Author Topic: The thing I hate about VTSAX  (Read 5552 times)

Montecarlo

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The thing I hate about VTSAX
« on: August 18, 2019, 12:39:39 PM »
Is you end up invested in shit companies like Uber, Tesla, and WeWork

harvestbook

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Re: The thing I hate about VTSAX
« Reply #1 on: August 18, 2019, 01:12:06 PM »
At various times, people have thought Microsoft, Walmart, Amazon, and Apple were shitty. I'd rather not invest in Facebook myself, but because I don't trust emotions around money, I stay agnostic. So I don't love or hate anything. I let the market do it for me.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #2 on: August 18, 2019, 01:19:05 PM »
Only one thing?

(Full disclosure: I donít ďhateĒ VTSAX. I just think itís suboptimal. And I donít like it being touted as a sort of portfolio panacea.)

MrDelane

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Re: The thing I hate about VTSAX
« Reply #3 on: August 18, 2019, 01:38:02 PM »
Only one thing?

(Full disclosure: I don’t “hate” VTSAX. I just think it’s suboptimal. And I don’t like it being touted as a sort of portfolio panacea.)

To be fair, it is 'suboptimal' by definition.
'Optimal' returns would beat the market consistently by the greatest percentage possible.
Obviously there is no way to do that by simply investing in the total market - that's not a failure of VTSAX, it does exactly what it is meant to do.

As far as it being a portfolio panacea - you may be right, it may be overhyped a bit.  Though there is something to be said for a "minimum effective dose" approach to investing when we consider the majority of people don't save anything, much less have the desire or attention to learn how to invest 'optimally.'
« Last Edit: August 18, 2019, 01:39:49 PM by MrDelane »

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #4 on: August 18, 2019, 02:00:40 PM »

To be fair, it is 'suboptimal' by definition.
'Optimal' returns would beat the market consistently by the greatest percentage possible.
Obviously there is no way to do that by simply investing in the total market - that's not a failure of VTSAX, it does exactly what it is meant to do.

As far as it being a portfolio panacea - you may be right, it may be overhyped a bit.  Though there is something to be said for a "minimum effective dose" approach to investing when we consider the majority of people don't save anything, much less have the desire or attention to learn how to invest 'optimally.'

By steering new investors towards any one portfolio strategy, I think weíre doing a disservice. We all know that eventually there will be a severe market downturn. And those who just got into an all equities strategy are going to get hammered. Everyone has a plan until they get punched in the mouth.

Maybe a Diversify, Diversify, Diversify! mantra would be more responsible.

Indexer

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Re: The thing I hate about VTSAX
« Reply #5 on: August 18, 2019, 02:20:30 PM »
True, there are some crap companies in there, but how do you see those in advance?  Uber and Tesla aren't the best run companies, but they each have a great concept/products that their customers really like. Great concept/products that their customers love would describe Amazon and Apple 10 years ago and look at them now. These companies might tank or they might grow exponentially. Uber, Tesla, and WeWork are also each a tiny <1% fraction of VTSAX so who cares? You are making a microscopic bet in a few companies you wouldn't put real money into.


What we do know: Most active strategies underperform VTSAX over time. That was probably too conservative. Let me rephrase that, 85-94% of active strategies underperform VTSAX over 10 year periods*. If we stretch it to 40 year periods only 5, out of thousands of active funds, managed to outperform the Vanguard 500 index**. This is the reason funds like this are becoming so popular and it's the reason people like MMM recommend them. Is it perfect? No, but it's darn close and it's reliable that it will stay that way. Some people will do better, but most of the people 'trying' to do better will end up doing a lot worse and paying excessive fees in the process.

*Source: Vangaurd's regular Performance reports showing how their index funds did against their active peers. I've seen the % as low as 85% and as high as 94% for 10 year periods.
**Source: The Little Book of Common Sense investing (J. Bogle)


That all said, I don't think someone should only be in VTSAX. VTSAX is a great way to get your US stock exposure, but you should diversify across asset classes, for instance adding international, bonds, real estate, etc.

Montecarlo

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Re: The thing I hate about VTSAX
« Reply #6 on: August 18, 2019, 02:37:35 PM »
For me, not comparable.  Microsoft and Apple made big investments into their product.  Amazon made huge investments in scale.  But their core products were profitable at prices consumers will pay.

Uber represents a massive transfer of wealth from investors to consumers in the form of a subsidized product people love, but wouldnít pay full price for.

Tesla is a good company, but has cash flow/debt risk and is it has a higher market cap than GM.


ChpBstrd

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Re: The thing I hate about VTSAX
« Reply #7 on: August 20, 2019, 03:04:47 PM »
Why not invest 99% of your equities allocation to VTSAX and 1% toward defined-risk short positions in the companies you have no confidence in? For example, use options to create a bear spread on Uber.

marty998

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Re: The thing I hate about VTSAX
« Reply #8 on: August 20, 2019, 03:16:41 PM »
There are a few stock on the Aussie Exchange that I wish the index would exclude. AMP being one. It should have died a decade ago but capitalism is broken these days - zombie companies live on propped up by low debt financing costs and low return expectations.

Uber represents a massive transfer of wealth from investors to consumers in the form of a subsidized product people love, but wouldnít pay full price for.

Agree, but I'd also add it's a very large transfer of wealth from taxi plate holders to the Uber founders for the time being.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #9 on: August 20, 2019, 03:33:12 PM »
Why not invest 99% of your equities allocation to VTSAX and 1% toward defined-risk short positions in the companies you have no confidence in? For example, use options to create a bear spread on Uber.

Clever.  Hereís another strategy: do your homework and buy stocks that look like a long term value. I wouldnít build a big portfolio of those, but maybe a nice chunk. Use index funds to flesh it out as none of us is as smart as we think we are.  Add other asset classes. Have some fun stuff.

vand

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Re: The thing I hate about VTSAX
« Reply #10 on: August 21, 2019, 04:11:00 AM »
Is you end up invested in shit companies like Uber, Tesla, and WeWork

You can't tell what is shit and what is gold. That ENTIRELY the whole point of buying an index fund.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #11 on: August 21, 2019, 01:50:58 PM »
Is you end up invested in shit companies like Uber, Tesla, and WeWork

You can't tell what is shit and what is gold. That ENTIRELY the whole point of buying an index fund.

Not for me it isnít. The problem is high fees and lousy returns that are endemic with managed funds. Which if you think about it is the most likely end result given the perverse incentives and constraints we throw at managed funds.

So in my view, index funds are sort of least worst strategy when you donít have the time, money, skill or desire to do your own asset picks. For most folks itís a good enough choice. But not for all.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #12 on: August 21, 2019, 02:28:29 PM »
Is you end up invested in shit companies like Uber, Tesla, and WeWork

Given that you have the time and desire you could put together a similarly weighted portfolio of say 20 stocks. Youíll get most of the benefits of diversification while avoiding stocks you donít like. And so long as you use a broker that doesnít charge maintenance fees, your ongoing costs beyond the buy/sell transactions would be essentially zero.

The problem most people would run into is making rotten choices. For example buying stocks theyíve heard of versus ones that they havenít. 

vand

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Re: The thing I hate about VTSAX
« Reply #13 on: August 22, 2019, 03:08:25 AM »
Is you end up invested in shit companies like Uber, Tesla, and WeWork

You can't tell what is shit and what is gold. That ENTIRELY the whole point of buying an index fund.

Not for me it isnít. The problem is high fees and lousy returns that are endemic with managed funds. Which if you think about it is the most likely end result given the perverse incentives and constraints we throw at managed funds.

So in my view, index funds are sort of least worst strategy when you donít have the time, money, skill or desire to do your own asset picks. For most folks itís a good enough choice. But not for all.


What I mean is that everything, shit or gold, has its fair price.


If you only want to invest in successful companies then buy a narrower index! buy the Dow or the S&P100! Crap companies don't grow into megacorporations. And failing companies get dropped out of these indexes pdq.

You or I may think Tesla is a a piece of worthless crap, but frankly that is neither here nor there, it is what the whole market thinks of it and comes to a consensus on what the current price should be that is important.  To say that Tesla is a "piece of crap" is to disagree with the market view, in which case why are you even buying an index fund if you are disagreeing with its assessment of what individual company is worth?

If you index then you agree with - or at the very least accept in principle - the efficient market hypothesis that everything that is known about the company is in the price and you are buying it at the fair price.

I may think Tesla is a terrible company but if I could buy the whole company for a week's wages then I would do just that, because everything, good, bad, or somewhere in between has its fair price.

The reason my investment strategy isn't build upon VTSAX is because I'm a bit of a cheapskate and have a hard time paying 150 times earnings for Amazon stock (fabulous company though it undoubtedly is), but that may and probably will change if and when the market is only prepared to pay considerably less.. everything has its fair price.
« Last Edit: August 22, 2019, 03:22:02 AM by vand »

habaneroNorway

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Re: The thing I hate about VTSAX
« Reply #14 on: August 22, 2019, 03:53:12 AM »
Don't know about the US, but in smaller markets there are likely to be stocks in small-to-mid-cap companies by local standards (as in tiny-tiny by S&P - standard) that are not in any relevant national index and that frankly almost noone looks at in earnest. They aren't covered by most analyst houses as they are small and quite illiquid etc. I think - for someone who is willing to put in the time and effort (I, for one, ain't) to be able to skew the odds a fair bit in their own favor. It probably only works at a small scale due to liquidity etc, but I think it can be doable on a private account. 

The problem is that for the strategy to work, you are dependent on someone else figuring it out at some point to start generating some capital gains.

Indexer

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Re: The thing I hate about VTSAX
« Reply #15 on: August 22, 2019, 07:37:04 AM »
Why not invest 99% of your equities allocation to VTSAX and 1% toward defined-risk short positions in the companies you have no confidence in? For example, use options to create a bear spread on Uber.


This is great when implemented correctly. A bear spread with options would work so I agree with you, but I wouldn't want other posters reading your post and trying to implement this by just shorting Uber.

Why: One difference between long and short positions is that long positions have a maximum loss(a 100% drop) while short positions have an infinite downside. I know someone who tried a similar strategy, mostly index funds, and a small short on a company they really didn't like.

That company was Netflix. They lost a lot more than 1% of their portfolio as a result.

vand

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Re: The thing I hate about VTSAX
« Reply #16 on: August 22, 2019, 07:58:25 AM »
Shorting stocks, especially in a bull market, is a lot tricker than some people here are making it sound.

Everything that is known about a stock is in the price.

You need to have insight that the general market doesn't have. Short a beaten up company that releases a whiff of good news or shows a hint of a turnaround and watch the stock jump and your shorts burn a hole in your FIRE station.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #17 on: August 22, 2019, 10:05:37 AM »

What I mean is that everything, shit or gold, has its fair price.

If you only want to invest in successful companies then buy a narrower index! buy the Dow or the S&P100! Crap companies don't grow into megacorporations. And failing companies get dropped out of these indexes pdq.

You or I may think Tesla is a a piece of worthless crap, but frankly that is neither here nor there, it is what the whole market thinks of it and comes to a consensus on what the current price should be that is important.  To say that Tesla is a "piece of crap" is to disagree with the market view, in which case why are you even buying an index fund if you are disagreeing with its assessment of what individual company is worth?

If you index then you agree with - or at the very least accept in principle - the efficient market hypothesis that everything that is known about the company is in the price and you are buying it at the fair price.

I may think Tesla is a terrible company but if I could buy the whole company for a week's wages then I would do just that, because everything, good, bad, or somewhere in between has its fair price.

The reason my investment strategy isn't build upon VTSAX is because I'm a bit of a cheapskate and have a hard time paying 150 times earnings for Amazon stock (fabulous company though it undoubtedly is), but that may and probably will change if and when the market is only prepared to pay considerably less.. everything has its fair price.

Thanks for the detailed reply.

Good points. I happen to disagree with the efficient markets hypothesis. I just donít think it holds true so much as it may have say 20-30 years ago. A lot of that is because of passive investment strategies and fewer folks taking the time to analyze and invest in individual stocks as a result. Leads to some interesting opportunities. And bizarre price moves. Also there is a whole lot of money chasing not many opportunities which I think is exacerbating things.

Even so I think investing in stock indexes is often the best available choice. I donít have the time or the inclination to look at thousands, hundreds, or even dozens of stocks. Good enough sometimes just has to be good enough.

As for the high priced, gold standard stocks I agree. I canít persuade myself to spend money on stocks or indexes that have PE ratios through the roof. I wish there were index funds that skipped the top 100. Iím not aware of any that are all that nuanced. I think over time we will get more nuanced, boutique like index funds that you can drill down with but itís a slow process. If we can get the buy/sell transaction costs down low enough, then you could potentially craft an ďindexĒ more or less from scratch.

markbike528CBX

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Re: The thing I hate about VTSAX
« Reply #18 on: August 22, 2019, 10:20:34 AM »
...snip.....

 I wish there were index funds that skipped the top 100. Iím not aware of any that are all that nuanced. I think over time we will get more nuanced, boutique like index funds that you can drill down with but itís a slow process. If we can get the buy/sell transaction costs down low enough, then you could potentially craft an ďindexĒ more or less from scratch.

There are mid cap funds (start at S&P 501) and small cap funds. Put them together,and most of your wishes are complete.

If you could "drill down" then it wouldn't BE an index, it would be actively managed, with all the costs and errors associated.

thesis

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Re: The thing I hate about VTSAX
« Reply #19 on: August 22, 2019, 10:52:21 AM »
Yeah, it kind of annoys me that it puts a little more emphasis on the larger companies, I feel like that defeats the purpose. But for what it's worth, I prefer VTSAX to the various flavors of S&P 500 index funds, which are almost ubiquitous in 401k plans. From what I understand, VTSAX is way more diversified. I only now have been at two jobs that offer 401k plans, but I've been a part of 3 HSAs, and all of these investment buckets have never given an option for investing in a total stock market index fund, ONLY their respective S&P 500 funds. *sigh*. First world problems. But my Roth IRA is 100% VTSAX, fortunately I have control over that.

EvenSteven

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Re: The thing I hate about VTSAX
« Reply #20 on: August 22, 2019, 10:55:03 AM »
I want a low cost, broadly diversified, passive index fund where the fund only buys stocks that are going to go up, and if a stock isn't going to go up then the fund doesn't buy it.

Indexer

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Re: The thing I hate about VTSAX
« Reply #21 on: August 22, 2019, 11:26:33 AM »

Good points. I happen to disagree with the efficient markets hypothesis. I just don’t think it holds true so much as it may have say 20-30 years ago. A lot of that is because of passive investment strategies and fewer folks taking the time to analyze and invest in individual stocks as a result. Leads to some interesting opportunities. And bizarre price moves. Also there is a whole lot of money chasing not many opportunities which I think is exacerbating things.


I think there are flaws in the EMH as well, but the flaws I see are in behavioral economics. As much as we see ourselves as rational beings we have a lot of traits hard wired into us for survival in the wild that don't translate well into financial markets. This plays a huge part in bubbles and crashes, which shouldn't exist in a perfectly efficient market. There is actually a niche industry now where big traders(mutual funds, hedge funds) will pay a behavioral specialist to study their trading activity looking for behavioral mistakes.

That said, all the evidence I've read concerning the effect of passive investments is that they increase market efficiency. Here is the logic. Your highly sophisticated traders, normally CFAs working at big investment firms where they have teams of analysts at their disposal, are positioned to do better than some random guy with an E-trade account and no investing education. When those CFAs are up against each other, a battle of the experts, it's really hard to squeeze out any alpha. However, sometimes the E-trade guy does something dumb and the CFAs or HFTs can quickly take advantage of that. It's an inefficiency in the market. The novice investor isn't playing with the same level of technical knowledge, therefor he isn't playing by the perfectly logical rules of the EMH. He is also more likely to make those dumb behavioral mistakes.

How do index funds figure into this?  When the novice investors abandon stock picking and move to index funds it means the remaining 'active' portion of the market is more concentrated with true professionals... it's more efficient. In addition, as some active funds continue to underperform the market their investors will move to index funds, those active funds will shut down, meaning that even among professionals the weakest are removed, leaving only the best of the professionals to trade with each other. Index investors also tend to be more disciplined during market declines. If you have an active fund there is an expectation(normally wrong, but it exists) that the manager will zig when the market zags and avoid a downturn. When you own an index fund you know going in that you are along for the ride. Accepting that in advance tends to make investors far more disciplined. VTSAX was actually one of very few stock funds that had net inflows in 2008, a testament to how disciplined it's investors are.

Boofinator

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Re: The thing I hate about VTSAX
« Reply #22 on: August 22, 2019, 12:16:21 PM »
I happen to disagree with the efficient markets hypothesis. I just donít think it holds true so much as it may have say 20-30 years ago. A lot of that is because of passive investment strategies and fewer folks taking the time to analyze and invest in individual stocks as a result. Leads to some interesting opportunities. And bizarre price moves. Also there is a whole lot of money chasing not many opportunities which I think is exacerbating things.

I think having fewer folks taking the time to analyze and invest in individual stocks is a good thing for the market and improves the efficient market hypothesis. Because most of those folks who have switched to passive investing are the average Joes like you and me. The heavy hitters are still around, and those are the folks setting the price. (Needless to say, indexers do not set prices for individual stocks.)

Note that the efficient market hypothesis doesn't say that there aren't inefficiencies which could be exploited, it only states that these inefficiencies are quickly capitalized on by the people who analyze stocks for a living, and it is therefore best for everyone who doesn't analyze stocks for a living to assume that stocks are efficiently priced. Even stocks that I think are inefficiently priced (such as TSLA) in reality aren't, because even though there is a decent probability the company will go bankrupt, there is also a not-insignificant probability that the company actually achieves its ambitious goals, and when all the possible outcomes are weighted probabilistically you get that the stock is risky but efficiently priced.

(On a side note, I have to laugh any time someone compares TSLA's market cap to GM's, considering GM's market cap dropped to zero in recent history.)

ETA: Indexer put it quicker and much better than I did.

frugledoc

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Re: The thing I hate about VTSAX
« Reply #23 on: August 22, 2019, 01:15:36 PM »

To be fair, it is 'suboptimal' by definition.
'Optimal' returns would beat the market consistently by the greatest percentage possible.
Obviously there is no way to do that by simply investing in the total market - that's not a failure of VTSAX, it does exactly what it is meant to do.

As far as it being a portfolio panacea - you may be right, it may be overhyped a bit.  Though there is something to be said for a "minimum effective dose" approach to investing when we consider the majority of people don't save anything, much less have the desire or attention to learn how to invest 'optimally.'

By steering new investors towards any one portfolio strategy, I think weíre doing a disservice. We all know that eventually there will be a severe market downturn. And those who just got into an all equities strategy are going to get hammered. Everyone has a plan until they get punched in the mouth.

Maybe a Diversify, Diversify, Diversify! mantra would be more responsible.

Please do tell when this severe market downturn is going to occur so I can get out at the top.

Maybe you should start your own, "Top is in" Thread , maybe you will be "the one" who gets it right.


Montecarlo

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Re: The thing I hate about VTSAX
« Reply #24 on: August 22, 2019, 03:23:11 PM »
Even stocks that I think are inefficiently priced (such as TSLA) in reality aren't, because even though there is a decent probability the company will go bankrupt, there is also a not-insignificant probability that the company actually achieves its ambitious goals, and when all the possible outcomes are weighted probabilistically you get that the stock is risky but efficiently priced.

(On a side note, I have to laugh any time someone compares TSLA's market cap to GM's, considering GM's market cap dropped to zero in recent history.)


On your first point, what the market is saying is that the mean outcome for TSLA over the next 20-30 years is GM level market share.  Which means it is pricing in possibilities of much larger than GM market share, to offset 0 market share or ( more likely) restructuring.  Cray cray.

On your secondGM was priced where it should be as it was near insolvency.  TSLA was never priced that way when continued funding was uncertain.

FIPurpose

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Re: The thing I hate about VTSAX
« Reply #25 on: August 22, 2019, 03:39:53 PM »
Is you end up invested in shit companies like Uber, Tesla, and WeWork

Well WeWork hasn't IPO'd yet, so I don't think VTSAX would own any of it. But based on the index that VTSAX tries to follow it should be approx.

UBER: 0.03%
TSLA: 0.12%

So if you had a 1MM portfolio of just VTSAX you would be the proud owner of
$300 worth of Uber
$1,200 worth of Tesla.

Maybe the companies are trash. Or maybe they come up with a huge patent that makes them a couple billion dollars. Both are playing in the automated trucking industry and there is huge opportunity there to make butt loads of money.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #26 on: August 22, 2019, 06:12:27 PM »

To be fair, it is 'suboptimal' by definition.
'Optimal' returns would beat the market consistently by the greatest percentage possible.
Obviously there is no way to do that by simply investing in the total market - that's not a failure of VTSAX, it does exactly what it is meant to do.

As far as it being a portfolio panacea - you may be right, it may be overhyped a bit.  Though there is something to be said for a "minimum effective dose" approach to investing when we consider the majority of people don't save anything, much less have the desire or attention to learn how to invest 'optimally.'

By steering new investors towards any one portfolio strategy, I think weíre doing a disservice. We all know that eventually there will be a severe market downturn. And those who just got into an all equities strategy are going to get hammered. Everyone has a plan until they get punched in the mouth.

Maybe a Diversify, Diversify, Diversify! mantra would be more responsible.

Please do tell when this severe market downturn is going to occur so I can get out at the top.

Maybe you should start your own, "Top is in" Thread , maybe you will be "the one" who gets it right.

If I knew exactly when the market was going to move, I sure wouldnít be hanging around here. Iíd be too busy looking for my new ski chalet.

A severe market downturn at some point is a certainty. Weíre about 10 years into a bull market. If you want to put all your stash into it at this point knowing that youíre at the tail end of one of the longest bull runs ever, then what can I say? Good luck!


habaneroNorway

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Re: The thing I hate about VTSAX
« Reply #27 on: August 23, 2019, 12:12:01 AM »
the index that VTSAX tries to follow follows it should be approx...

Corrected that for ya ;)


dragoncar

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Re: The thing I hate about VTSAX
« Reply #28 on: August 23, 2019, 12:48:53 AM »
At various times, people have thought Microsoft, Walmart, Amazon, and Apple were shitty. I'd rather not invest in Facebook myself, but because I don't trust emotions around money, I stay agnostic. So I don't love or hate anything. I let the market do it for me.

Eh, I still think some of those are shitty.  But I don't make the market, so I invest in the index.

frugledoc

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Re: The thing I hate about VTSAX
« Reply #29 on: August 23, 2019, 01:03:36 AM »

To be fair, it is 'suboptimal' by definition.
'Optimal' returns would beat the market consistently by the greatest percentage possible.
Obviously there is no way to do that by simply investing in the total market - that's not a failure of VTSAX, it does exactly what it is meant to do.

As far as it being a portfolio panacea - you may be right, it may be overhyped a bit.  Though there is something to be said for a "minimum effective dose" approach to investing when we consider the majority of people don't save anything, much less have the desire or attention to learn how to invest 'optimally.'

By steering new investors towards any one portfolio strategy, I think weíre doing a disservice. We all know that eventually there will be a severe market downturn. And those who just got into an all equities strategy are going to get hammered. Everyone has a plan until they get punched in the mouth.

Maybe a Diversify, Diversify, Diversify! mantra would be more responsible.

Please do tell when this severe market downturn is going to occur so I can get out at the top.

Maybe you should start your own, "Top is in" Thread , maybe you will be "the one" who gets it right.

If I knew exactly when the market was going to move, I sure wouldnít be hanging around here. Iíd be too busy looking for my new ski chalet.

A severe market downturn at some point is a certainty. Weíre about 10 years into a bull market. If you want to put all your stash into it at this point knowing that youíre at the tail end of one of the longest bull runs ever, then what can I say? Good luck!

Im pretty much 100% in the all world rather than VTSAX, but the following is still relevant. 
1) Itís nothing to do with luck. Iím a long term investor and not a speculator.
2) this bull run is only about 9 months old as it started from the bottom of an intra day bear in dec 2018
3) market corrections and crashes are a completely normal phenomenon and not possible to predict.  Best just to ignore them and carry on.
4) nobody can time the market successfully, and most that try will fail so if you want to try it good luck to you

Itís clear you are inexperienced and have a low risk tolerance.  I would recommend something like 60:40 for you.
« Last Edit: August 23, 2019, 01:08:14 AM by frugledoc »

vand

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Re: The thing I hate about VTSAX
« Reply #30 on: August 23, 2019, 02:37:39 AM »

What I mean is that everything, shit or gold, has its fair price.

If you only want to invest in successful companies then buy a narrower index! buy the Dow or the S&P100! Crap companies don't grow into megacorporations. And failing companies get dropped out of these indexes pdq.

You or I may think Tesla is a a piece of worthless crap, but frankly that is neither here nor there, it is what the whole market thinks of it and comes to a consensus on what the current price should be that is important.  To say that Tesla is a "piece of crap" is to disagree with the market view, in which case why are you even buying an index fund if you are disagreeing with its assessment of what individual company is worth?

If you index then you agree with - or at the very least accept in principle - the efficient market hypothesis that everything that is known about the company is in the price and you are buying it at the fair price.

I may think Tesla is a terrible company but if I could buy the whole company for a week's wages then I would do just that, because everything, good, bad, or somewhere in between has its fair price.

The reason my investment strategy isn't build upon VTSAX is because I'm a bit of a cheapskate and have a hard time paying 150 times earnings for Amazon stock (fabulous company though it undoubtedly is), but that may and probably will change if and when the market is only prepared to pay considerably less.. everything has its fair price.

Thanks for the detailed reply.

Good points. I happen to disagree with the efficient markets hypothesis. I just donít think it holds true so much as it may have say 20-30 years ago. A lot of that is because of passive investment strategies and fewer folks taking the time to analyze and invest in individual stocks as a result. Leads to some interesting opportunities. And bizarre price moves. Also there is a whole lot of money chasing not many opportunities which I think is exacerbating things.

Even so I think investing in stock indexes is often the best available choice. I donít have the time or the inclination to look at thousands, hundreds, or even dozens of stocks. Good enough sometimes just has to be good enough.

As for the high priced, gold standard stocks I agree. I canít persuade myself to spend money on stocks or indexes that have PE ratios through the roof. I wish there were index funds that skipped the top 100. Iím not aware of any that are all that nuanced. I think over time we will get more nuanced, boutique like index funds that you can drill down with but itís a slow process. If we can get the buy/sell transaction costs down low enough, then you could potentially craft an ďindexĒ more or less from scratch.

I also don't agree with EMH in its strictest form, but the idea holds merit most of the time and it highlights the point which most people still get wrong (OP being a perfect example) that the market is always a forward looking mechanism. This automatically puts it ahead of most investors who think that current sentiment dictates future price action. I do think that EMH framework has a great trump card however, namely being able to quantify performance on a risk adjusted basis.

A side-hustle of mine involves getting mucky with betting exchanges where the price of an event is set by the pure market of buyers and sellers of that event, and I always marvel at how the wisdom of the crowds is always always able to set the the correct price of an event happening. If you analyze a large enough sample of events that are priced at 2.0 you will find exactly a 50% win rate.  If you analyze all events that are priced at 10.0 you will find a long term a 10% win rate.  Ditto for any price you care to name, any event type... the betting markets always gets it ruthlessly right. (nice primer here http://www.football-data.co.uk/The_Wisdom_of_the_Crowd.pdf)

edit: another good aritcle https://www.betfair.com.au/hub/wisdom-of-the-crowd/
« Last Edit: August 23, 2019, 03:32:20 AM by vand »

Montecarlo

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Re: The thing I hate about VTSAX
« Reply #31 on: August 23, 2019, 05:40:19 AM »
Wait, what did I get wrong?  Or are you inferring something I didnít say?

Boofinator

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Re: The thing I hate about VTSAX
« Reply #32 on: August 23, 2019, 09:36:50 AM »
Even stocks that I think are inefficiently priced (such as TSLA) in reality aren't, because even though there is a decent probability the company will go bankrupt, there is also a not-insignificant probability that the company actually achieves its ambitious goals, and when all the possible outcomes are weighted probabilistically you get that the stock is risky but efficiently priced.

(On a side note, I have to laugh any time someone compares TSLA's market cap to GM's, considering GM's market cap dropped to zero in recent history.)


On your first point, what the market is saying is that the mean outcome for TSLA over the next 20-30 years is GM level market share.  Which means it is pricing in possibilities of much larger than GM market share, to offset 0 market share or ( more likely) restructuring.  Cray cray.

But is it cray-cray? In late '07 GM was trading at $40 per share, and within two years it went belly-up and those shareholders were wiped out. So being big doesn't guarantee success when operating on low margins and in a business that is cyclical with the economy. Tesla, on the other hand, is seen almost as much as a tech company as a car company, it clearly dominates the electric car market at the moment, and is set to have massive profits (from both its car and other industries) should there be any major legislation that increases carbon costs, which I give 50-50 odds to happening in the next 5-10 years.

So yes, on the surface things seem cray-cray, but people who study this for a living and are probably much smarter than you or I hold a majority of TSLA's privately-owned stock and have thus set the price. I don't understand it either given their cash-flow difficulties, but the efficient market hypothesis says I don't have to understand it.* The EMH and index fund investing is the closest thing to a free lunch that average Joe stock owners can get.

*The EMH can break down with low-cap stocks that are manipulated through pump-and-dump schemes and the like (but since again most of us can't predict which ones are being manipulated, it's generally better to buy the market). TSLA has had some of this ($420 a share), but their CEO has been punished by the SEC accordingly, and hopefully that behavior will tone down in the future.

Montecarlo

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Re: The thing I hate about VTSAX
« Reply #33 on: August 23, 2019, 09:41:56 AM »
I'm generally not a fan of the "a lot of really smart people studied this" argument.  I'm really smart and I do dumb shit all the time. 

The people who invested in moviepass were smart, and I don't think you needed to rely on hindsight to realize that selling product for less than cost is not a sustainable business venture (looking @ you, Uber)

Boofinator

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Re: The thing I hate about VTSAX
« Reply #34 on: August 23, 2019, 10:26:38 AM »
I'm a big fan of the "a lot of really smart people studied this" approach to simplifying my life (as long as those smart persons' incentives are aligned with mine, which is where the challenge truly lies). What this means is that for every stock that's out there, hundreds of extremely smart people are studying the fundamentals of the business every day. So sure, a few of those smart people could make some dumb mistakes, but generally those other smart people will observe those dumb mistakes and capitalize on them, and thus bring prices to an efficient price. And needless to say, too many dumb mistakes will generally weed out the "smart-but-not-quite-smart-enough" folks from the game.

Other areas where I rely on the "smart people studied this" approach: climate change, essential surgery, etc.

So I was curious and looked at the stock price for the company behind moviepass, Helios and Matheson Analytics Inc. According to Google Finance, the stock has dropped 99.99997% in the last couple of years (it was delisted from NASDAQ earlier this year and is currently OTC). I hope the smart people who invested in moviepass managed to jump ship at the right time.

ChpBstrd

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Re: The thing I hate about VTSAX
« Reply #35 on: August 23, 2019, 10:31:01 AM »
I'm generally not a fan of the "a lot of really smart people studied this" argument.  I'm really smart and I do dumb shit all the time. 

The people who invested in moviepass were smart, and I don't think you needed to rely on hindsight to realize that selling product for less than cost is not a sustainable business venture (looking @ you, Uber)

Counterargument:
Amazon went from 1997 until 2004 without making any significant profits.

Montecarlo

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Re: The thing I hate about VTSAX
« Reply #36 on: August 23, 2019, 10:53:47 AM »
I'm generally not a fan of the "a lot of really smart people studied this" argument.  I'm really smart and I do dumb shit all the time. 

The people who invested in moviepass were smart, and I don't think you needed to rely on hindsight to realize that selling product for less than cost is not a sustainable business venture (looking @ you, Uber)

Counterargument:
Amazon went from 1997 until 2004 without making any significant profits.

I'm pretty sure they weren't selling product for less than cost, i.e. negative gross margins.

Boofinator

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Re: The thing I hate about VTSAX
« Reply #37 on: August 23, 2019, 11:11:02 AM »
I'm generally not a fan of the "a lot of really smart people studied this" argument.  I'm really smart and I do dumb shit all the time. 

The people who invested in moviepass were smart, and I don't think you needed to rely on hindsight to realize that selling product for less than cost is not a sustainable business venture (looking @ you, Uber)

Counterargument:
Amazon went from 1997 until 2004 without making any significant profits.

I'm pretty sure they weren't selling product for less than cost, i.e. negative gross margins.

With Uber, just like Facebook and like Standard Oil way back in the day, they appear to be intent on creating a monopoly. In that case, as long as investors are willing to play the long game, selling below cost has the potential to wipe out competitors to the extent they can at some point raise costs without fear of too much defection.

So this is all about investors weighting probable outcomes in their decision analysis. If Uber has only a 10% probability of wiping out most taxi companies and competitors to become the go-to individual transit option, then the initial investors will make money hand-over-fist while the rest of us will look back in hindsight and say "man, I knew app-based personally-owned transportation vehicles were going to replace taxis, I wish I would have invested all my money in Uber back in the day".

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #38 on: August 23, 2019, 02:03:07 PM »

I also don't agree with EMH in its strictest form, but the idea holds merit most of the time and it highlights the point which most people still get wrong (OP being a perfect example) that the market is always a forward looking mechanism. This automatically puts it ahead of most investors who think that current sentiment dictates future price action. I do think that EMH framework has a great trump card however, namely being able to quantify performance on a risk adjusted basis.

A side-hustle of mine involves getting mucky with betting exchanges where the price of an event is set by the pure market of buyers and sellers of that event, and I always marvel at how the wisdom of the crowds is always always able to set the the correct price of an event happening. If you analyze a large enough sample of events that are priced at 2.0 you will find exactly a 50% win rate.  If you analyze all events that are priced at 10.0 you will find a long term a 10% win rate.  Ditto for any price you care to name, any event type... the betting markets always gets it ruthlessly right. (nice primer here http://www.football-data.co.uk/The_Wisdom_of_the_Crowd.pdf)

edit: another good aritcle https://www.betfair.com.au/hub/wisdom-of-the-crowd/

Mucky? Do tell. Or donít if youíre not comfortable. I assume itís some sort of arbitrage with wagers. All work and no play makes Jack a dull boy. 😁

I very much appreciated the links and did read them. Re-reading the first article over the weekend to make sure I grokked it.

Some great quotes from the articles : ďWeíve also seen, though, that crowds can sometimes fail Ė especially where they lack diversity, independence, and decentralisation Ė and that often, simply taking a contrary opinion to the majority can be enough to profit.Ē  Or my fave: ďHaving a diverse set of opinions is a prerequisite for collective wisdom. Where everyone is thinking or doing exactly the same thing, the probability of systematic error or bias increases.Ē

(coughlike buying index funds cough)

Interestingly I think these articles show some of the weaknesses of the EMH. It seems to me that the EMH is strongest when there are a lot of folks placing bets (or purchasing an investment). Not so much when there arenít a lot of bets (or investments). So said another way, you might make a pretty fair argument that, say, Apple stock is efficiently priced. But what about stocks that arenít so popular? The so called value stocks?  Companies that arenít a household name or are ďoooh ickyĒ?  I gotta wonder whether there arenít a heck of a lot of anomalies in the pricing of those stocks. The market sure seems to hate them. But when you look a little closer, you start to scratch your head and wonder what the heck is going on? Profitable company loses 50% of it market cap in a year. Huh? You also start to get some slight sense for why Warren Buffett is very wealthy.


Montecarlo

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Re: The thing I hate about VTSAX
« Reply #39 on: August 23, 2019, 06:54:54 PM »

With Uber, just like Facebook and like Standard Oil way back in the day, they appear to be intent on creating a monopoly. In that case, as long as investors are willing to play the long game, selling below cost has the potential to wipe out competitors to the extent they can at some point raise costs without fear of too much defection.

So this is all about investors weighting probable outcomes in their decision analysis. If Uber has only a 10% probability of wiping out most taxi companies and competitors to become the go-to individual transit option, then the initial investors will make money hand-over-fist while the rest of us will look back in hindsight and say "man, I knew app-based personally-owned transportation vehicles were going to replace taxis, I wish I would have invested all my money in Uber back in the day".

I like the automated trucking scenario better.  Even without competition, ride sharing has to compete with operating your personal vehicle, which is significantly cheaper even at subsidized rates, and about the same if you count capital costs of purchasing a cheap vehicle.  And I donít think thereís a huge barrier to entry.

I do think ridesharing will be around, but as a low margin business.  The automation piece is interesting, but there are a lot of horses in that race.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #40 on: August 24, 2019, 08:08:02 AM »

With Uber, just like Facebook and like Standard Oil way back in the day, they appear to be intent on creating a monopoly. In that case, as long as investors are willing to play the long game, selling below cost has the potential to wipe out competitors to the extent they can at some point raise costs without fear of too much defection.

So this is all about investors weighting probable outcomes in their decision analysis. If Uber has only a 10% probability of wiping out most taxi companies and competitors to become the go-to individual transit option, then the initial investors will make money hand-over-fist while the rest of us will look back in hindsight and say "man, I knew app-based personally-owned transportation vehicles were going to replace taxis, I wish I would have invested all my money in Uber back in the day".

I like the automated trucking scenario better.  Even without competition, ride sharing has to compete with operating your personal vehicle, which is significantly cheaper even at subsidized rates, and about the same if you count capital costs of purchasing a cheap vehicle.  And I donít think thereís a huge barrier to entry.

I do think ridesharing will be around, but as a low margin business.  The automation piece is interesting, but there are a lot of horses in that race.

How much of the value of these other popular stocks is based on their ability to deliver a return to their investors and how much is based on their being in fashion with the public at large?  Seems to me that fashion trumps return.

Here is a fun example.  Two "stocks of the day."  One was the bull of the day.  The other was the bear.  Different industries, but both transportation related. Here's some stats

BULL stock:
PE ratio 26.52
PB ratio 4.98
PS ratio 4.53
Operating margin: -26.91
Dividend yield: Not paying one.
Stock price change over a year: -19.58%
Projected to have negative EPS in 2020 and 2021

BEAR stock:
PE ratio 5.86
PB ratio 0.58
PS ratio 0.19
Operating margin: 5.74
Dividend yield: 5.86
Stock price change over year: -53.65%
Projected to have positive EPS in 2020 and 2021
 
You can't make this stuff up. The company in the loved industry is selling for a PE ratio that's 5 times the other.   

ecchastang

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Re: The thing I hate about VTSAX
« Reply #41 on: August 24, 2019, 08:28:10 AM »

With Uber, just like Facebook and like Standard Oil way back in the day, they appear to be intent on creating a monopoly. In that case, as long as investors are willing to play the long game, selling below cost has the potential to wipe out competitors to the extent they can at some point raise costs without fear of too much defection.

So this is all about investors weighting probable outcomes in their decision analysis. If Uber has only a 10% probability of wiping out most taxi companies and competitors to become the go-to individual transit option, then the initial investors will make money hand-over-fist while the rest of us will look back in hindsight and say "man, I knew app-based personally-owned transportation vehicles were going to replace taxis, I wish I would have invested all my money in Uber back in the day".

I like the automated trucking scenario better.  Even without competition, ride sharing has to compete with operating your personal vehicle, which is significantly cheaper even at subsidized rates, and about the same if you count capital costs of purchasing a cheap vehicle.  And I donít think thereís a huge barrier to entry.

I do think ridesharing will be around, but as a low margin business.  The automation piece is interesting, but there are a lot of horses in that race.

How much of the value of these other popular stocks is based on their ability to deliver a return to their investors and how much is based on their being in fashion with the public at large?  Seems to me that fashion trumps return.

Here is a fun example.  Two "stocks of the day."  One was the bull of the day.  The other was the bear.  Different industries, but both transportation related. Here's some stats

BULL stock:
PE ratio 26.52
PB ratio 4.98
PS ratio 4.53
Operating margin: -26.91
Dividend yield: Not paying one.
Stock price change over a year: -19.58%
Projected to have negative EPS in 2020 and 2021

BEAR stock:
PE ratio 5.86
PB ratio 0.58
PS ratio 0.19
Operating margin: 5.74
Dividend yield: 5.86
Stock price change over year: -53.65%
Projected to have positive EPS in 2020 and 2021
 
You can't make this stuff up. The company in the loved industry is selling for a PE ratio that's 5 times the other.   
Curious what two stocks are your example.

freedomfightergal

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Re: The thing I hate about VTSAX
« Reply #42 on: August 24, 2019, 12:51:00 PM »
I don't like how you can't be certain of price till after market closing.  The ETF version is my preferance now.

shinn497

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Re: The thing I hate about VTSAX
« Reply #43 on: August 24, 2019, 07:17:29 PM »
I love Tesla. Anyway. Distance a company from a stock. Also you will invest less in these companies with a value tilt

Boofinator

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Re: The thing I hate about VTSAX
« Reply #44 on: August 26, 2019, 07:11:53 AM »

With Uber, just like Facebook and like Standard Oil way back in the day, they appear to be intent on creating a monopoly. In that case, as long as investors are willing to play the long game, selling below cost has the potential to wipe out competitors to the extent they can at some point raise costs without fear of too much defection.

So this is all about investors weighting probable outcomes in their decision analysis. If Uber has only a 10% probability of wiping out most taxi companies and competitors to become the go-to individual transit option, then the initial investors will make money hand-over-fist while the rest of us will look back in hindsight and say "man, I knew app-based personally-owned transportation vehicles were going to replace taxis, I wish I would have invested all my money in Uber back in the day".

I like the automated trucking scenario better.  Even without competition, ride sharing has to compete with operating your personal vehicle, which is significantly cheaper even at subsidized rates, and about the same if you count capital costs of purchasing a cheap vehicle.  And I donít think thereís a huge barrier to entry.

I do think ridesharing will be around, but as a low margin business.  The automation piece is interesting, but there are a lot of horses in that race.

Nothing wrong with a low-margin business, so long as you have high volume. If ride-sharing replaces even half the taxis that were in existence 5(?!) years ago, it will be worth billions.

To use a very old example, today we don't think of oil companies as being easily monopolized, but over a generation or two where the right conditions existed, it sure made the Rockefellers a household name.

Boofinator

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Re: The thing I hate about VTSAX
« Reply #45 on: August 26, 2019, 07:50:40 AM »
How much of the value of these other popular stocks is based on their ability to deliver a return to their investors and how much is based on their being in fashion with the public at large?  Seems to me that fashion trumps return.

Here is a fun example.  Two "stocks of the day."  One was the bull of the day.  The other was the bear.  Different industries, but both transportation related. Here's some stats

BULL stock:
PE ratio 26.52
PB ratio 4.98
PS ratio 4.53
Operating margin: -26.91
Dividend yield: Not paying one.
Stock price change over a year: -19.58%
Projected to have negative EPS in 2020 and 2021

BEAR stock:
PE ratio 5.86
PB ratio 0.58
PS ratio 0.19
Operating margin: 5.74
Dividend yield: 5.86
Stock price change over year: -53.65%
Projected to have positive EPS in 2020 and 2021
 
You can't make this stuff up. The company in the loved industry is selling for a PE ratio that's 5 times the other.   

So what you're saying is that you are able to pick the winners and the losers (at least on some probabilistic level) from the data you've posted? If I had the ability to easily pick stocks that beat or lost to the market, I would not be investing in index funds, but rather I would be a multi-billionaire a la Biff in Back to the Future. I'm not trying to be funny here, just trying to suss whether or not the EMH would hold true in the example you provided.

The more-likely reason you think these stocks are mispriced has to do with you having a different information set than the people who are setting those prices. These are the people who spend days analyzing each company, along with their markets, their managers, their business practices, their capital, etc., etc. On some small level, they are probably even pricing in the value associated with chumps willing to buy the stock based on the P/E ratio or some other oversimplifying metric.

To use an analogy already discussed, picking winners and losers for individual stocks based on a quick summary of ten lines of data is no more possible than someone making good money as a professional sports gambler based on seeing a team's win-loss record and points scored per game versus those scored against. Sure these are good data points to have, and if knowing nothing else I would pick the team with the best win-loss ratio and the highest ratio of point-for versus points-against, but if I really want to beat the odds on a regular basis I am going to have to put a full-time job's worth of effort into analyzing what everybody else making these bets hasn't potentially considered.

theoverlook

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Re: The thing I hate about VTSAX
« Reply #46 on: August 26, 2019, 08:45:58 AM »
I'm generally not a fan of the "a lot of really smart people studied this" argument.  I'm really smart and I do dumb shit all the time. 

The people who invested in moviepass were smart, and I don't think you needed to rely on hindsight to realize that selling product for less than cost is not a sustainable business venture (looking @ you, Uber)

Counterargument:
Amazon went from 1997 until 2004 without making any significant profits.

I'm pretty sure they weren't selling product for less than cost, i.e. negative gross margins.
I'm pretty sure Uber isn't either. What is their cost for their third party drivers to operate third party vehicles? It costs me nothing to tell you to drive someone from A to B. Uber's only actual product / service costs are what they pay out to the drivers after they receive payment for that drive. That's definitely less than what they collect from the passenger. Beyond that, it's all management, marketing, and R&D. If they shitcanned all the elective stuff they would probably be a money printing machine, much like Amazon.

Montecarlo

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Re: The thing I hate about VTSAX
« Reply #47 on: August 26, 2019, 07:39:29 PM »
I'm generally not a fan of the "a lot of really smart people studied this" argument.  I'm really smart and I do dumb shit all the time. 

The people who invested in moviepass were smart, and I don't think you needed to rely on hindsight to realize that selling product for less than cost is not a sustainable business venture (looking @ you, Uber)

Counterargument:
Amazon went from 1997 until 2004 without making any significant profits.

I'm pretty sure they weren't selling product for less than cost, i.e. negative gross margins.
I'm pretty sure Uber isn't either. What is their cost for their third party drivers to operate third party vehicles? It costs me nothing to tell you to drive someone from A to B. Uber's only actual product / service costs are what they pay out to the drivers after they receive payment for that drive. That's definitely less than what they collect from the passenger. Beyond that, it's all management, marketing, and R&D. If they shitcanned all the elective stuff they would probably be a money printing machine, much like Amazon.

Thatís what Uber calls itís take rate, which is about 20%.  I personally would consider adding driver acquisition costs and insurance, at a minimum, into the mix as non-optional, costs that donít really decrease with scale.  I donít know if that takes them under 0%, but I have a pretty deep understanding of the financials of the company I work for and even 20% seems very low to me.

Maybe Iím wrong about Uber, but I think it goes without saying of all the cash-burning businesses out there, some arenít going to make it, and some will make the naysayers look foolish.

Montecarlo

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Re: The thing I hate about VTSAX
« Reply #48 on: September 03, 2019, 06:07:44 PM »
So, I definitely believe in wisdom of the crowds, and I do believe that most people, me included, have little chance of consistently picking winners... but... BUT!

Uber is down 40% from where it was 2 months ago.  Has the projected market size of ride hailing apps fallen 40%?  Or maybe % of trucking routes that can be easily automated?  Or maybe uberís projected market share of those has fallen?

Clearly none of that is true.

I may be convinced that EMH isnít exact.  The future is uncertain, and for a startup like Uber the fair value might fall in a -50%/+100% range, and the rest is just noise.

But Iím more convinced there is a significant herd mentality and trend following, as opposed to wisdom of the crowds.

Buffalo Chip

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Re: The thing I hate about VTSAX
« Reply #49 on: September 03, 2019, 08:02:07 PM »
So, I definitely believe in wisdom of the crowds, and I do believe that most people, me included, have little chance of consistently picking winners... but... BUT!

Uber is down 40% from where it was 2 months ago.  Has the projected market size of ride hailing apps fallen 40%?  Or maybe % of trucking routes that can be easily automated?  Or maybe uberís projected market share of those has fallen?

Clearly none of that is true.

I may be convinced that EMH isnít exact.  The future is uncertain, and for a startup like Uber the fair value might fall in a -50%/+100% range, and the rest is just noise.

But Iím more convinced there is a significant herd mentality and trend following, as opposed to wisdom of the crowds.

Itís not so much a question of whether markets are efficient, itís whether theyíre stark-raving nuts. 😁