"Active" Index investing vs. "Passive" Index investing

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

onourway wrote: Sat Oct 10, 2020 6:38 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Despite your assertions to the contrary, your idea is not in any way meaningfully different from the active investing that thousands of fund managers attempt year after year. Clearly, it does work for some of them, at least for some period of time. However the number of them that are able to out-perform their index for 20 years is astonishingly close to zero.
There is an earlier reply by someone on this thread saying that comparing what I am proposing to active mutual funds managers are like comparing apples to oranges.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

JPH wrote: Sat Oct 10, 2020 6:56 am Why limit your choices to stocks that comprise the index? If you want to try and pick the "best" ones, then pick from the entire universe of available stocks.
This is already answered above. Frankly you can't research all the companies out there. Narrow it down to what in the index then narrow it down to the sectors you have in-depth knowledge with.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

onourway wrote: Sat Oct 10, 2020 7:08 am
GoldenGoose wrote: Sat Oct 10, 2020 7:05 am
The index does not contain all the companies out there. Rather it contains companies representing the market and having certain qualifications. Tsla has huge market cap but it is not in an index ... Yet. (I have a feeling it will but that's another story). So my thought of picking from the index is to limit your research, control the risk and somewhat reflect the chosen indexs holdings.
I don’t think you even understand what an “index” is in this context. Tesla is most certainly included in the main index I hold. It’s the 9th largest holding. :oops:
I am thinking about the SP500 index.
onourway
Posts: 2883
Joined: Thu Dec 08, 2016 3:39 pm

Re: "Active" investing vs. "Passive" investing

Post by onourway »

GoldenGoose wrote: Sat Oct 10, 2020 7:16 am
onourway wrote: Sat Oct 10, 2020 6:38 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Despite your assertions to the contrary, your idea is not in any way meaningfully different from the active investing that thousands of fund managers attempt year after year. Clearly, it does work for some of them, at least for some period of time. However the number of them that are able to out-perform their index for 20 years is astonishingly close to zero.
There is an earlier reply by someone on this thread saying that comparing what I am proposing to active mutual funds managers are like comparing apples to oranges.
Which is patently ridiculous. You really think “pick only the best companies” is a novel idea?
User avatar
vineviz
Posts: 9052
Joined: Tue May 15, 2018 1:55 pm

Re: "Active" investing vs. "Passive" investing

Post by vineviz »

GoldenGoose wrote: Sat Oct 10, 2020 7:16 am
onourway wrote: Sat Oct 10, 2020 6:38 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Despite your assertions to the contrary, your idea is not in any way meaningfully different from the active investing that thousands of fund managers attempt year after year. Clearly, it does work for some of them, at least for some period of time. However the number of them that are able to out-perform their index for 20 years is astonishingly close to zero.
There is an earlier reply by someone on this thread saying that comparing what I am proposing to active mutual funds managers are like comparing apples to oranges.
If you're referring to the comment by user 000, then you are going to find yourself misled.

What you propose has virtually no chance of succeeding reliably on its merits: you're competing with people who have far more money, time, and expertise than you have. It's like playing the daily lottery: you'll get lucky every so often, but you'll be far better off on average by not playing the game.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

onourway wrote: Sat Oct 10, 2020 7:23 am
GoldenGoose wrote: Sat Oct 10, 2020 7:16 am
onourway wrote: Sat Oct 10, 2020 6:38 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Despite your assertions to the contrary, your idea is not in any way meaningfully different from the active investing that thousands of fund managers attempt year after year. Clearly, it does work for some of them, at least for some period of time. However the number of them that are able to out-perform their index for 20 years is astonishingly close to zero.
There is an earlier reply by someone on this thread saying that comparing what I am proposing to active mutual funds managers are like comparing apples to oranges.
Which is patently ridiculous. You really think “pick only the best companies” is a novel idea?
I wonder how Buffett does it that makes him rich.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

vineviz wrote: Sat Oct 10, 2020 7:24 am
GoldenGoose wrote: Sat Oct 10, 2020 7:16 am
onourway wrote: Sat Oct 10, 2020 6:38 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Despite your assertions to the contrary, your idea is not in any way meaningfully different from the active investing that thousands of fund managers attempt year after year. Clearly, it does work for some of them, at least for some period of time. However the number of them that are able to out-perform their index for 20 years is astonishingly close to zero.
There is an earlier reply by someone on this thread saying that comparing what I am proposing to active mutual funds managers are like comparing apples to oranges.
If you're referring to the comment by user 000, then you are going to find yourself misled.

What you propose has virtually no chance of succeeding reliably on its merits: you're competing with people who have far more money, time, and expertise than you have. It's like playing the daily lottery: you'll get lucky every so often, but you'll be far better off on average by not playing the game.
You could be right and you could be wrong. This statement I find unfailingly reliable.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: "Active" investing vs. "Passive" investing

Post by Kelrex »

GoldenGoose wrote: Sat Oct 10, 2020 6:18 am
Kelrex wrote: Fri Oct 09, 2020 9:25 pm Oh! Just monitor companies to make sure they're not in trouble? I wonder why so many professional investors go bust when it's that easy??? It's not like that industry is filled with some of the most terrifyingly brilliant and ruthless people in existence...

Sarcasm aside, that's like saying the secret to winning an Olympic race is to run faster.

You know what the biggest potential problem I see with your "pick the best" stock approach is though?? It's that even if you magically could identify the best and strongest companies, you might end up making much less money.

Why? Because your biggest gains will typically be from owning stocks in the smaller, crappier companies *before* they get to be big, stable, "strong" companies.

The major benefit of the index is that a total loss can only lose 100% of its value, but stocks that explode can easily gain many hundreds of percent in value. So when you own a bit of all of them, you capture all of the meteoric gains, which really aren't uncommon, they're just very very hard to detect in advance, so already owning them as part of an index really helps nail that otherwise impossible timing.

It also helps to be invested in the kind of companies that blow up during the kind of economic conditions where other established companies stagnate.

If you select only the "best" companies, those huge gains are baked into the price, you will almost always be off on your timing of buying them. You miss out on the biggest gains, and leave yourself still very vulnerable to the losses because even big juggernaut companies can and do fail. So your net gains over time would probably be less, because you would have almost no huge wins.

So not only is the concept of monitoring companies for possible failure impractical/impossible, but even if you could, you might actually be shooting yourself in the foot and throttling your gains.

Passive indexing is indeed easy, but that's because it's us hitching a free ride. You have to see the value of the insane work underneath it to appreciate just how exceptional you would have to be to beat it.

It's not that you have to be just a bit smarter than the indexers to beat the index, that's not how it works, the indexers are just hitching a free ride on the market, like pilot fish on a shark. You have to be smarter than everyone involved in the entire market to beat *the market itself*, you have to beat the shark, and you're just a fish.
It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Well, you seem very confident in your proposed approach, so I wish you luck with it and hope that you post regularly about it so we can see what happens.

If you truly find a simple way to beat the index over years, then you should absolutely do it professionally and invest other people's money as well.

Oh, and many, many, many people have done this type of thing before, and yes, many of them have beat the index...for a given period of time. Is your particular approach meaningfully different? Perhaps, I don't know what particular industry insights you are talking about, so I can't actually judge.

I wonder if you really read my post though and understand the downside I was explaining about missing out on major gains by only buying the "best" stocks. Did that make sense to you? Missing out on the disproportionate growth of "mediocre" stocks that explode into "great" stocks, which by definition you wouldn't be holding at the right time with your approach?

How would you handle that issue? Or is your approach assuming that the amount of loss you would avoid by only holding "good" stocks would be so significant that you could afford to lose out on meteoric rises?

Is your perspective that the gains of index itself are dragged down by a disproportionate number of losses compared to those large gains of companies that explode?

Because there's pretty available math that you could find on the subject to confirm or disprove your position.
FoolMeOnce
Posts: 1025
Joined: Mon Apr 24, 2017 11:16 am

Re: "Active" investing vs. "Passive" investing

Post by FoolMeOnce »

GoldenGoose wrote: Fri Oct 09, 2020 10:57 pm If that is the case then you use your knowledge to pick the better stocks. If you ask me how then I guess we better stop here.
GoldenGoose wrote: Sat Oct 10, 2020 5:37 am With active investing, it is YOUR job to recognize these few outperformed in the index and select them. If I need to explain "how do you know which ones?", then this approach is not for you. Recognizing these few performing stocks in the index takes time, effort, intuition and know-how.
You are going about this wrong. You should share your picks widely to drive up demand and increase your gains.
whereskyle
Posts: 1312
Joined: Wed Jan 29, 2020 10:29 am

Re: "Active" investing vs. "Passive" investing

Post by whereskyle »

GoldenGoose wrote: Sat Oct 10, 2020 6:18 am
Kelrex wrote: Fri Oct 09, 2020 9:25 pm Oh! Just monitor companies to make sure they're not in trouble? I wonder why so many professional investors go bust when it's that easy??? It's not like that industry is filled with some of the most terrifyingly brilliant and ruthless people in existence...

Sarcasm aside, that's like saying the secret to winning an Olympic race is to run faster.

You know what the biggest potential problem I see with your "pick the best" stock approach is though?? It's that even if you magically could identify the best and strongest companies, you might end up making much less money.

Why? Because your biggest gains will typically be from owning stocks in the smaller, crappier companies *before* they get to be big, stable, "strong" companies.

The major benefit of the index is that a total loss can only lose 100% of its value, but stocks that explode can easily gain many hundreds of percent in value. So when you own a bit of all of them, you capture all of the meteoric gains, which really aren't uncommon, they're just very very hard to detect in advance, so already owning them as part of an index really helps nail that otherwise impossible timing.

It also helps to be invested in the kind of companies that blow up during the kind of economic conditions where other established companies stagnate.

If you select only the "best" companies, those huge gains are baked into the price, you will almost always be off on your timing of buying them. You miss out on the biggest gains, and leave yourself still very vulnerable to the losses because even big juggernaut companies can and do fail. So your net gains over time would probably be less, because you would have almost no huge wins.

So not only is the concept of monitoring companies for possible failure impractical/impossible, but even if you could, you might actually be shooting yourself in the foot and throttling your gains.

Passive indexing is indeed easy, but that's because it's us hitching a free ride. You have to see the value of the insane work underneath it to appreciate just how exceptional you would have to be to beat it.

It's not that you have to be just a bit smarter than the indexers to beat the index, that's not how it works, the indexers are just hitching a free ride on the market, like pilot fish on a shark. You have to be smarter than everyone involved in the entire market to beat *the market itself*, you have to beat the shark, and you're just a fish.
It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
The issue is behavioral. If you can choose a diversified basket of 60 or so stocks that you can stick with no matter what, you should do just as well as the market (of course you might do better and you might do worse). The
serious risks arise, however, if you hold a non-market portfolio for a year, it underperforms, and you question whether you made the right decision in picking your 60 or so stocks. Now what do you do? Do you stick with what you have or not? If you decide not to, then what do you do? Do you choose another basket of 60 or so stocks and see how those do for a year? What if you just changed from a basket that was about to do well to a different basket that now also underperforms?

The questions start popping up all over the place, and these psychological terrors can lead people to quit investing altogether.

Total-market investing is right for me because I want to minimize behavioral risks. I tried straying from the market and I very quickly saw how much more stressful life became. I was never certain that I had actually chosen the right basket of stocks and I soon became paralyzed by uncertainty. With total-market investing, I embrace uncertainty as inevitable and I don't take my performance personally, which is probably why I think total-market investing eliminates serious behavioral risks at least for me.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
User avatar
PicassoSparks
Posts: 166
Joined: Tue Apr 28, 2020 5:41 am

Re: "Active" investing vs. "Passive" investing

Post by PicassoSparks »

GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
Buffett’s full time job (with a team!) is evaluating and investing in companies. He has outperformed over the long term. He has underperformed recently. All in all, one of the greatest factors in his success is the stubborn duration of it. He started investing young. Most of his present wealth was earned after he qualified for social security. Compounding as a factor far outstrips his recent underperformance.

In your scenario, the person doesn’t have that kind of time.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

What I find interesting in this thought excercise is the risk adverse nature of this board. Everyone who chimed in always has the specter of failure. If picking individual companies is impossible, then how has Buffett been doing it? No one on this board has answered this question. If he was a nobody posting on this board and talk about his successes in picking stocks/companies, I guess everyone would be saying "it was just dumb luck".
UpperNwGuy
Posts: 4730
Joined: Sun Oct 08, 2017 7:16 pm

Re: "Active" investing vs. "Passive" investing

Post by UpperNwGuy »

GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
There is no comparison., Buffet is not a small investor buying stocks. Buffet is the CEO of a large company with a staff of analysts to do his research. He doesn't buy stocks, he buys controlling interest in entire companies and large stakes in even larger companies. The companies in which he invests open their books to him, allow him to meet with the management team, and otherwise give him advantages that you will never have.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

Kelrex wrote: Sat Oct 10, 2020 7:39 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am
Kelrex wrote: Fri Oct 09, 2020 9:25 pm Oh! Just monitor companies to make sure they're not in trouble? I wonder why so many professional investors go bust when it's that easy??? It's not like that industry is filled with some of the most terrifyingly brilliant and ruthless people in existence...

Sarcasm aside, that's like saying the secret to winning an Olympic race is to run faster.

You know what the biggest potential problem I see with your "pick the best" stock approach is though?? It's that even if you magically could identify the best and strongest companies, you might end up making much less money.

Why? Because your biggest gains will typically be from owning stocks in the smaller, crappier companies *before* they get to be big, stable, "strong" companies.

The major benefit of the index is that a total loss can only lose 100% of its value, but stocks that explode can easily gain many hundreds of percent in value. So when you own a bit of all of them, you capture all of the meteoric gains, which really aren't uncommon, they're just very very hard to detect in advance, so already owning them as part of an index really helps nail that otherwise impossible timing.

It also helps to be invested in the kind of companies that blow up during the kind of economic conditions where other established companies stagnate.

If you select only the "best" companies, those huge gains are baked into the price, you will almost always be off on your timing of buying them. You miss out on the biggest gains, and leave yourself still very vulnerable to the losses because even big juggernaut companies can and do fail. So your net gains over time would probably be less, because you would have almost no huge wins.

So not only is the concept of monitoring companies for possible failure impractical/impossible, but even if you could, you might actually be shooting yourself in the foot and throttling your gains.

Passive indexing is indeed easy, but that's because it's us hitching a free ride. You have to see the value of the insane work underneath it to appreciate just how exceptional you would have to be to beat it.

It's not that you have to be just a bit smarter than the indexers to beat the index, that's not how it works, the indexers are just hitching a free ride on the market, like pilot fish on a shark. You have to be smarter than everyone involved in the entire market to beat *the market itself*, you have to beat the shark, and you're just a fish.
It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Well, you seem very confident in your proposed approach, so I wish you luck with it and hope that you post regularly about it so we can see what happens.

If you truly find a simple way to beat the index over years, then you should absolutely do it professionally and invest other people's money as well.

Oh, and many, many, many people have done this type of thing before, and yes, many of them have beat the index...for a given period of time. Is your particular approach meaningfully different? Perhaps, I don't know what particular industry insights you are talking about, so I can't actually judge.

I wonder if you really read my post though and understand the downside I was explaining about missing out on major gains by only buying the "best" stocks. Did that make sense to you? Missing out on the disproportionate growth of "mediocre" stocks that explode into "great" stocks, which by definition you wouldn't be holding at the right time with your approach?

How would you handle that issue? Or is your approach assuming that the amount of loss you would avoid by only holding "good" stocks would be so significant that you could afford to lose out on meteoric rises?

Is your perspective that the gains of index itself are dragged down by a disproportionate number of losses compared to those large gains of companies that explode?

Because there's pretty available math that you could find on the subject to confirm or disprove your position.
Missing out on the gain is a risk. If a company picked from the index goes bankrupted, do you think the index would be unaffected? What happen if you didnt pick that stock? Would you beat the index? You might.

Again, this is a thought excercise. Nothing more. I am not out to prove me right or you wrong. Just food for thought. If you agree with the proposition, you can consider it. If not, stay the BH course.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: "Active" investing vs. "Passive" investing

Post by Kelrex »

UpperNwGuy wrote: Sat Oct 10, 2020 7:50 am
GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
There is no comparison., Buffet is not a small investor buying stocks. Buffet is the CEO of a large company with a staff of analysts to do his research. He doesn't buy stocks, he buys controlling interest in entire companies and large stakes in even larger companies. The companies in which he invests open their books to him, allow him to meet with the management team, and otherwise give him advantages that you will never have.
He also knows that his own actions, and even just what he says to the media will have an effect on the markets, which he can also harness for gains.

The man doesn't stock pick, he sticks his hands right into the markets and shapes parts of it.
UpperNwGuy
Posts: 4730
Joined: Sun Oct 08, 2017 7:16 pm

Re: "Active" investing vs. "Passive" investing

Post by UpperNwGuy »

GoldenGoose wrote: Sat Oct 10, 2020 7:52 am Again, this is a thought excercise. Nothing more. I am not out to prove me right or you wrong. Just food for thought. If you agree with the proposition, you can consider it. If not, stay the BH course.
You've been pushing back pretty aggressively on the comments that disagree with you. That tells me that, for you, this is more than just a thought exercise.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

whereskyle wrote: Sat Oct 10, 2020 7:43 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am
Kelrex wrote: Fri Oct 09, 2020 9:25 pm Oh! Just monitor companies to make sure they're not in trouble? I wonder why so many professional investors go bust when it's that easy??? It's not like that industry is filled with some of the most terrifyingly brilliant and ruthless people in existence...

Sarcasm aside, that's like saying the secret to winning an Olympic race is to run faster.

You know what the biggest potential problem I see with your "pick the best" stock approach is though?? It's that even if you magically could identify the best and strongest companies, you might end up making much less money.

Why? Because your biggest gains will typically be from owning stocks in the smaller, crappier companies *before* they get to be big, stable, "strong" companies.

The major benefit of the index is that a total loss can only lose 100% of its value, but stocks that explode can easily gain many hundreds of percent in value. So when you own a bit of all of them, you capture all of the meteoric gains, which really aren't uncommon, they're just very very hard to detect in advance, so already owning them as part of an index really helps nail that otherwise impossible timing.

It also helps to be invested in the kind of companies that blow up during the kind of economic conditions where other established companies stagnate.

If you select only the "best" companies, those huge gains are baked into the price, you will almost always be off on your timing of buying them. You miss out on the biggest gains, and leave yourself still very vulnerable to the losses because even big juggernaut companies can and do fail. So your net gains over time would probably be less, because you would have almost no huge wins.

So not only is the concept of monitoring companies for possible failure impractical/impossible, but even if you could, you might actually be shooting yourself in the foot and throttling your gains.

Passive indexing is indeed easy, but that's because it's us hitching a free ride. You have to see the value of the insane work underneath it to appreciate just how exceptional you would have to be to beat it.

It's not that you have to be just a bit smarter than the indexers to beat the index, that's not how it works, the indexers are just hitching a free ride on the market, like pilot fish on a shark. You have to be smarter than everyone involved in the entire market to beat *the market itself*, you have to beat the shark, and you're just a fish.
It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
The issue is behavioral. If you can choose a diversified basket of 60 or so stocks that you can stick with no matter what, you should do just as well as the market (of course you might do better and you might do worse). The
serious risks arise, however, if you hold a non-market portfolio for a year, it underperforms, and you question whether you made the right decision in picking your 60 or so stocks. Now what do you do? Do you stick with what you have or not? If you decide not to, then what do you do? Do you choose another basket of 60 or so stocks and see how those do for a year? What if you just changed from a basket that was about to do well to a different basket that now also underperforms?

The questions start popping up all over the place, and these psychological terrors can lead people to quit investing altogether.

Total-market investing is right for me because I want to minimize behavioral risks. I tried straying from the market and I very quickly saw how much more stressful life became. I was never certain that I had actually chosen the right basket of stocks and I soon became paralyzed by uncertainty. With total-market investing, I embrace uncertainty as inevitable and I don't take my performance personally, which is probably why I think total-market investing eliminates serious behavioral risks at least for me.
All BH-ers invest in the SP500 and nothing else? Yes? No? What happens if your chosen funds severely underperform for a long time comparing to another fund/index? Do you stay the course and hope for a better day?
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

PicassoSparks wrote: Sat Oct 10, 2020 7:44 am
GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
Buffett’s full time job (with a team!) is evaluating and investing in companies. He has outperformed over the long term. He has underperformed recently. All in all, one of the greatest factors in his success is the stubborn duration of it. He started investing young. Most of his present wealth was earned after he qualified for social security. Compounding as a factor far outstrips his recent underperformance.

In your scenario, the person doesn’t have that kind of time.
Buffet started out with a team full of people? I read that he earned his first million not by investing in index fund, but by running a hedge fund.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: "Active" investing vs. "Passive" investing

Post by Kelrex »

GoldenGoose wrote: Sat Oct 10, 2020 7:52 am
Kelrex wrote: Sat Oct 10, 2020 7:39 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am
Kelrex wrote: Fri Oct 09, 2020 9:25 pm Oh! Just monitor companies to make sure they're not in trouble? I wonder why so many professional investors go bust when it's that easy??? It's not like that industry is filled with some of the most terrifyingly brilliant and ruthless people in existence...

Sarcasm aside, that's like saying the secret to winning an Olympic race is to run faster.

You know what the biggest potential problem I see with your "pick the best" stock approach is though?? It's that even if you magically could identify the best and strongest companies, you might end up making much less money.

Why? Because your biggest gains will typically be from owning stocks in the smaller, crappier companies *before* they get to be big, stable, "strong" companies.

The major benefit of the index is that a total loss can only lose 100% of its value, but stocks that explode can easily gain many hundreds of percent in value. So when you own a bit of all of them, you capture all of the meteoric gains, which really aren't uncommon, they're just very very hard to detect in advance, so already owning them as part of an index really helps nail that otherwise impossible timing.

It also helps to be invested in the kind of companies that blow up during the kind of economic conditions where other established companies stagnate.

If you select only the "best" companies, those huge gains are baked into the price, you will almost always be off on your timing of buying them. You miss out on the biggest gains, and leave yourself still very vulnerable to the losses because even big juggernaut companies can and do fail. So your net gains over time would probably be less, because you would have almost no huge wins.

So not only is the concept of monitoring companies for possible failure impractical/impossible, but even if you could, you might actually be shooting yourself in the foot and throttling your gains.

Passive indexing is indeed easy, but that's because it's us hitching a free ride. You have to see the value of the insane work underneath it to appreciate just how exceptional you would have to be to beat it.

It's not that you have to be just a bit smarter than the indexers to beat the index, that's not how it works, the indexers are just hitching a free ride on the market, like pilot fish on a shark. You have to be smarter than everyone involved in the entire market to beat *the market itself*, you have to beat the shark, and you're just a fish.
It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Well, you seem very confident in your proposed approach, so I wish you luck with it and hope that you post regularly about it so we can see what happens.

If you truly find a simple way to beat the index over years, then you should absolutely do it professionally and invest other people's money as well.

Oh, and many, many, many people have done this type of thing before, and yes, many of them have beat the index...for a given period of time. Is your particular approach meaningfully different? Perhaps, I don't know what particular industry insights you are talking about, so I can't actually judge.

I wonder if you really read my post though and understand the downside I was explaining about missing out on major gains by only buying the "best" stocks. Did that make sense to you? Missing out on the disproportionate growth of "mediocre" stocks that explode into "great" stocks, which by definition you wouldn't be holding at the right time with your approach?

How would you handle that issue? Or is your approach assuming that the amount of loss you would avoid by only holding "good" stocks would be so significant that you could afford to lose out on meteoric rises?

Is your perspective that the gains of index itself are dragged down by a disproportionate number of losses compared to those large gains of companies that explode?

Because there's pretty available math that you could find on the subject to confirm or disprove your position.
Missing out on the gain is a risk. If a company picked from the index goes bankrupted, do you think the index would be unaffected? What happen if you didnt pick that stock? Would you beat the index? You might.

Again, this is a thought excercise. Nothing more. I am not out to prove me right or you wrong. Just food for thought. If you agree with the proposition, you can consider it. If not, stay the BH course.
Again, that's my entire point, which you don't seem to be answering.

Yes, crashes to zero happen, and you lose 100% of your holding. But those losses are capped at 100%.

On the flip side, you can gain way more than 100% when a company booms.

Your approach posits that you can beat the index by trying to avoid the 100% losses, but it's guaranteed to come at the cost of missing out on the much bigger gains.

You say it's a thought exercise, okay cool, but it's also something that can actually be verified by historical data, which you could easily look up to see if it makes sense.

Then you call the rest of us programmed towards failure because we have actually read the data that suggests that your particular approach would cost more money than it would protect??

But you don't care about math?

So then, on what are you basing your assumption that none of us have the balls to contemplate something other than passive investing? Because that's a pretty bold assumption.

Who says we haven't done this exact kind of thought experiment ourselves? Or do you just assume that we're all here, participating on a financial forum because we're a bunch of non-thinking lemmings who are too scared to consider anything other than the soft, comforting snuggly blanket of index funds???

Go ahead and assume that we're all clueless and gutless and that we haven't spent thousands of hours contemplating and researching exactly how we want to invest.
That's an interesting theory...
FoolMeOnce
Posts: 1025
Joined: Mon Apr 24, 2017 11:16 am

Re: "Active" investing vs. "Passive" investing

Post by FoolMeOnce »

GoldenGoose wrote: Sat Oct 10, 2020 7:58 am All BH-ers invest in the SP500 and nothing else? Yes? No? What happens if your chosen funds severely underperform for a long time comparing to another fund/index? Do you stay the course and hope for a better day?
When you pick a total market fund, which is most commonly recommended here, you can't underperform the market.
Last edited by FoolMeOnce on Sat Oct 10, 2020 8:08 am, edited 1 time in total.
RJC
Posts: 794
Joined: Fri Dec 14, 2018 1:40 pm

Re: "Active" investing vs. "Passive" investing

Post by RJC »

Yes (S&P 500 or TSM). The chances of either underperforming or stagnating for a long period of time is not impossible but is least risky compared to other stock options.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: "Active" investing vs. "Passive" investing

Post by Kelrex »

GoldenGoose wrote: Sat Oct 10, 2020 8:02 am
PicassoSparks wrote: Sat Oct 10, 2020 7:44 am
GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
Buffett’s full time job (with a team!) is evaluating and investing in companies. He has outperformed over the long term. He has underperformed recently. All in all, one of the greatest factors in his success is the stubborn duration of it. He started investing young. Most of his present wealth was earned after he qualified for social security. Compounding as a factor far outstrips his recent underperformance.

In your scenario, the person doesn’t have that kind of time.
Buffet started out with a team full of people? I read that he earned his first million not by investing in index fund, but by running a hedge fund.
Many hedge funds beat the market for a period of time. Of course they do, that's their job. Now...many don't...

Are you positing that you could start a successful hedge fund? If so, then why not do that??

Seriously, I said that in my previous post. If you can beat the index, even for just a period of time, you should do it professionally.
Last edited by Kelrex on Sat Oct 10, 2020 8:06 am, edited 1 time in total.
alex_686
Posts: 7799
Joined: Mon Feb 09, 2015 2:39 pm

Re: "Active" investing vs. "Passive" investing

Post by alex_686 »

GoldenGoose wrote: Sat Oct 10, 2020 5:49 am
alex_686 wrote: Fri Oct 09, 2020 9:10 pm
GoldenGoose wrote: Fri Oct 09, 2020 8:59 pm Not sure I understand.
What do you not understand? I am happy to expand.

Are we talking about risk? The fact that such a person has a low ability to take risk?
In the given scenario, this person has to have good risk tolerance. If not then just gamble with the index's return in hope that they will have enough money for retirement. However, the risk tolerance here does not equate to recklessness (no lottery, no daytrading, no penny stock speculation).
You may be missing my point. Let me illustrate.

Let us say you are a poker player. You believe you have exceptional skill. You go to the tables with a small stake and lose it. This happens In poker.

Do you reach into your pocket and pull out your rent money? Professionally poker players would say no and leave the table. They tend to be very hard nosed about risk. Gamblers and addicts would.

The point here is that somebody starting out late with not much of a stake has a low ability to take on risk. You may not be able to hazard much risk.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

UpperNwGuy wrote: Sat Oct 10, 2020 7:50 am
GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
There is no comparison., Buffet is not a small investor buying stocks. Buffet is the CEO of a large company with a staff of analysts to do his research. He doesn't buy stocks, he buys controlling interest in entire companies and large stakes in even larger companies. The companies in which he invests open their books to him, allow him to meet with the management team, and otherwise give him advantages that you will never have.
Of course he has to do DD on the companies he was going to buy right? Buying a bad company is just like buying a bad stock. Given his current position I agree. He has more advantages than we have. So unfair. But not to say he didnt make big mistakes or that he did not speculate at one time like we are doing now. My point is he didnt get rich by buying index funds. He took risks and "luckily" reaped the rewards.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

UpperNwGuy wrote: Sat Oct 10, 2020 7:57 am
GoldenGoose wrote: Sat Oct 10, 2020 7:52 am Again, this is a thought excercise. Nothing more. I am not out to prove me right or you wrong. Just food for thought. If you agree with the proposition, you can consider it. If not, stay the BH course.
You've been pushing back pretty aggressively on the comments that disagree with you. That tells me that, for you, this is more than just a thought exercise.
Nothing personal. This is a 2-way discussion so yes there will be back and forth. Jusy want to see what others think.
FoolMeOnce
Posts: 1025
Joined: Mon Apr 24, 2017 11:16 am

Re: "Active" investing vs. "Passive" investing

Post by FoolMeOnce »

GoldenGoose wrote: Sat Oct 10, 2020 8:07 am
UpperNwGuy wrote: Sat Oct 10, 2020 7:50 am
GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
There is no comparison., Buffet is not a small investor buying stocks. Buffet is the CEO of a large company with a staff of analysts to do his research. He doesn't buy stocks, he buys controlling interest in entire companies and large stakes in even larger companies. The companies in which he invests open their books to him, allow him to meet with the management team, and otherwise give him advantages that you will never have.
Of course he has to do DD on the companies he was going to buy right? Buying a bad company is just like buying a bad stock. Given his current position I agree. He has more advantages than we have. So unfair. But not to say he didnt make big mistakes or that he did not speculate at one time like we are doing now. My point is he didnt get rich by buying index funds. He took risks and "luckily" reaped the rewards.
Didn't he also buy large enough stakes to influence how the companies operated going forward?
User avatar
cinghiale
Posts: 1334
Joined: Wed Oct 17, 2007 4:37 pm
Location: A latare Mare Nostrum

Re: "Active" investing vs. "Passive" investing

Post by cinghiale »

This thread is a stumper.

As I write this, the OP has almost 250 posts over close to three years. Yet, s/he sounds like a troll. Every available stock out there is part of an “index.” I simply fail to see what is being proposed here that differs from stock picking. This has been patiently pointed out numerous times. It keeps hitting a stone wall.

OP, after three years you must know what kinds of responses you are going to receive for what you have proposed.
"We don't see things as they are; we see them as we are." Anais Nin | | "Sometimes the first duty of intelligent men is the restatement of the obvious." George Orwell
whereskyle
Posts: 1312
Joined: Wed Jan 29, 2020 10:29 am

Re: "Active" investing vs. "Passive" investing

Post by whereskyle »

GoldenGoose wrote: Sat Oct 10, 2020 7:58 am
whereskyle wrote: Sat Oct 10, 2020 7:43 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am
Kelrex wrote: Fri Oct 09, 2020 9:25 pm Oh! Just monitor companies to make sure they're not in trouble? I wonder why so many professional investors go bust when it's that easy??? It's not like that industry is filled with some of the most terrifyingly brilliant and ruthless people in existence...

Sarcasm aside, that's like saying the secret to winning an Olympic race is to run faster.

You know what the biggest potential problem I see with your "pick the best" stock approach is though?? It's that even if you magically could identify the best and strongest companies, you might end up making much less money.

Why? Because your biggest gains will typically be from owning stocks in the smaller, crappier companies *before* they get to be big, stable, "strong" companies.

The major benefit of the index is that a total loss can only lose 100% of its value, but stocks that explode can easily gain many hundreds of percent in value. So when you own a bit of all of them, you capture all of the meteoric gains, which really aren't uncommon, they're just very very hard to detect in advance, so already owning them as part of an index really helps nail that otherwise impossible timing.

It also helps to be invested in the kind of companies that blow up during the kind of economic conditions where other established companies stagnate.

If you select only the "best" companies, those huge gains are baked into the price, you will almost always be off on your timing of buying them. You miss out on the biggest gains, and leave yourself still very vulnerable to the losses because even big juggernaut companies can and do fail. So your net gains over time would probably be less, because you would have almost no huge wins.

So not only is the concept of monitoring companies for possible failure impractical/impossible, but even if you could, you might actually be shooting yourself in the foot and throttling your gains.

Passive indexing is indeed easy, but that's because it's us hitching a free ride. You have to see the value of the insane work underneath it to appreciate just how exceptional you would have to be to beat it.

It's not that you have to be just a bit smarter than the indexers to beat the index, that's not how it works, the indexers are just hitching a free ride on the market, like pilot fish on a shark. You have to be smarter than everyone involved in the entire market to beat *the market itself*, you have to beat the shark, and you're just a fish.
It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
The issue is behavioral. If you can choose a diversified basket of 60 or so stocks that you can stick with no matter what, you should do just as well as the market (of course you might do better and you might do worse). The
serious risks arise, however, if you hold a non-market portfolio for a year, it underperforms, and you question whether you made the right decision in picking your 60 or so stocks. Now what do you do? Do you stick with what you have or not? If you decide not to, then what do you do? Do you choose another basket of 60 or so stocks and see how those do for a year? What if you just changed from a basket that was about to do well to a different basket that now also underperforms?

The questions start popping up all over the place, and these psychological terrors can lead people to quit investing altogether.

Total-market investing is right for me because I want to minimize behavioral risks. I tried straying from the market and I very quickly saw how much more stressful life became. I was never certain that I had actually chosen the right basket of stocks and I soon became paralyzed by uncertainty. With total-market investing, I embrace uncertainty as inevitable and I don't take my performance personally, which is probably why I think total-market investing eliminates serious behavioral risks at least for me.
All BH-ers invest in the SP500 and nothing else? Yes? No? What happens if your chosen funds severely underperform for a long time comparing to another fund/index? Do you stay the course and hope for a better day?
I hold the entire US equities market (VTI) and the entire global equities market (VT) in roughly equal proportions.

Nothing for me to miss out on frankly.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
onourway
Posts: 2883
Joined: Thu Dec 08, 2016 3:39 pm

Re: "Active" investing vs. "Passive" investing

Post by onourway »

GoldenGoose wrote: Sat Oct 10, 2020 8:07 am
Of course he has to do DD on the companies he was going to buy right? Buying a bad company is just like buying a bad stock. Given his current position I agree. He has more advantages than we have. So unfair. But not to say he didnt make big mistakes or that he did not speculate at one time like we are doing now. My point is he didnt get rich by buying index funds. He took risks and "luckily" reaped the rewards.
This is sort of the crux of the problem.

It's easy to pick out the winners - both the investors and companies that have done well - in retrospect. There will always be a number of them that do better than merely getting "average" index returns. What's not so obvious is how extraordinarily difficult it is to pick out which of those will have done well 20 years from now. There is a huge body of research that demonstrates that by and large, those that do pick them, have done so primarily by luck, not skill.

What's also not apparent is that for every manager or stock picker who does well, there are thousands or tens of thousands who have done substantially worse than the index. Again, there are large bodies of evidence that show that most investors - even index investors - do worse than their benchmark, primarily because they swap funds too often, chasing performance, or flavor of the month.

So it turns out that merely matching the actual index's performance is hard for any individual to do over the long run, and that those who can do it end up in the top tier of performance of all investors.

Lastly, for someone in the position you suggest in your first post, your suggestion is that they must take more risk because they are behind. I, and many others here, would instead suggest that they should take less risk because they cannot afford to lose what they have. Picking stocks has a real opportunity for people to lose a LOT of money. Buy and hold index investing may not hit the grand slam, but it's much less likely to leave you broke.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

Kelrex wrote: Sat Oct 10, 2020 8:03 am
GoldenGoose wrote: Sat Oct 10, 2020 7:52 am
Kelrex wrote: Sat Oct 10, 2020 7:39 am
GoldenGoose wrote: Sat Oct 10, 2020 6:18 am
Kelrex wrote: Fri Oct 09, 2020 9:25 pm Oh! Just monitor companies to make sure they're not in trouble? I wonder why so many professional investors go bust when it's that easy??? It's not like that industry is filled with some of the most terrifyingly brilliant and ruthless people in existence...

Sarcasm aside, that's like saying the secret to winning an Olympic race is to run faster.

You know what the biggest potential problem I see with your "pick the best" stock approach is though?? It's that even if you magically could identify the best and strongest companies, you might end up making much less money.

Why? Because your biggest gains will typically be from owning stocks in the smaller, crappier companies *before* they get to be big, stable, "strong" companies.

The major benefit of the index is that a total loss can only lose 100% of its value, but stocks that explode can easily gain many hundreds of percent in value. So when you own a bit of all of them, you capture all of the meteoric gains, which really aren't uncommon, they're just very very hard to detect in advance, so already owning them as part of an index really helps nail that otherwise impossible timing.

It also helps to be invested in the kind of companies that blow up during the kind of economic conditions where other established companies stagnate.

If you select only the "best" companies, those huge gains are baked into the price, you will almost always be off on your timing of buying them. You miss out on the biggest gains, and leave yourself still very vulnerable to the losses because even big juggernaut companies can and do fail. So your net gains over time would probably be less, because you would have almost no huge wins.

So not only is the concept of monitoring companies for possible failure impractical/impossible, but even if you could, you might actually be shooting yourself in the foot and throttling your gains.

Passive indexing is indeed easy, but that's because it's us hitching a free ride. You have to see the value of the insane work underneath it to appreciate just how exceptional you would have to be to beat it.

It's not that you have to be just a bit smarter than the indexers to beat the index, that's not how it works, the indexers are just hitching a free ride on the market, like pilot fish on a shark. You have to be smarter than everyone involved in the entire market to beat *the market itself*, you have to beat the shark, and you're just a fish.
It seems too many people are so conditioned to failure so the only question asked is what if the return is lower than the index. What about what if the return is higher than the index? Isn't that a potentiality? Has anyone done this before to definitively say it doesn't work?
Well, you seem very confident in your proposed approach, so I wish you luck with it and hope that you post regularly about it so we can see what happens.

If you truly find a simple way to beat the index over years, then you should absolutely do it professionally and invest other people's money as well.

Oh, and many, many, many people have done this type of thing before, and yes, many of them have beat the index...for a given period of time. Is your particular approach meaningfully different? Perhaps, I don't know what particular industry insights you are talking about, so I can't actually judge.

I wonder if you really read my post though and understand the downside I was explaining about missing out on major gains by only buying the "best" stocks. Did that make sense to you? Missing out on the disproportionate growth of "mediocre" stocks that explode into "great" stocks, which by definition you wouldn't be holding at the right time with your approach?

How would you handle that issue? Or is your approach assuming that the amount of loss you would avoid by only holding "good" stocks would be so significant that you could afford to lose out on meteoric rises?

Is your perspective that the gains of index itself are dragged down by a disproportionate number of losses compared to those large gains of companies that explode?

Because there's pretty available math that you could find on the subject to confirm or disprove your position.
Missing out on the gain is a risk. If a company picked from the index goes bankrupted, do you think the index would be unaffected? What happen if you didnt pick that stock? Would you beat the index? You might.

Again, this is a thought excercise. Nothing more. I am not out to prove me right or you wrong. Just food for thought. If you agree with the proposition, you can consider it. If not, stay the BH course.
Again, that's my entire point, which you don't seem to be answering.

Yes, crashes to zero happen, and you lose 100% of your holding. But those losses are capped at 100%.

On the flip side, you can gain way more than 100% when a company booms.

Your approach posits that you can beat the index by trying to avoid the 100% losses, but it's guaranteed to come at the cost of missing out on the much bigger gains.

You say it's a thought exercise, okay cool, but it's also something that can actually be verified by historical data, which you could easily look up to see if it makes sense.

Then you call the rest of us programmed towards failure because we have actually read the data that suggests that your particular approach would cost more money than it would protect??

But you don't care about math?

So then, on what are you basing your assumption that none of us have the balls to contemplate something other than passive investing? Because that's a pretty bold assumption.

Who says we haven't done this exact kind of thought experiment ourselves? Or do you just assume that we're all here, participating on a financial forum because we're a bunch of non-thinking lemmings who are too scared to consider anything other than the soft, comforting snuggly blanket of index funds???

Go ahead and assume that we're all clueless and gutless and that we haven't spent thousands of hours contemplating and researching exactly how we want to invest.
That's an interesting theory...
We respectfully disagree. My proposition only guarantees that you might beat the index, stay even with the index, or lose to the index. That's it. Not saying BH-ers are clueless. I have no idea where you get it from but I don't want to get personal or confrontational. If you want to do index, that's 1000% fine too. Someday I will be there as well but I won't look down on people who play the lottery or daytrading. If they make it, they will make it more than I. If they lose it, well they have to face the consequences.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

FoolMeOnce wrote: Sat Oct 10, 2020 8:03 am
GoldenGoose wrote: Sat Oct 10, 2020 7:58 am All BH-ers invest in the SP500 and nothing else? Yes? No? What happens if your chosen funds severely underperform for a long time comparing to another fund/index? Do you stay the course and hope for a better day?
When you pick a total market fund, which is most commonly recommended here, you can't underperform the market.
And the reward is you get average market return. That's cool if it's ok with you. I am fine with that.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

RJC wrote: Sat Oct 10, 2020 8:04 am Yes (S&P 500 or TSM). The chances of either underperforming or stagnating for a long period of time is not impossible but is least risky compared to other stock options.
Ah, risk vs reward.
FoolMeOnce
Posts: 1025
Joined: Mon Apr 24, 2017 11:16 am

Re: "Active" investing vs. "Passive" investing

Post by FoolMeOnce »

GoldenGoose wrote: Sat Oct 10, 2020 8:21 am
FoolMeOnce wrote: Sat Oct 10, 2020 8:03 am
GoldenGoose wrote: Sat Oct 10, 2020 7:58 am All BH-ers invest in the SP500 and nothing else? Yes? No? What happens if your chosen funds severely underperform for a long time comparing to another fund/index? Do you stay the course and hope for a better day?
When you pick a total market fund, which is most commonly recommended here, you can't underperform the market.
And the reward is you get average market return. That's cool if it's ok with you. I am fine with that.
The point isn't that this is fine or not for different people. It is that your criticism of "What happens if your chosen funds severely underperform" is not valid.
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: "Active" investing vs. "Passive" investing

Post by Kelrex »

GoldenGoose wrote: Sat Oct 10, 2020 8:19 am
Kelrex wrote: Sat Oct 10, 2020 8:03 am
Again, that's my entire point, which you don't seem to be answering.

Yes, crashes to zero happen, and you lose 100% of your holding. But those losses are capped at 100%.

On the flip side, you can gain way more than 100% when a company booms.

Your approach posits that you can beat the index by trying to avoid the 100% losses, but it's guaranteed to come at the cost of missing out on the much bigger gains.

You say it's a thought exercise, okay cool, but it's also something that can actually be verified by historical data, which you could easily look up to see if it makes sense.

Then you call the rest of us programmed towards failure because we have actually read the data that suggests that your particular approach would cost more money than it would protect??

But you don't care about math?

So then, on what are you basing your assumption that none of us have the balls to contemplate something other than passive investing? Because that's a pretty bold assumption.

Who says we haven't done this exact kind of thought experiment ourselves? Or do you just assume that we're all here, participating on a financial forum because we're a bunch of non-thinking lemmings who are too scared to consider anything other than the soft, comforting snuggly blanket of index funds???

Go ahead and assume that we're all clueless and gutless and that we haven't spent thousands of hours contemplating and researching exactly how we want to invest.
That's an interesting theory...
We respectfully disagree. My proposition only guarantees that you might beat the index, stay even with the index, or lose to the index. That's it. Not saying BH-ers are clueless. I have no idea where you get it from but I don't want to get personal or confrontational. If you want to do index, that's 1000% fine too. Someday I will be there as well but I won't look down on people who play the lottery or daytrading. If they make it, they will make it more than I. If they lose it, well they have to face the consequences.
Your reply to my original questioning of your approach was that people are programmed towards failure.

That presupposition posits that the people, myself included, offered challenges to your idea because we're too afraid of alternatives.

I don't look down on anyone's approach to investing, as long as they understand it and understand their risks. So on that front, you and I have the exact same attitude about active investing.

I question your particular method and it's probability of beating the index. That's what I engaged you on, in good faith.

You were the one who then posited that the only reason I was questioning your approach is because I'm somehow programmed to failure. Which implies that mine and any other commenters challenges weren't valid.

That's kind of an attack from you, no?
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

FoolMeOnce wrote: Sat Oct 10, 2020 8:11 am
GoldenGoose wrote: Sat Oct 10, 2020 8:07 am
UpperNwGuy wrote: Sat Oct 10, 2020 7:50 am
GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
There is no comparison., Buffet is not a small investor buying stocks. Buffet is the CEO of a large company with a staff of analysts to do his research. He doesn't buy stocks, he buys controlling interest in entire companies and large stakes in even larger companies. The companies in which he invests open their books to him, allow him to meet with the management team, and otherwise give him advantages that you will never have.
Of course he has to do DD on the companies he was going to buy right? Buying a bad company is just like buying a bad stock. Given his current position I agree. He has more advantages than we have. So unfair. But not to say he didnt make big mistakes or that he did not speculate at one time like we are doing now. My point is he didnt get rich by buying index funds. He took risks and "luckily" reaped the rewards.
Didn't he also buy large enough stakes to influence how the companies operated going forward?
I am not sure but I still remember back in 2008 he got an extremely sweet deal with GS. For his 5 billions invested in GS preferred shares (not common shares we common folks can only get), he gets 10% interest annually plus warrants to buy millions more shares of GS at that time period price. He made out like a bandit because of his unfair clout.
FoolMeOnce
Posts: 1025
Joined: Mon Apr 24, 2017 11:16 am

Re: "Active" investing vs. "Passive" investing

Post by FoolMeOnce »

onourway wrote: Sat Oct 10, 2020 8:17 am
GoldenGoose wrote: Sat Oct 10, 2020 8:07 am
Of course he has to do DD on the companies he was going to buy right? Buying a bad company is just like buying a bad stock. Given his current position I agree. He has more advantages than we have. So unfair. But not to say he didnt make big mistakes or that he did not speculate at one time like we are doing now. My point is he didnt get rich by buying index funds. He took risks and "luckily" reaped the rewards.
This is sort of the crux of the problem.

It's easy to pick out the winners - both the investors and companies that have done well - in retrospect. There will always be a number of them that do better than merely getting "average" index returns. What's not so obvious is how extraordinarily difficult it is to pick out which of those will have done well 20 years from now. There is a huge body of research that demonstrates that by and large, those that do pick them, have done so primarily by luck, not skill.

What's also not apparent is that for every manager or stock picker who does well, there are thousands or tens of thousands who have done substantially worse than the index. Again, there are large bodies of evidence that show that most investors - even index investors - do worse than their benchmark, primarily because they swap funds too often, chasing performance, or flavor of the month.
This is an important point. "Warren Buffett" could have been any of thousands of people. It is basically a statistical given than someone would turn out to have Buffett's success. It turned out to be Warren Buffett. OP takes this as an indication than others can or should try this as well, but the thousands that failed are a far more likely model.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

Kelrex wrote: Sat Oct 10, 2020 8:06 am
GoldenGoose wrote: Sat Oct 10, 2020 8:02 am
PicassoSparks wrote: Sat Oct 10, 2020 7:44 am
GoldenGoose wrote: Sat Oct 10, 2020 7:31 am I wonder how Buffett does it that makes him rich.
Buffett’s full time job (with a team!) is evaluating and investing in companies. He has outperformed over the long term. He has underperformed recently. All in all, one of the greatest factors in his success is the stubborn duration of it. He started investing young. Most of his present wealth was earned after he qualified for social security. Compounding as a factor far outstrips his recent underperformance.

In your scenario, the person doesn’t have that kind of time.
Buffet started out with a team full of people? I read that he earned his first million not by investing in index fund, but by running a hedge fund.
Many hedge funds beat the market for a period of time. Of course they do, that's their job. Now...many don't...

Are you positing that you could start a successful hedge fund? If so, then why not do that??

Seriously, I said that in my previous post. If you can beat the index, even for just a period of time, you should do it professionally.
I truly do not know if I can beat the index or not but that shouldn't prevent me from trying. I don't do riskiest stuff so my loss will be not able to match up to the index. My reward is that I might beat the index. Without that, there is no incentive for me to not do the index.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

alex_686 wrote: Sat Oct 10, 2020 8:06 am
GoldenGoose wrote: Sat Oct 10, 2020 5:49 am
alex_686 wrote: Fri Oct 09, 2020 9:10 pm
GoldenGoose wrote: Fri Oct 09, 2020 8:59 pm Not sure I understand.
What do you not understand? I am happy to expand.

Are we talking about risk? The fact that such a person has a low ability to take risk?
In the given scenario, this person has to have good risk tolerance. If not then just gamble with the index's return in hope that they will have enough money for retirement. However, the risk tolerance here does not equate to recklessness (no lottery, no daytrading, no penny stock speculation).
You may be missing my point. Let me illustrate.

Let us say you are a poker player. You believe you have exceptional skill. You go to the tables with a small stake and lose it. This happens In poker.

Do you reach into your pocket and pull out your rent money? Professionally poker players would say no and leave the table. They tend to be very hard nosed about risk. Gamblers and addicts would.

The point here is that somebody starting out late with not much of a stake has a low ability to take on risk. You may not be able to hazard much risk.
This is from your own personal perspective. Others might think differently. That's why you do index while others do daytrading. You can't make blanket assumptions.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

cinghiale wrote: Sat Oct 10, 2020 8:13 am This thread is a stumper.

As I write this, the OP has almost 250 posts over close to three years. Yet, s/he sounds like a troll. Every available stock out there is part of an “index.” I simply fail to see what is being proposed here that differs from stock picking. This has been patiently pointed out numerous times. It keeps hitting a stone wall.

OP, after three years you must know what kinds of responses you are going to receive for what you have proposed.
Come on man. I am enjoying the lively conversation with my fellow posters and you just have to come in and call me a troll. If you don't like the topic then just ignore it then, like I do to most of the topics I am not interested in. No need to come in and insinuate.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

Just because things have been done for so long around here doesn't mean they can't change. I recall someone posted that in the beginning of this forum a 50/50 allocation was the norm. Look where we are now. I might be the next generation of the board's evolution. :)
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

onourway wrote: Sat Oct 10, 2020 8:17 am
GoldenGoose wrote: Sat Oct 10, 2020 8:07 am
Of course he has to do DD on the companies he was going to buy right? Buying a bad company is just like buying a bad stock. Given his current position I agree. He has more advantages than we have. So unfair. But not to say he didnt make big mistakes or that he did not speculate at one time like we are doing now. My point is he didnt get rich by buying index funds. He took risks and "luckily" reaped the rewards.
This is sort of the crux of the problem.

It's easy to pick out the winners - both the investors and companies that have done well - in retrospect. There will always be a number of them that do better than merely getting "average" index returns. What's not so obvious is how extraordinarily difficult it is to pick out which of those will have done well 20 years from now. There is a huge body of research that demonstrates that by and large, those that do pick them, have done so primarily by luck, not skill.

What's also not apparent is that for every manager or stock picker who does well, there are thousands or tens of thousands who have done substantially worse than the index. Again, there are large bodies of evidence that show that most investors - even index investors - do worse than their benchmark, primarily because they swap funds too often, chasing performance, or flavor of the month.

So it turns out that merely matching the actual index's performance is hard for any individual to do over the long run, and that those who can do it end up in the top tier of performance of all investors.

Lastly, for someone in the position you suggest in your first post, your suggestion is that they must take more risk because they are behind. I, and many others here, would instead suggest that they should take less risk because they cannot afford to lose what they have. Picking stocks has a real opportunity for people to lose a LOT of money. Buy and hold index investing may not hit the grand slam, but it's much less likely to leave you broke.
I am a risk taker. You are a risk taker too. The difference is in the levels of risk and the kinds of risk we accept. If the person in my hypothetical scenario just want to do index they also take a risk in their return not able to fund their expected retirement lifestyle. For you, index investing might give you the return you want, but why assume that it would work for everyone else.
sycamore
Posts: 1803
Joined: Tue May 08, 2018 12:06 pm

Re: "Active" investing vs. "Passive" investing

Post by sycamore »

GoldenGoose, this thread is kind of going back and forth to nowhere. Your approach to investing is like previous attempts to beat the market used many, many people, including the BHers in this thread offering their wisdom & experience. Please do your due diligence and post your stock picks -- ahead of time, of course -- so we can all see how it turns out. There will be some who scoff at your attempts but so what? Assuming you accept the risks involved, I encourage you to give it a try.

I did this quite some time ago. Some picks did about as well as the market, and a couple were fantastic, but some failed spectacularly. Overall I never kept track of my portfolio performance for comparison with S&P 500 or Total Stock Market, but I'm pretty sure I lagged on a risk (volatility)-adjusted basis. Maybe you'll do better. Only one way to find out...
Kelrex
Posts: 241
Joined: Wed Aug 26, 2020 1:32 pm

Re: "Active" investing vs. "Passive" investing

Post by Kelrex »

You're moving the goal posts.

First you come in here positing an approach, then you claim that you have knowledge and abilities that allow you to identify stronger companies to invest in, then people challenge that approach with pretty well thought out challenges, then you say that we're all basically programmed towards failure, which is why we won't consider anything other than indexing, then you switch to saying that you might beat the index or you might not, and never actually said that you could beat the index with your knowledge and abilities to pick stocks.

So now, what is your original point?

Is this all just to say that you feel like stock picking, and don't care what anyone thinks?

Okay cool, have fun stock picking.
I really don't understand what you are looking for from us???
FoolMeOnce
Posts: 1025
Joined: Mon Apr 24, 2017 11:16 am

Re: "Active" investing vs. "Passive" investing

Post by FoolMeOnce »

GoldenGoose wrote: Sat Oct 10, 2020 8:54 am
onourway wrote: Sat Oct 10, 2020 8:17 am
GoldenGoose wrote: Sat Oct 10, 2020 8:07 am
Of course he has to do DD on the companies he was going to buy right? Buying a bad company is just like buying a bad stock. Given his current position I agree. He has more advantages than we have. So unfair. But not to say he didnt make big mistakes or that he did not speculate at one time like we are doing now. My point is he didnt get rich by buying index funds. He took risks and "luckily" reaped the rewards.
This is sort of the crux of the problem.

It's easy to pick out the winners - both the investors and companies that have done well - in retrospect. There will always be a number of them that do better than merely getting "average" index returns. What's not so obvious is how extraordinarily difficult it is to pick out which of those will have done well 20 years from now. There is a huge body of research that demonstrates that by and large, those that do pick them, have done so primarily by luck, not skill.

What's also not apparent is that for every manager or stock picker who does well, there are thousands or tens of thousands who have done substantially worse than the index. Again, there are large bodies of evidence that show that most investors - even index investors - do worse than their benchmark, primarily because they swap funds too often, chasing performance, or flavor of the month.

So it turns out that merely matching the actual index's performance is hard for any individual to do over the long run, and that those who can do it end up in the top tier of performance of all investors.

Lastly, for someone in the position you suggest in your first post, your suggestion is that they must take more risk because they are behind. I, and many others here, would instead suggest that they should take less risk because they cannot afford to lose what they have. Picking stocks has a real opportunity for people to lose a LOT of money. Buy and hold index investing may not hit the grand slam, but it's much less likely to leave you broke.
I am a risk taker. You are a risk taker too. The difference is in the levels of risk and the kinds of risk we accept. If the person in my hypothetical scenario just want to do index they also take a risk in their return not able to fund their expected retirement lifestyle. For you, index investing might give you the return you want, but why assume that it would work for everyone else.
So does your argument boil down to people can beat the market if they take more risk than an index fund? Of course. Nobody would dispute that.

What people are disputing is what comes across as a belief that this risk has a good chance of paying off if you do your due diligence. That it isn't all that risky after all. I think if you take the probabilities of possible outcomes, the overall probabilistic return is that you will trail the market significantly, like most people who do this for a living. That's not even a wild guess. We have data on active managers for decades. Overall, they lose.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

Kelrex wrote: Sat Oct 10, 2020 8:27 am
GoldenGoose wrote: Sat Oct 10, 2020 8:19 am
Kelrex wrote: Sat Oct 10, 2020 8:03 am
Again, that's my entire point, which you don't seem to be answering.

Yes, crashes to zero happen, and you lose 100% of your holding. But those losses are capped at 100%.

On the flip side, you can gain way more than 100% when a company booms.

Your approach posits that you can beat the index by trying to avoid the 100% losses, but it's guaranteed to come at the cost of missing out on the much bigger gains.

You say it's a thought exercise, okay cool, but it's also something that can actually be verified by historical data, which you could easily look up to see if it makes sense.

Then you call the rest of us programmed towards failure because we have actually read the data that suggests that your particular approach would cost more money than it would protect??

But you don't care about math?

So then, on what are you basing your assumption that none of us have the balls to contemplate something other than passive investing? Because that's a pretty bold assumption.

Who says we haven't done this exact kind of thought experiment ourselves? Or do you just assume that we're all here, participating on a financial forum because we're a bunch of non-thinking lemmings who are too scared to consider anything other than the soft, comforting snuggly blanket of index funds???

Go ahead and assume that we're all clueless and gutless and that we haven't spent thousands of hours contemplating and researching exactly how we want to invest.
That's an interesting theory...
We respectfully disagree. My proposition only guarantees that you might beat the index, stay even with the index, or lose to the index. That's it. Not saying BH-ers are clueless. I have no idea where you get it from but I don't want to get personal or confrontational. If you want to do index, that's 1000% fine too. Someday I will be there as well but I won't look down on people who play the lottery or daytrading. If they make it, they will make it more than I. If they lose it, well they have to face the consequences.
Your reply to my original questioning of your approach was that people are programmed towards failure.

That presupposition posits that the people, myself included, offered challenges to your idea because we're too afraid of alternatives.

I don't look down on anyone's approach to investing, as long as they understand it and understand their risks. So on that front, you and I have the exact same attitude about active investing.

I question your particular method and it's probability of beating the index. That's what I engaged you on, in good faith.

You were the one who then posited that the only reason I was questioning your approach is because I'm somehow programmed to failure. Which implies that mine and any other commenters challenges weren't valid.

That's kind of an attack from you, no?
Attack? No. It wasnt directed at anyone in particular. It is just my observation that the comments tend to be on the failure side and not the risk reward ratio. I understand. This is the BH forum where we want to do passive index investing because its safe. No problem with that. Just for me, I want to up the return somehow (dont we all).
FoolMeOnce
Posts: 1025
Joined: Mon Apr 24, 2017 11:16 am

Re: "Active" investing vs. "Passive" investing

Post by FoolMeOnce »

GoldenGoose wrote: Sat Oct 10, 2020 9:04 am This is the BH forum where we want to do passive index investing because its safe.
I think this misunderstands Boglehead or index investing. It isn't a retreat to safety. It is an advance toward the best chance at good gains. Far more often than not, the return will be greater than stock picking.
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

Kelrex wrote: Sat Oct 10, 2020 9:01 am You're moving the goal posts.

First you come in here positing an approach, then you claim that you have knowledge and abilities that allow you to identify stronger companies to invest in, then people challenge that approach with pretty well thought out challenges, then you say that we're all basically programmed towards failure, which is why we won't consider anything other than indexing, then you switch to saying that you might beat the index or you might not, and never actually said that you could beat the index with your knowledge and abilities to pick stocks.

So now, what is your original point?

Is this all just to say that you feel like stock picking, and don't care what anyone thinks?

Okay cool, have fun stock picking.
I really don't understand what you are looking for from us???
My goal is to have a debate about investment theory. This is the board for it, isnt it? I do appreciate you guys for trying to poke holes in the theory. I was trying to defend the thesis (somebody has to). Again, not personal not confrontational, no ego. What disappointed me so far is no one could switch position to see if there are any merits from the pro side. Everyones concern seems to be losing to the index. And no, this is a buy and hold. No stock trading.
User avatar
firebirdparts
Posts: 2250
Joined: Thu Jun 13, 2019 4:21 pm

Re: "Active" investing vs. "Passive" investing

Post by firebirdparts »

I figured this original post was a joke, but I didn’t want to be rude if I was wrong. I especially like the last line, where it says “there’s no right or wrong”. Truly bizarre, but just not funny enough to get the laughs.

If it was a joke, you need a little more punch, but these follow ups are certainly getting there.
A fool and your money are soon partners
User avatar
cinghiale
Posts: 1334
Joined: Wed Oct 17, 2007 4:37 pm
Location: A latare Mare Nostrum

Re: "Active" investing vs. "Passive" investing

Post by cinghiale »

GoldenGoose wrote:
“I understand. This is the BH forum where we want to do passive index investing because its safe.
Obviously, you do not understand. BHers do not engage in passive investing because it is safe. One invests passively because all the credible research and decades of statistics on investing returns demonstrates that owning the entire market gives an investor the best chance of capturing 100% of market returns (minus expenses) over the long haul. The fact that you haven’t absorbed this foundational fact after almost three years of participation in this forum is perplexing to say the least.
"We don't see things as they are; we see them as we are." Anais Nin | | "Sometimes the first duty of intelligent men is the restatement of the obvious." George Orwell
Topic Author
GoldenGoose
Posts: 329
Joined: Tue Jan 30, 2018 2:08 pm

Re: "Active" investing vs. "Passive" investing

Post by GoldenGoose »

Unlike @cinghiale insinuation, I do have a life to live (my family) and it is just waking up now. So I will have to stop "trolling". I am passionate about investing but will have to sign off for now.
Locked