Do posters/the press underestimate changes to the structure of markets?

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Tellurius
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Do posters/the press underestimate changes to the structure of markets?

Post by Tellurius » Mon May 13, 2019 5:54 am

I often see discussion on historical performance of stocks, which seem to me to not take into account the "superstructure" markets.

I am thinking of the following changes

The move to floating commissions from the 3% fixed commissions (in the late 70's I believe?), enabling small stocks to be traded much more frequently
The emergence of ETFs which own every stock in an index, narrowing the gap between the "household name" stocks and the rest.
The headstart of the USA in the ETF industry, possibly increasing the pull of the USA as a place for foreigners to park funds
The necessity for Americans to self-invest their pensions in the stock and bond markets (picked up steam in the 80's? not sure), increasing demand for stocks, while in Europe a lot of individuals depend on their government/social security pension

Why are posters and articles not discussing these more, in your opinion?
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chevca
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by chevca » Mon May 13, 2019 6:21 am

What's to discuss there?

We don't recommend or talk about trading small stocks frequently here on BH.

An ETF holding all the stocks of an index fund is just an index fund that can be traded throughout the day rather than getting COB price.

I'd encourage you to look into how many Americans even save or invest in their 401ks and what the typical balance is before calling it a necessity. Should they all? Yes. Do they all? Well....

Maybe you could share with us what a superstructure market is?

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Tellurius
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by Tellurius » Mon May 13, 2019 8:08 am

chevca wrote:
Mon May 13, 2019 6:21 am
What's to discuss there?

We don't recommend or talk about trading small stocks frequently here on BH.

An ETF holding all the stocks of an index fund is just an index fund that can be traded throughout the day rather than getting COB price.

I'd encourage you to look into how many Americans even save or invest in their 401ks and what the typical balance is before calling it a necessity. Should they all? Yes. Do they all? Well....

Maybe you could share with us what a superstructure market is?
Sorry if my post was unclear. I was referring to conversations about the American stock market's historical performance.

In posts such as on Value vs Growth, or on the infamous "small value premium", there aren't many mentions of "structural" changes, such as the cost of trading, or the influence of indexing.

I used ETF, should have used passive index funds vs active (it's because in Europe we've skipped the mutual fund stage, in a sense). With regard to index funds, if you look at how, for example, in the late 90's bubble, the top 10% of stocks in the S&P500 were bid up to much higher PE10 compared to the rest, in comparison to the situation now. I wonder whether that is due to the influence of index funds.

Necessity means "they should". I am not saying that many people are putting money in their 401k. I am just wondering what the effect of the ones who do is on the stock market, in general.

By "superstructure" I meant everything that accompanies the market and ultimately affects exchange. The venues, the brokers (and the change in their commission structures, the funds (the active, the passive, the hedge etc).

I hope this clarifies my post somewhat.

Tellurius
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JoMoney
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by JoMoney » Mon May 13, 2019 8:11 am

Some of that has been brought up before, I know I've brought some of that up when discussing the historical performance of small-cap stocks, that seems to primarily hinge on an unusual spurt of growth that all occurred between 1975-1983. Using his data-set for small caps, Wharton Prof. Jeremey Siegel has suggested that the entire small-cap "premium" relies on an unusual period between 1975-1983 , if you remove that period and the highest 9 years from large-caps and perform monte carlo simulations small caps underperform in majority of simulations.
Image

There's been lots of structural changes in the market, that (at least theoretically) have made small-stocks more accessible, things like the
Brokerage "May Day" that started lowering the costs of involved with large portfolios, the creation of "retirement accounts" like IRA's and 401ks, changes to trusts and "Prudent Man" rules which would have previously prevent large trusts like pension funds from buying small-cap stocks or any investment that might get them into trouble if was considered generally to be too risky, ERISA rule changes allowed for pensions to emphasize "diversification" more than "prudent man" rules, the growth and popularity of mutual funds/ETFs as investments, computers to trade and manage large portfolios, large changes in the industry sector weightings of the markets... and more
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Murgatroyd
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by Murgatroyd » Mon May 13, 2019 8:18 am

JoMoney wrote:
Mon May 13, 2019 8:11 am
Some of that has been brought up before, I know I've brought some of that up when discussing the historical performance of small-cap stocks, that seems to primarily hinge on an unusual spurt of growth that all occurred between 1975-1983. Using his data-set for small caps, Wharton Prof. Jeremey Siegel has suggested that the entire small-cap "premium" relies on an unusual period between 1975-1983 , if you remove that period and the highest 9 years from large-caps and perform monte carlo simulations small caps underperform in majority of simulations.
Image

There's been lots of structural changes in the market, that (at least theoretically) have made small-stocks more accessible, things like the
Brokerage "May Day" that started lowering the costs of involved with large portfolios, the creation of "retirement accounts" like IRA's and 401ks, changes to trusts and "Prudent Man" rules which would have previously prevent large trusts like pension funds from buying small-cap stocks or any investment that might get them into trouble if was considered generally to be too risky, ERISA rule changes allowed for pensions to emphasize "diversification" more than "prudent man" rules, the growth and popularity of mutual funds/ETFs as investments, computers to trade and manage large portfolios, large changes in the industry sector weightings of the markets... and more
Jomoney, that Jeremy Siegel chart is an eye opener. What has he submitted as the reason(s) for the “unusual period”?

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Tellurius
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by Tellurius » Mon May 13, 2019 8:25 am

JoMoney wrote:
Mon May 13, 2019 8:11 am
Some of that has been brought up before, I know I've brought some of that up when discussing the historical performance of small-cap stocks, that seems to primarily hinge on an unusual spurt of growth that all occurred between 1975-1983. Using his data-set for small caps, Wharton Prof. Jeremey Siegel has suggested that the entire small-cap "premium" relies on an unusual period between 1975-1983 , if you remove that period and the highest 9 years from large-caps and perform monte carlo simulations small caps underperform in majority of simulations.

There's been lots of structural changes in the market, that (at least theoretically) have made small-stocks more accessible, things like the
Brokerage "May Day" that started lowering the costs of involved with large portfolios, the creation of "retirement accounts" like IRA's and 401ks, changes to trusts and "Prudent Man" rules which would have previously prevent large trusts like pension funds from buying small-cap stocks or any investment that might get them into trouble if was considered generally to be too risky, ERISA rule changes allowed for pensions to emphasize "diversification" more than "prudent man" rules, the growth and popularity of mutual funds/ETFs as investments, computers to trade and manage large portfolios, large changes in the industry sector weightings of the markets... and more
Thanks! That is quite interesting. It would be nice to see more articles on things like that.

People are not so "prudent" any more.
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JoMoney
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by JoMoney » Mon May 13, 2019 8:32 am

Murgatroyd wrote:
Mon May 13, 2019 8:18 am
...
Jomoney, that Jeremy Siegel chart is an eye opener. What has he submitted as the reason(s) for the “unusual period”?
It's from his book "Stocks For the Long Run", he doesn't have definitive answer but poses the question as something to consider when looking at small cap stocks. He offers some possibilities, like many of the things i mentioned in my post, and I believe a few other systemic events in that time period like the 'Oil Crisis', others might revolve around massive inflation, and large changes in global trade (decreased costs in manufacturing/labor).
Note however, that some people dismiss his data set used, because it's built on a combination of the Ibbotson Small-Stock data (which is what everyone uses between the 1925-1970s period) then linked to the Russell 2000 index data (which some people don't like the way is constructed), and then to the DFA US Small cap mutual fund.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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JoMoney
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by JoMoney » Mon May 13, 2019 8:38 am

Tellurius wrote:
Mon May 13, 2019 8:25 am
...
Thanks! That is quite interesting. It would be nice to see more articles on things like that.

People are not so "prudent" any more.
It certainly bothers me when I see/hear so many people uncritically accept the markets "efficiency". There's a lot garbage out there... I'm on board with broad-market indexing, and I think it's provable that as a group we can't beat ourselves, but it's a bit of a different thing when you're relying on a market where everyone is doing there own due diligence vs everyone expecting that someone else is watching for it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

pdavi21
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by pdavi21 » Mon May 13, 2019 7:13 pm

Yes. There are a lot of opinions presented on BH that are foolish (in my opinion) and supported only by backtesting and not sound logic.

In the end, the market is foolish anyway, so even logical plans are only marginally less likely to fail.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Karamatsu
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Re: Do posters/the press underestimate changes to the structure of markets?

Post by Karamatsu » Tue May 14, 2019 6:59 pm

Why are posters and articles not discussing these more, in your opinion?
There are big differences among posters here, of course, with different levels of knowledge and expertise, but when you get right down to it, the only data we have on which to base our decisions are the data that we have. Perhaps the implicit assertion is that, while changes in market structure from country to country, or within the same market from time period to time period (or even within one market at different times of a single day) are real, these differences wash out in the end, leaving us with roughly applicable rules of thumb about human nature and the human activity of "trading" that can keep us on a path that has a better chance of a positive outcome... of if not that, at least gives us the illusion of some rational strategy to use as a basis for decision-making. A lot of "research" is just tea leaves and data fitting, and I think you can gauge how reliable it all is by the fact that brokerage companies universally disclaim any relationship between past performance and future returns. If there is no such relationship, then no back testing is worth the CPU time spent to compute it. And yet this is an investing board, and we try to be rational, so we have to do something!

Anyway, I find the differences in markets or in the same markets over time inherently interesting, and we can have fun speculating all day, but the results are not particularly actionable except to the extent that it is sometimes useful to understand how the markets in a given country are rigged to achieve political aims, or to protect certain favored industries, companies, or even individuals. A lot of the changes in markets are politically driven, but that's the one subject that is taboo.

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