The Relentless bid up in the Markets

[soccerluvof4]

Kind of hard to dispute his opinion.  Vanguard now 2.3 Trillion under management! Very good read.

http://www.thereformedbroker.com/2014/03/05/the-relentless-bid-explained/ 

[KingCoin]

I didn't really find the article very convincing.

More convincing?
1) None of the events that have caused dips have really panned out to be major worldwide economic events. We get a bunch of headlines and the problem fizzles.
2) The economy is steadily improving which mirrors a steadily improving stock market.
3) ZIRP leads to a reach for yield and stocks are pretty much the only place to go.

[sol]

Let's see if I understand this correctly.  He's saying that Vanguard's low-cost structure and the trend towards buy and hold investing has changed the way professional money managers work, slowly moving them away from the active churning of funds which used to generate commissions. 

And this is somehow a bad thing?  Is he worried about a market in which brokers don't profit by buying and selling for no reason?  His observational support is that the market keeps climbing, with the dips being bought in short order instead of drawing out for months and months of decline, and he thinks it is because too many people have money to invest.

This looks to me like a period of rising prosperity, not an alarm bell.  I don't see how his interpretation generates any actionable advice.  What strategy would you adopt if he's actually spot on?  What would you do if he's got it all wrong?

It just seems like half of an article.  He offers his opinion about why the market has done so well, but then he doesn't take that next analytical step to tell us what that means.  Is it supposed to be obvious and I'm just no seeing it?  If the US economy is chugging along so well that vast sums of wealth are being generated and invested in businesses, isn't that best strategy to ride that wave?  Don't most investors fantasize about prolonged periods of steadily growing economic activity and corresponding equity valuations?

Or maybe he's sore about this because he was one of those day traders who's been shorting every bump for the past two years?  We have several folks like that  here on this forum, people who said the market was frothy 18 months ago and they were 100% cash until the "inevitable" coming crash that they were sure was just around the corner.  I can see how somebody like that would write this article because they're upset about the rising tide.

[soccerluvof4]

Its all up for interpretation and I see where your coming from. I took it more as him being somewhat sarcastic and him seeing the market continuing to rise and not to panic. But again all up for interpretation but I thought it to be a good read never the less.

[KingCoin]

His argument essentially boils down to the following:

(1) More money is being moved from active accounts to passive accounts.
(2) Passive money managers are likely to buy aggressively as stocks fall, but less aggressively as stocks rise, creating a stabilizing force in the market.

For (1), he uses fee based accounts at major brokers as a proxy. That doesn't prove that it's broadly true, but I suspect it is given the general trend toward lower fees index funds and the like.
For (2), he offers no evidence. He just supposes it. It's an interesting question as to whether a higher proportion of passive investors makes the market more or less stable. You could concoct an compelling argument either way, but I haven't seen any studies that attempt to answer the question (though I wouldn't be surprised if they exist).

[FIPurpose]

Is the market being stable a bad thing? I realize that a lot of  people can make big bucks in large dips, but as long as the economy is growing at 7-8% who cares? Sounds like a day trader who's scared for his job.

[sol]

It's an interesting question as to whether a higher proportion of passive investors makes the market more or less stable. You could concoct an compelling argument either way

That's an interesting insight that I hadn't considered.  He's suggesting that "passive" investors who always buy and never sell are buying the dips and buying less on the bumps, thereby smoothing out the long term trend by reducing volatility.  I'd say that would be a good thing, though it has theoretically always been the case, even with active traders.  And isn't buying more/less based on today's return just a slightly muted form of active trading?

Conversely, you could argue that having such a large fraction of the market be passive investors reduces the volume of trades that actually influence prices.  If 99% of investors never sell anything, then all of the price fluctuations are solely dictated by the active 1%.  This would tend to destabilize prices, not smooth them out, and make the market more susceptible to manipulation.

I'm still not seeing the actionable advice.  I just want to shake that guy and say "what does it mean, man!"

[soccerluvof4]

It's an interesting question as to whether a higher proportion of passive investors makes the market more or less stable. You could concoct an compelling argument either way

That's an interesting insight that I hadn't considered.  He's suggesting that "passive" investors who always buy and never sell are buying the dips and buying less on the bumps, thereby smoothing out the long term trend by reducing volatility.  I'd say that would be a good thing, though it has theoretically always been the case, even with active traders.  And isn't buying more/less based on today's return just a slightly muted form of active trading?

Conversely, you could argue that having such a large fraction of the market be passive investors reduces the volume of trades that actually influence prices.  If 99% of investors never sell anything, then all of the price fluctuations are solely dictated by the active 1%.  This would tend to destabilize prices, not smooth them out, and make the market more susceptible to manipulation.

I'm still not seeing the actionable advice.  I just want to shake that guy and say "what does it mean, man!"

haha! and from your picture at least it looks like you could do that! haha.

On a different note kinda..It amazes me (as i am a little older) I have never heard as many people now say " If only the market drops ,  I learned this time". It just seems more than ever people want to be in this market at least from where I am sitting. Let the melt up continue ! Hell I love it! haha

[hodedofome]

Yeah when everyone piles into passive index funds, that will probably be the point where active management starts outperforming again. And then they'll start chasing the active managers again at just the wrong time.

Let a 20%+ fall in the market happen and we'll see how many buy and holders are really out there...

[PeteD01]

Yeah when everyone piles into passive index funds, that will probably be the point where active management starts outperforming again.

This won't happen because it can't happen. It will always be 50% of investment outperforming the market and 50% underperforming the market average. Then the active management tacks on their fees and makes about 75% of their clients' invested money underperforming.
That is just how the math works and the only way the outperforming percentage can rise is by lowering fees - which they have been doing. But the outperforming percentage can never be higher than 50% - that is a mathematical certainty.

Peter

[warfreak2]

Someone's got their means and medians confused. Most people have fewer than the mean number of pet squirrels, for example... (and nobody has fewer than the median number!)

[sol]

Someone's got their means and medians confused.

Q:  Is the next Wimbledon champion more likely to have less than or more than the average number of arms?

A: Guaranteed to have more than the average number of arms, since the average number of arms is less than two.

[Cheddar Stacker]

Someone's got their means and medians confused.

Q:  Is the next Wimbledon champion more likely to have less than or more than the average number of arms?

A: Guaranteed to have more than the average number of arms, since the average number of arms is less than two.

Unless he's just a hell of a one-armed tennis player!

His observational support is that the market keeps climbing, with the dips being bought in short order instead of drawing out for months and months of decline, and he thinks it is because too many people have money to invest.

Does anyone else think this is why P/E ratio's have been consistently higher for years now? This was my general theory as to why we've seen such unparalleled ratios lately so I'm intrigued to hear someone else say it. I'm not saying it's a bad thing that more people are investing more money, I just think it's a big part of what's driving up prices beyond historical P/E Ratio values.

EDIT: spelling - sticky keyboard.

[sol]

Someone's got their means and medians confused.

Q:  Is the next Wimbledon champion more likely to have less than or more than the average number of arms?

A: Guaranteed to have more than the average number of arms, since the average number of arms is less than two.

And the average human being has one fallopian tube.

*edit: okay, approximately one fallopian tube.  Like 0.995 fallopian tubes.

[TreeTired]

So this relentless bid virtually guarantees that the market will keep going up.... forever... relentlessly.  That means without a major pullback.  Meanwhile,  I just read on Marketwatch that we should buy this market because it is going up up up,  and even Mr MM thinks that everything is pretty fucking great.   What happened to all the doom and gloom stock market crash articles?   I find this shift in sentiment very disturbing,  in fact I consider a uniformly positive market sentiment a prerequisite for a meaningful correction.

[soccerluvof4]

So this relentless bid virtually guarantees that the market will keep going up.... forever... relentlessly.  That means without a major pullback.  Meanwhile,  I just read on Marketwatch that we should buy this market because it is going up up up,  and even Mr MM thinks that everything is pretty fucking great.   What happened to all the doom and gloom stock market crash articles?   I find this shift in sentiment very disturbing,  in fact I consider a uniformly positive market sentiment a prerequisite for a meaningful correction.

Once the market has a dip then you will see all the doom and gloom articles. Seems like everyone wants to be "The predictor" ....hey thats a good name for a movie!

[matchewed]

So this relentless bid virtually guarantees that the market will keep going up.... forever... relentlessly.  That means without a major pullback.  Meanwhile,  I just read on Marketwatch that we should buy this market because it is going up up up,  and even Mr MM thinks that everything is pretty fucking great.   What happened to all the doom and gloom stock market crash articles?   I find this shift in sentiment very disturbing,  in fact I consider a uniformly positive market sentiment a prerequisite for a meaningful correction.

Trust me you can find doom and gloom articles. There will be articles that express every color of the emotional rainbow at any time in history, during booms, during busts, and during "mehs". Letting articles like this influence you, regardless of whether they are doom and gloom or puppies and rainbows, is the problem. Educate yourself on the claims first and come to a rational and educated decision on the matter. Don't let the plucking of your emotional strings by some crap article influence you.

[soccerluvof4]

So this relentless bid virtually guarantees that the market will keep going up.... forever... relentlessly.  That means without a major pullback.  Meanwhile,  I just read on Marketwatch that we should buy this market because it is going up up up,  and even Mr MM thinks that everything is pretty fucking great.   What happened to all the doom and gloom stock market crash articles?   I find this shift in sentiment very disturbing,  in fact I consider a uniformly positive market sentiment a prerequisite for a meaningful correction.

Trust me you can find doom and gloom articles. There will be articles that express every color of the emotional rainbow at any time in history, during booms, during busts, and during "mehs". Letting articles like this influence you, regardless of whether they are doom and gloom or puppies and rainbows, is the problem. Educate yourself on the claims first and come to a rational and educated decision on the matter. Don't let the plucking of your emotional strings by some crap article influence you.

AMEN!

[ThermionicScott]

I didn't really find the article very convincing.

More convincing?
1) None of the events that have caused dips have really panned out to be major worldwide economic events. We get a bunch of headlines and the problem fizzles.
2) The economy is steadily improving which mirrors a steadily improving stock market.
3) ZIRP leads to a reach for yield and stocks are pretty much the only place to go.

+1.  I didn't see anything brilliant in the article either.  Just whining about active managers losing out to passive funds.