More on evils of indexing

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larryswedroe
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More on evils of indexing

Post by larryswedroe » Wed Sep 04, 2013 7:29 am

http://www.cbsnews.com/8301-505123_162- ... -indexing/

Taking economist George Gilder to task for his rants against the evils of indexing

Hope you find it helpful
Larry

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macchiato
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Re: More on evils of indexing

Post by macchiato » Wed Sep 04, 2013 8:12 am

The original article didn't seem to be calling indexing inherently evil. The interviewer and interviewee were engaged in a "Reductio Ad Adsurdum" about how if everyone did indexing, there would be no information advantage and no "real" wealth creation beyond the boring old generation of wealth over your lifetime with passive investing. That kind of economics is beyond my pay grade, except that the paradox does appear to exist, that passive investors and Warren Buffett can all win.

I suppose that generating controversy and using "evil" in a headline generates the requisite alpha in pageviews these days.

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Ged
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Re: More on evils of indexing

Post by Ged » Wed Sep 04, 2013 8:56 am

"Reductio Ad Adsurdum" is a good one. Since the day when everyone indexes seems to be in the improbable future, the idiom "ad kalendas graecas" might be also be useful.

Wikipedia has a list of these under

http://en.wikipedia.org/wiki/List_of_id ... robability

so if Latin is not your thing you can pick your language.

dhodson
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Re: More on evils of indexing

Post by dhodson » Wed Sep 04, 2013 9:02 am

sometimes i wonder if we need to thank the people who shill out active investing with their heavy fees. If they didnt exist then i might have less purchasing power in the future.

Levett
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Re: More on evils of indexing

Post by Levett » Wed Sep 04, 2013 9:20 am

"I suppose that generating controversy and using "evil" in a headline generates the requisite alpha in pageviews these days"

:thumbsup

Surely the topic has been beaten to death.

Lev

jebmke
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Re: More on evils of indexing

Post by jebmke » Wed Sep 04, 2013 9:43 am

More data-free claims, looks like.
When you discover that you are riding a dead horse, the best strategy is to dismount.

FafnerMorell
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Re: More on evils of indexing

Post by FafnerMorell » Wed Sep 04, 2013 9:51 am

At least "Evil indexing" sounds more exciting than "passive investing". Just think, now when folks are talking about their investments, I can toss in "For decades I've been buying up portions of almost every company (that's stock is for sale) across the entire free world as part of an investing approach that's so successful that the hedge fund managers whine how I've got unfair advantage over them - in fact, they cry that my approach is EVIL incarnate compared to their piddling attempts for financial domination - BAHAHAHAHA!!".

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Ged
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Re: More on evils of indexing

Post by Ged » Wed Sep 04, 2013 10:13 am

Deep Woods Off! looks evil if you are a mosquito.

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telemark
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Re: More on evils of indexing

Post by telemark » Wed Sep 04, 2013 10:57 am

"First they ignore you. Then they laugh at you. Then they attack you. Then you win."

There's some doubt as to whether Gandhi actually said that, but it seems apropos.

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hornet96
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Re: More on evils of indexing

Post by hornet96 » Wed Sep 04, 2013 11:15 am

macchiato wrote:The original article didn't seem to be calling indexing inherently evil. The interviewer and interviewee were engaged in a "Reductio Ad Adsurdum" about how if everyone did indexing, there would be no information advantage and no "real" wealth creation beyond the boring old generation of wealth over your lifetime with passive investing. That kind of economics is beyond my pay grade, except that the paradox does appear to exist, that passive investors and Warren Buffett can all win.

I suppose that generating controversy and using "evil" in a headline generates the requisite alpha in pageviews these days.
I believe the paradox exists in that because financial markets are nearly efficient, but not totally efficient, arbitrage opportunities would develop if every market participant used an indexing strategy, which would then induce an active manager to exploit that arbitrage opportunity to generate alpha.

I remember studying this point as part of the CFA level II curriculum, and had to chuckle to myself a bit when I came across this part. I think this is (sort of) the point of the other recent article that refers to indexers as "parasites" - i.e., the indexers benefit indirectly from all the high-cost active management that is keeping the markets efficient (or at least nearly efficient).

I'll happily continue on in my parasitic ways as an indexer myself. :sharebeer

Leesbro63
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Re: More on evils of indexing

Post by Leesbro63 » Wed Sep 04, 2013 11:31 am

dhodson wrote:sometimes i wonder if we need to thank the people who shill out active investing with their heavy fees. If they didnt exist then i might have less purchasing power in the future.
+1. My experience as a Boglehead for over 15 years is that I have only sold a very few on it. Most fall into one of the following categories:

1. Not enough money saved to care.
2. Think they are smarter and "their guy" has "a system"
3. Too afraid of stocks "because their grandfather lost everything in 1929"
4. Can't grasp indexing because it seems "too simple".

Helot
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Re: More on evils of indexing

Post by Helot » Wed Sep 04, 2013 11:44 am

Leesbro63 wrote: +1. My experience as a Boglehead for over 15 years is that I have only sold a very few on it. Most fall into one of the following categories

3. Too afraid of stocks "because their grandfather lost everything in 1929"
I would update this to

3. Too afraid of stocks "because everybody lost all of their money in 2008."

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neurosphere
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Re: More on evils of indexing

Post by neurosphere » Wed Sep 04, 2013 11:45 am

Leesbro63 wrote:
dhodson wrote:sometimes i wonder if we need to thank the people who shill out active investing with their heavy fees. If they didnt exist then i might have less purchasing power in the future.
+1. My experience as a Boglehead for over 15 years is that I have only sold a very few on it. Most fall into one of the following categories:

1. Not enough money saved to care.
2. Think they are smarter and "their guy" has "a system"
3. Too afraid of stocks "because their grandfather lost everything in 1929"
4. Can't grasp indexing because it seems "too simple".
I have similar experiences. When I get close to convincing someone they can invest on their own, there seems to be a point where they either decide "A HA!" and "get it" or they go the other way, and think that there must be some catch, that they don't trust themselves and they back away from the thought of managing their own money using cheap index funds.

I had an acquaintance of mine from residency, who had initially been excited about learning about investing and was diligently saving in a Roth for several years. I recently learned that he gave his money to an insurance-based "financial planner". His reason was "I got tired of thinking about my money". He basically just wanted someone else to do it for him, even after doing on his own for a while. We're not close enough where I was willing to take the effort to point out the money he was losing to fees and commissions (he had funds with upfront sales charges and also 12b-1 fees), or to try to recommend a cheaper investment manager with fewer conflicts of interest.

NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

grok87
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Re: More on evils of indexing

Post by grok87 » Wed Sep 04, 2013 12:16 pm

"Market Cap Weighting is backwards looking"
Larry, if you'll allow me, I'd like to answer the question of which of his claims might be the LEAST absurd. I think the above might have a grain of truth not perhaps for the market as a whole but for the SMALL/VALUE premium.
If one buys into the hypothesis that the small value premium is not ENTIRELY a risk story- i.e. that there is a behavioral element, then one way to characterize investors behavior is that they misprice small value stocks by being backward looking. Small value stocks are usually basket cases- past bad management, bad market position vis-à-vis competitors, perhaps some shady accounting, etc. Krispy Kreme in the late 2000s comes to mind. But such stocks can sometimes rejuvenate/reinvent themselves. When the stock price gets really low, their is a lot off optionality.

Anyway, just a thought...
cheers,
Keep calm and Boglehead on. KCBO.

larryswedroe
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Re: More on evils of indexing

Post by larryswedroe » Wed Sep 04, 2013 1:19 pm

Grok
I agree that there is at least some behavioral story to the value premium, which is much larger in small than large.
Part of reason is that small growth is such a black hole--as is any investment with lottery like characteristics (excess kurtosis and positive skew)--the literature finds this more and more. Another recent paper on this that I just wrote up this morning--so stay tuned watching my blog

Best wishes
Larry

grok87
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Re: More on evils of indexing

Post by grok87 » Wed Sep 04, 2013 4:56 pm

larryswedroe wrote:Grok
I agree that there is at least some behavioral story to the value premium, which is much larger in small than large.
Part of reason is that small growth is such a black hole--as is any investment with lottery like characteristics (excess kurtosis and positive skew)--the literature finds this more and more. Another recent paper on this that I just wrote up this morning--so stay tuned watching my blog

Best wishes
Larry
Thanks Larry-look forward to reading your new paper.
Keep calm and Boglehead on. KCBO.

grog
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Re: More on evils of indexing

Post by grog » Thu Sep 05, 2013 10:44 am

larryswedroe wrote:Grok
I agree that there is at least some behavioral story to the value premium, which is much larger in small than large.
Part of reason is that small growth is such a black hole--as is any investment with lottery like characteristics (excess kurtosis and positive skew)--the literature finds this more and more. Another recent paper on this that I just wrote up this morning--so stay tuned watching my blog

Best wishes
Larry
When I first read your comment about small-cap growth I didn't quite get it as I would have thought small-cap growth=extremely risky=risk premium, but it made more sense the more I thought about it. I guess the seeming contradiction is why on earth people would put money into a risky, underperforming asset class (and squaring this with investor rationality). This is where your lottery comparison is helpful. There is an extreme tail where you get extremely good returns. It's sort of like insurance, but reversed. People overpay actuarially speaking for insurance to avoid a bad outcome and similarly they will tolerate below average returns for a chance at the big windfall.

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neurosphere
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Re: More on evils of indexing

Post by neurosphere » Thu Sep 05, 2013 11:23 am


--Vanguard founder "John Bogle is a great hero for defining a mode of investment with no possibility of information in it"

--Indexing provides no possibility of alpha (outperformance relative to an appropriate risk-adjusted benchmark), no upside

--A market cap-weighted passive investment is always, by definition, backward-looking

--Venture capital has a strong advantage over what arms-length public investments have become

--Other than the heat death, entropy, average equilibrium return of a cap-weighted index

--The random walk down Wall Street ends with gambler’s ruin
If index-investing is just SO AWFUL, how is it that their returns beat the vast majority of active managers? I guess what the Forbes interview is really trying to say is that indexing is horrible, but that active investing is much much worse (since indexing provides better returns). So by the "lesser of two evils" theorem, we should all go with indexing. :D
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".


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