Larry Swedroe: Trades Reveal Institutiinal Truths

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Random Walker
Posts: 2479
Joined: Fri Feb 23, 2007 8:21 pm

Larry Swedroe: Trades Reveal Institutiinal Truths

Post by Random Walker » Mon Nov 27, 2017 9:37 am

http://www.etf.com/sections/index-inves ... nopaging=1

More evidence that markets are super competitive, efficient, tough.

Dave

livesoft
Posts: 60127
Joined: Thu Mar 01, 2007 8:00 pm

Re: Larry Swedroe: Trades Reveal Institutiinal Truths

Post by livesoft » Mon Nov 27, 2017 11:43 am

I read the Swedroe article on the other article and saw a major obvious flaw: They did not take into account Tax-loss Harvesting.

I am going to tax-loss harvest all my short-term losses every year in my taxable account. The Robo-TLHers are also going to TLH all the short-term losses, too. There are very strong incentives to sell losing positions in the short-term and to keep winners for the long-term. So when I read Swedroe's analysis of the Chakrabarty et al. 2017 paper, my thought was "This is exactly what one should expect."

Now I did not read the original paper which may have mentioned TLH, but if it had, Swedroe should have written something about that.

But maybe you and Swedroe are hinting that institutional traders are acting rationally and unemotionally which some retail investors often do not do.
Wiki This signature message sponsored by sscritic: Learn to fish.

afan
Posts: 3355
Joined: Sun Jul 25, 2010 4:01 pm

Re: Larry Swedroe: Trades Reveal Institutiinal Truths

Post by afan » Mon Nov 27, 2017 7:34 pm

Well, maybe.

Many of these institutional investors are tax exempt- pension plans and endowments, for example. They gain nothing from loss harvesting because they pay no taxes anyway.

Many mutual funds are held by some combination of taxable, tax deferred and tax exempt investors. The funds market themselves on pre tax returns and are not tax managed. It is possible some of the investors would be better off in the funds did tax loss harvesting. But many of the investors would not care and explaining what they are doing would make the marketing more complicated.

So I am not sure that tax loss harvesting would explain much of the behavior.

On the other hand, factor investors have to sell stocks when they move out of the parameters that make them qualify for inclusion. Depending on how tightly they conform to their factor criteria institutional investors may be forcesd to sell stocks after short holding periods. This need not reflect active investment management changing their minds about the prospects for a stock.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

User avatar
grabiner
Advisory Board
Posts: 21845
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Larry Swedroe: Trades Reveal Institutiinal Truths

Post by grabiner » Thu Nov 30, 2017 11:03 pm

"Perhaps their most interesting finding, though, was that, on average, short-duration trades would have been profitable had they been held for a year instead of being closed out within three months."

This isn't a particularly interesting conclusion; it reflects the upward trend of the market. If you have a 3% loss after three months, and the market gains an average of 8% per year, you expect to have a 3% gain if you hold to the end of the year. If you sell and buy something else, your gain throughout the year will still be 3%.
afan wrote:
Mon Nov 27, 2017 7:34 pm
On the other hand, factor investors have to sell stocks when they move out of the parameters that make them qualify for inclusion. Depending on how tightly they conform to their factor criteria institutional investors may be forcesd to sell stocks after short holding periods. This need not reflect active investment management changing their minds about the prospects for a stock.
Whether this causes gains or losses depends on the factor. Small-cap stocks which become large-cap must have risen, and value stocks which become growth are likely to have risen since rising prices increase price/book and price/earnings ratios. However, positive-momentum stocks which lose their positive momentum must have fallen, and I would expect that quality stocks which lose their quality are likely to fall in price at the same time.
Wiki David Grabiner

Post Reply