Stats for nerds
2recommend
4mentions
3people
2022–2025years
75% recommend25% neutral
Mentions per year
What Hacker News says
- The book 'Trillions' by FT journo Robin Wigglesworth is very good on this subject
- Your comment is funny because of the loads of irony behind it.
Empirically incorrect? The 'index fund strategy' stated under another name is essentially the same as efficient markets theory, which multiple economists have won Nobel Prizes for. This is mainstream economic theory today.
But even worse - to my knowledge even skeptics of efficient markets theory don't deny that few people beat the index. They think they can pick them of course - but they never claim that most people outperform the market (the same thesis, restated).
So your comment is, bluntly stated, empirically incorrect, because no serious academic (to my knowledge) denies that very few people beat the index. The reason incidentally is because index funds have zero fees, and active investors have nonzero fees, and long term they converge - so the zero fee lower cost basis strategy wins out. And if you're claiming that average investors with "zero fees" generally outperform the market... that is empirically, provably, incorrect.
Stated with unbelievable confidence... yes, the confidence that the papers that the economists who won those Nobel Prizes instilled, which has now become economic orthodoxy, which also helped spur the creation of index funds in the first place.
There is a strong connection between efficient markets theory & those funds very existence: because if active investors underperform the market, then the best strategy is just to hold the market, a strategy which got repackaged and named as 'index funds.'
A good book on the topic:
https://www.amazon.com/Trillions-Renegades-Invented-Changed-...
- People interested in this topic should really read "Trillions" by Wigglesworth. Maybe the most consequential book I read in 2022, as someone who read about a book a month, mostly nonfiction.
The book, first of all, does a good job of laying out the complete case for why index funds beat human managers, starting out by telling the story of an investor who made that very bet (literally), who ironically most people would put on the other side of that: Warren Buffett. Buffett bet a fund manager that an index fund would beat the best of any funds his opponent would select. A decade or so later, Buffett was proved right and declared the winner.
https://www.advisorperspectives.com/articles/2017/11/13/ted-....
If even Warren Buffett is betting on index funds as beating active investors, why are most people so reluctant to?
But besides that... why are index funds - which you can also think of as 'fully automated/computerized investing' - so effective?
There's a few reasons, but a really simple explanation is: over time, a bunch of fund managers are just going to recapitulate the market, and the advantage computers have is, they can duplicate that functionality but their fees are zero (or 0.001% per year, whatever is the tiny amount it costs to run the servers). Human fees are not zero. Therefore, the computers win.
Another one is just that the whole market, diversified, ends up being the best hedge against... everything. Is Elon Musk a genius one day, and now getting pilloried as an idiot as the head of Twitter? If he's a big part of your portfolio, and you bought in a year ago, that really hurts. When you hold the whole market following impersonal computer rules, you are insulated from this.
And it turns out, when you look at the full impartial record of active investor picks, it's pretty poor really.
A final thought that book suggested to me: if you have over 10 million dollars, you probably can't beat what the market can do. Wave the white flag and throw it all in an index fund. The computers have won, and just as we acknowledge that with chess and Go (art's probably next), index funds are an extension of same.
- > I think the bears are vastly underestimating the size and power of the moat (or garden wall) that Apple has built.
See 'Are "Good Companies" Good Investments?' (references used in the description):
* https://www.youtube.com/watch?v=ZY_NFQNUr_k
The above is a summary of this podcast episode, 'The "Good Company is a Good Investment" Fallacy':
> It sounds reasonable to say that investing in the most popular companies would produce the best returns, but this is just not how asset pricing works. Today on the show, we unpack the ‘good company is a good investment’ fallacy. Before diving into the main topic, we kick off our discussion on the subject of index funds with Robert Wigglesworth’s Trillions. From there, we share some updates about custom indexing and home buying in Canada, along with the immense valuation of Tesla as well as Elon Musk’s net worth. This acts as a great segue into the focus of today’s show: a so-called good company has high historical returns, strong earnings growth, strong forecasted earnings growth, and high prices. But just because the good companies have done well historically, this does not mean they will continue to be a good investment. In fact, there is a premium that says that higher-priced stocks earn lower returns than lower-priced stocks and value stocks. We unpack several papers that explore the concept that it is the lesser-known companies that tend to have better returns. We also get into how growth extrapolation, the skewness effect, and the big market delusion plays into the good company is a good investment fallacy. Our discussion concludes with the idea that investors are better off paying attention to expected returns rather than falling victim to extrapolation errors. Tune in today!
