indexed?" threads, but the distinction between this and the philosophical objection sol expressed to momentum strategies is that this would not disrupt the market for everyone else (i.e., in this case, active traders), but make the market less efficient and therefore easier for them to exploit (which, in practice if not in theory, is why the hypothetical tipping point will never be reached).

sol

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Re: Ready for a Correction
« Reply #330 on: September 10, 2015, 08:10:00 PM »
But probably only to the market timer that knows the content of the latest show before it airs. 

If someone can find the previously posted links, you might change your mind.  If memory serves, it was like a 2.5% bump in the price of his buy recommendations, starting the day after the show and lasting somewhere between a week to a month before the prices re-equilibrated.

It's really no different than any other pump and dump scheme.  The Motley Fool does the exact same thing, trying to reach as wide of an audience as possible to promote a stock and bid up the price temporarily, but Kramer has a wider (and probably even less educated) audience.

DavidAnnArbor

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Re: Ready for a Correction
« Reply #331 on: September 10, 2015, 08:13:31 PM »
Can we just make QEX a permanent part of the US economy?  As long as inflation isn't a problem, is there a downside to just perpetually printing money that is essentially turned into instantly rising corporate valuations?  Seems like it's only a problem if they shut it off, but that's true of most government programs.

Greater federal fiscal spending would also help boost demand in the economy which would feed into rising corporate valuations, but also give us the added benefit of better infrastructure/reduced carbon and pollution emissions.

Mr. Green

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Re: Ready for a Correction
« Reply #332 on: September 11, 2015, 07:06:58 AM »

I was thinking about this today, specifically about how significantly speculation can increase the prices of single companies (or entire industries).


It has been happening for a very long time. 

http://www.library.hbs.edu/hc/ssb/history.html
They even made a movie about it called Boiler Room. Slightly different details, same exact concept.

forummm

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Re: Ready for a Correction
« Reply #333 on: September 11, 2015, 10:28:24 AM »
I have the same opinion about index fund investing.  If a significant majority of investment funds are just automatic systems tracking an index, and the index itself is a representation of a very recent snapshot of the state of the market being tracked; then there is a tipping point at which the 'feedback loop' created by automated index fund investing becomes unstable.  Once index investing becomes large enough to influence the index itself, an aware market mover can deliberately game the index.  Like a finger flicking the first domino that each domino is 1% larger than the last.  I have no idea if this has already happened, or if it ever will, but the thought has concerned me in the past considering the magnitude of funds invested in this manner.

This is a common misunderstanding of how index funds work. They are market neutral in the market they are indexing. They don't buy and sell (other than people adding to or subtracting from their accounts), they just sit there.

nobodyspecial

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Re: Ready for a Correction
« Reply #334 on: September 11, 2015, 12:21:43 PM »
They could have an effect on stocks near the bottom of the index.
If the 499th SP500 company gets bought every day by millions of ETFs then its price is going to rise - it could create a big gulf between this and the 501st which is self reinforcing.

MoonShadow

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Re: Ready for a Correction
« Reply #335 on: September 11, 2015, 12:35:17 PM »
I have the same opinion about index fund investing.  If a significant majority of investment funds are just automatic systems tracking an index, and the index itself is a representation of a very recent snapshot of the state of the market being tracked; then there is a tipping point at which the 'feedback loop' created by automated index fund investing becomes unstable.  Once index investing becomes large enough to influence the index itself, an aware market mover can deliberately game the index.  Like a finger flicking the first domino that each domino is 1% larger than the last.  I have no idea if this has already happened, or if it ever will, but the thought has concerned me in the past considering the magnitude of funds invested in this manner.

This is a common misunderstanding of how index funds work. They are market neutral in the market they are indexing. They don't buy and sell (other than people adding to or subtracting from their accounts), they just sit there.

Typically, yes, but every investor has an effect upon the market.  There is a feedback effect to index funds, I just don't know how significant it may be.

sol

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Re: Ready for a Correction
« Reply #336 on: September 11, 2015, 01:24:30 PM »
Just to clarify, index funds totally do buy and sell, and they don't typically hold every stock in the index.  The goal is to track the index with a representative sampling of stocks, not own every company.  That's why they all have tracking errors.

It's never practical to buy more shares of every company in an index every time any investors buys into the index.  They buy big lots of stocks less frequently, to try to simulate the total index return by maintaining an appropriate balance of industries, but they necessarily have to hold some cash in between, too.

nobodyspecial

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Re: Ready for a Correction
« Reply #337 on: September 11, 2015, 01:40:19 PM »
Just to clarify, index funds totally do buy and sell, and they don't typically hold every stock in the index. ...It's never practical to buy more shares of every company in an index every time any investors buys into the index. 
OK - I assumed they did buy a market weighted amount of each stock.

Obviously they don't do this everytime I buy a single ETF share but I assumed they gradually, over the day, bought and sold to match their total  holding - and this was the cause of the tracking error.

sol

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Re: Ready for a Correction
« Reply #338 on: September 11, 2015, 01:50:50 PM »
I assumed they did buy a market weighted amount of each stock.

Transaction costs on the Russel 5000 would be killer.

forummm

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Re: Ready for a Correction
« Reply #339 on: September 11, 2015, 01:56:03 PM »
Just to clarify, index funds totally do buy and sell, and they don't typically hold every stock in the index.  The goal is to track the index with a representative sampling of stocks, not own every company.  That's why they all have tracking errors.

It's never practical to buy more shares of every company in an index every time any investors buys into the index.  They buy big lots of stocks less frequently, to try to simulate the total index return by maintaining an appropriate balance of industries, but they necessarily have to hold some cash in between, too.

Actually that's not correct. I'm just going to go off of Vanguard's practices since they are the originator and leader of index funds. Other funds could have different practices, but index funds are explicitly designed to own the index, and the entire index, and in the same proportions as dictated by the index. If no one was buying or selling shares of the index fund, Vanguard would not be buying or selling any shares at all (unless the index changed--which it does infrequently as a new stock is added to or removed from the index the fund is tracking). That's why index funds are so cost efficient--there's almost no buying and selling. If no one buys or sells VFIAX on a particular day and Apple doubles in market price, the index does not buy or sell any Apple shares, or any other shares.

Now Vanguard does do some smart stuff to manage how they buy and sell shares so that they put the money into play right away and can track the index more perfectly. One of those tactics is to buy or sell index futures when the underlying shares don't have as much liquidity as desired. So for VFIAX when a bunch of people buy more VFIAX, Vanguard might buy an S&P500 e-Mini temporarily (so the money goes to work day 1) while they slowly buy the underlying stocks when liquidity is available. But otherwise they put almost 100% of the money directly into the underlying stocks (a very small fraction is held in the Vanguard Liquidity Fund to pay out cash for dividends and redemptions). You can see exactly how much they own of every single company in the index on the fund's holding web page.

forummm

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Re: Ready for a Correction
« Reply #340 on: September 11, 2015, 02:01:04 PM »
Just to clarify, index funds totally do buy and sell, and they don't typically hold every stock in the index. ...It's never practical to buy more shares of every company in an index every time any investors buys into the index. 
OK - I assumed they did buy a market weighted amount of each stock.

Obviously they don't do this everytime I buy a single ETF share but I assumed they gradually, over the day, bought and sold to match their total  holding - and this was the cause of the tracking error.

Actually they do buy a market weighted amount of stock. When you buy an ETF you are buying it from someone else who owns that share. So the underlying index doesn't do any buying or selling at all. Sometimes the index fund creator issues new lots ("creation units") of usually 50,000 shares, and sometimes market makers will redeem a creation unit amount of shares and receive the underlying stocks in return. But ETF trading incurs no transaction costs for the fund itself (but it does for you personally).

I assumed they did buy a market weighted amount of each stock.

Transaction costs on the Russel 5000 would be killer.

There is hardly any transaction cost for these small stocks because very few shares are actually transacted. Again, the genius of a market weighted index. And Vanguard uses Russell index futures to even further minimize any transaction or liquidity expense associated with buying or selling VTSAX. If you look at the annual report for VTSAX you can see the portfolio holding of all the different companies and the index futures as well.

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Re: Ready for a Correction
« Reply #341 on: September 11, 2015, 02:42:09 PM »
but index funds are explicitly designed to own the index, and the entire index, and in the same proportions as dictated by the index. If no one was buying or selling shares of the index fund, Vanguard would not be buying or selling any shares at all (unless the index changed--which it does infrequently as a new stock is added to or removed from the index the fund is tracking).

This.  While Sol is correct in the sense that not all index funds respond immediately and precisely, the very definition of an index fund is a mutual fund that replicates an index with pre-determined rules regarding weighting.  Market cap weighting is the typical method, but an index fund can choose another weighting methodology, such as the 10 year P/E ratio average, or dividend income weighting, etc.  But a mutual fund that does not possess every individual stock listed on an index is not an index fund.  My understanding, which may be incorrect, is that index funds rebalance against their index periodicly.  The main reason that there isn't much actual turnover is that a large index fund sort-of functions as an off-street marketplace in it's own right, because the index fund only buys or sells stocks when in-flows and out-flows of cash payments don't balance out well.  VFIAX is so large that the cash fund necessary to buffer those cash flows is miniscule compared to the total fund value; so generally speaking, the larger the index fund, the lower the turnover rate.

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Re: Ready for a Correction
« Reply #342 on: September 11, 2015, 02:46:58 PM »
but index funds are explicitly designed to own the index, and the entire index, and in the same proportions as dictated by the index. If no one was buying or selling shares of the index fund, Vanguard would not be buying or selling any shares at all (unless the index changed--which it does infrequently as a new stock is added to or removed from the index the fund is tracking).

This.  While Sol is correct in the sense that not all index funds respond immediately and precisely, the very definition of an index fund is a mutual fund that replicates an index with pre-determined rules regarding weighting.  Market cap weighting is the typical method, but an index fund can choose another weighting methodology, such as the 10 year P/E ratio average, or dividend income weighting, etc.  But a mutual fund that does not possess every individual stock listed on an index is not an index fund.  My understanding, which may be incorrect, is that index funds rebalance against their index periodicly.  The main reason that there isn't much actual turnover is that a large index fund sort-of functions as an off-street marketplace in it's own right, because the index fund only buys or sells stocks when in-flows and out-flows of cash payments don't balance out well.  VFIAX is so large that the cash fund necessary to buffer those cash flows is miniscule compared to the total fund value; so generally speaking, the larger the index fund, the lower the turnover rate.

You have several errors here:
1) An index fund does not have to be a mutual fund (most ETFs are index funds)
2) Many index funds do not contain every security in the index.  This is perhaps most common in bond indices, where there are thousands or tens of thousands of individual issues in an index.  As an example, the Vanguard Total Bond Market Fund contains 7632 bonds, while the index it tracks contains 9541 bonds. https://personal.vanguard.com/us/funds/snapshot?FundId=0084&FundIntExt=INT#tab=2

dull

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Re: Ready for a Correction
« Reply #343 on: October 02, 2015, 09:28:15 AM »
I think all the right elements are in place. Oil, China, rate hike, etc. I think we only need another 3% drop or so. I had some cash in an online savings account that I've been content to let sit until now. I've yanked it in anticipation of throwing it in with the rest of my investments. I'm not looking to time the bottom, just pick up a healthy bump on the drop since I don't see the fundamentals for a prolonged or deep drop in the markets. I know, I know timing. But this is just a little game for me that I enjoy.

Margin debt is at all time highs again (high as 2000, higher than 2008) and turning over---not a bad time to get defensive imo.

Mr. Green

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Re: Ready for a Correction
« Reply #344 on: October 02, 2015, 10:32:29 AM »
I think all the right elements are in place. Oil, China, rate hike, etc. I think we only need another 3% drop or so. I had some cash in an online savings account that I've been content to let sit until now. I've yanked it in anticipation of throwing it in with the rest of my investments. I'm not looking to time the bottom, just pick up a healthy bump on the drop since I don't see the fundamentals for a prolonged or deep drop in the markets. I know, I know timing. But this is just a little game for me that I enjoy.

Margin debt is at all time highs again (high as 2000, higher than 2008) and turning over---not a bad time to get defensive imo.
Thread resurrection! I won't being making any moves out of equities because I think someone is ripe to get burned on timing. Everyone is hopping on the bear bandwagon so each little piece of disappointing data is being played up by the media. We're already down ~10%. If you get out now, we could see good data and things go back up. I don't want to have to think that much because it makes me anxious and that makes me unhappy.

BarkyardBQ

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Re: Ready for a Correction
« Reply #345 on: October 02, 2015, 11:32:24 AM »
I don't really care, still as scheduled for today rebalanced my TLH and last taxable savings for this year.

But can someone please tell me how we started this morning with -1.5% on a crappy jobs report and now we're up .5%

WTF is going on, there is no correlation to any relevant data. I think this was asked before, but who is responsible for the trading volume?

Pooperman

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Re: Ready for a Correction
« Reply #346 on: October 02, 2015, 12:59:56 PM »
WTF is going on, there is no correlation to any relevant data. I think this was asked before, but who is responsible for the trading volume?

Basically, bad news means no rate hike. No rate hike means higher equity prices and possibly even another QE (even more into equities). So there's that.

mxt0133

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Re: Ready for a Correction
« Reply #347 on: October 02, 2015, 01:07:53 PM »
I don't really care, still as scheduled for today rebalanced my TLH and last taxable savings for this year.

But can someone please tell me how we started this morning with -1.5% on a crappy jobs report and now we're up .5%

WTF is going on, there is no correlation to any relevant data. I think this was asked before, but who is responsible for the trading volume?

Ahh correlation.  I love that term, people spend soo much time and money trying to identify correlation between two independent variables, by looking at historical data.

This is why economics is considered a social science vs physics or chemistry.  Humans do not obey any universal laws as we are all different and react to the same stimulation differently.  We learn and adopt, so I find it comical when I work with so many 'smart' people that develop trading strategies based on historical data and complain that their correlation models are not working.  It works some of the time but the only constant is that it will continuously change.

Think Long-Term Capital in the early 90's.

UnleashHell

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Re: Ready for a Correction
« Reply #348 on: October 02, 2015, 01:14:23 PM »
I was thinking about this today, specifically about how significantly speculation can increase the prices of single companies (or entire industries).

This forum has repeatedly linked to studies that show that companies that Kramer features on his program as great buys experience a temporary price bump. It's consistent and repeatable, and probably worth millions to the savvy market timer.

cramer has done this before.

check out jon stewart interviewing him  - I'm sure its on youtube.

cramer is the biggest talking head of all.

But probably only to the market timer that knows the content of the latest show before it airs.  If Kramer himself did this, it would be against the law; but what if his camera man or 'grip boy' was doing this just following the taping of the show?  Would that be insider trading?  How would anyone catch it?

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Re: Ready for a Correction
« Reply #349 on: October 02, 2015, 11:36:21 PM »
I was thinking about this today, specifically about how significantly speculation can increase the prices of single companies (or entire industries).

This forum has repeatedly linked to studies that show that companies that Kramer features on his program as great buys experience a temporary price bump. It's consistent and repeatable, and probably worth millions to the savvy market timer.

cramer has done this before.

check out jon stewart interviewing him  - I'm sure its on youtube.

cramer is the biggest talking head of all.

But probably only to the market timer that knows the content of the latest show before it airs.  If Kramer himself did this, it would be against the law; but what if his camera man or 'grip boy' was doing this just following the taping of the show?  Would that be insider trading?  How would anyone catch it?

No, it wouldn't be insider trading. Kramer, nor the camera guy, possess material non-public information. Front running the market on a hunch is legal.