There will always be a mix of active and passive.
Fundamentally - passive only works when it follows smart active. Actives do expensive research and trade against each other to arrive at the consensus price. Passives trade at that price for "free." Since both get the same price on average but passives incur no cost, they win on average
This breaks down if passives outnumber actives, or if actives are exceptionally stupid.
Imagine 100% is passive. That means any stock in an index will be bought tomorrow and forever regardless of price. I could exploit that in a ton of ways. For example, do a "squeeze" (think of the recent GME short squeeze but in reverse.)
Or, imagine company X will obviously default but stock keeps going up because passives are obligated to buy. Very easy to exploit by going active!
Finally - think about this. Does your index fund have any GME? That part of your portfolio trades at the price set by Reddit apes. The more of that goes on, the more tempting it is to go "active" on the other side.
But then I had the question: When the world has gone passive, who is left as an active investor?
1. Wallstreetbets users who do poorly on average, and they are small
2. Highly skilled Hedgefunds like Medallion who do great on average, but they are small
3. ... the company using debt to buyback its own shares
So the key behind this entire stock market is that its a beauty contest where you need to make guesses as to what everyone else will do. But as active investors shrink with the increase in passive, what we are allowing happen is that the companies who use debt to buyback their shares are whats driving the market. Every dollar they spend on their stock is then magnified 100x by the big passive funds, and both 1 & 2 have no agency other than to try to get swept up in the winds.
I have not yet done the intensive research to understand how large 3 can effect a stock, does anyone here have any idea if this will be a problem, and if we are already seeing signs that this is happening already?
A market is "too passive" when it becomes exploitable due to perfect predictability. But - that is the very thing that will keep it from ever reaching that level of passivity. Exploiting it is an active step, then someone else bets against the exploiter, etc.
I've always found stock buybacks intriguing and confusing. Here's a hypothetical scenario that seems to go against what you're saying:
Company A buys back $1 work of stock. Since there is now $1 less in Company A's bank account, that company is now worth $1 less. So the market cap should in theory be $1 less. Since the market cap should be $1 less, and $1 of stock disappeared, those perfectly balance out and mean the stock price should stay the same.
Now the index investors take a look at the situation. Company A's market cap has shrunk, whereas other companies' market caps haven't. So Company A has a smaller share of the index than other companies than it had before. But the index investors still have the old ratio of Company A to other companies, so they are overinvested in Company A. They all sell a bit of Company A in order to get the correct balance according to the index. Company A goes down in value.
So a stock buyback caused the price to go down.
He goes into a lot of data around the idea that the market is "too passive", and he believes that we were already at that point last year before the pandemic.
Medallion usually does well, but hedge funds underperformed in the 2010's.
The best example is Berkshire Hathaway stock (BRK A share) which currently trades at $402,620 per share.
For more recent (and much more technically difficult) treatment, you can take a look at Garleanu and Pederson (2018) ("Efficiently Inefficient Markets for Asset and Asset Management").
Simplest example I cited already: it becomes obvious that company X will default in short order, but it's a member of an index and the market will "buy" it anyway: I can short it (by borrowing from the passives and selling it to them next time they buy the index) and never have to cover since it's bankrupt. That's a simple example of a single-player active skewering the passives.
You can try to figure out what this means in terms of tracking error but it's kinda irrelevant to my point.
That said, I as a buyer-and-holder, I welcome the hordes of active traders willing to expend time, effort, and money to discover the price that I too will be able to trade at.
With more and more assets going into passive funds, when might we actually see them owning such large fractions of companies that a play like this is possible? Google suggests that 10-15% of the SP500 is owned by mutual funds. Presumably there's going to be an inflection point where this becomes problematic.
Index funds need to rebalance so they’re not just holding, but it seems like for passive investors, they approximate holding? Maybe the rebalancing would tend to exaggerate the effects of active trading?
Reverse how? There are so many axis I don't know which to use as the basis of my flip. If you care to, please explain a bit more in detail.
But, sure. Let's say I know that you (index fun) are obligated to buy stock X tomorrow and over all foreseeable future. I am gonna hoard those shares at no risk and sell them to you at a VERY VERY painful price, since you have no room to say "that's too expensive, no thanks"
No, actives can make money on average. If the actives do expensive research and learn things, they can buy good stocks at low (below-fair-value-given-new-knowledge) prices, drive up the price, and the passives follow later, buying at high (fair) prices. No one needs to lose, but actives accrue a disproportionate fraction of the gains.
> This breaks down if passives outnumber actives
Hypothetically there is a level of passive investing where the system breaks, but (1) this has nothing to do with 50% threshold (a small active minority can be fine) and (2) the are natural strong forces that prevent this from happening (as the fraction of passives increases, the reward for being active increases, drawing in more actives).
Also, saying "no more" to refer to a blip fad is a ridiculous healdit.
I agree that there is a lot of gambling and excessive risk taking going on. And I myself stick to a 3 ETF portfolio because I like the simplicity. But to call it almost entirely just gambling I think is missing the point. There is some interesting and good stuff happening now in the intersection of social media and low cost trading, and it makes sense I think for VCs to be investing in that space.
It is difficult to convey this because, in the end, you have no idea either so you don't know whether there is useful stuff on YouTube or if I am just talking nonsense too...but it is so bad, and it gives the misleading impression that picking stocks is very easy. It isn't, people do CFAs (allegedly, a hard exam), MBAs, and work in fund management every day for decades...and will never come close to being profitable (indeed, what is amazing is how many people have no knowledge but end up doing okay...it is remarkable...the post is a perfect example, no content, no apparent understanding of investing...somehow the guy is a billionaire from investing, like Chamath...amazing).
It is gambling (the distinction between gambling and investing is information), what most VCs are doing in the space is financial terrorism (stuff like WealthFront is an unbelievable scam, it is 1980s-style financial advice), and most people should take your approach (although it is still very easy to go wrong with 3 ETFs...most people will get there though).
Do you happen to have those links?
Betting exchanges can offer good liquidity, tight spreads and commissions as low as 2%
gamestop was the example of what happens in the limit - only the DTCC prevented a global financial crisis as a circuit breaker of last resort.
Casinos wont let you put a billion $$$ on red or black just because they have a 1/37 edge on the roulette wheel. That variance is to high.
There are failure modes
>> if enough gamblers stick to one ticker, they can break the market
HF's, I assume, has had this power all along and they probably tried more than once to break the market.
So, what's the difference then, between internet hive minds and HFs and why should one take more blame than the other when it comes to "breaking things"?
Casinos need to ensure that they have enough liquidity to withstand a large bet hitting. The law of large numbers only works if you can survive the short term swings.
Nonsense, a few private funds losing a lot of money is not a financial crisis, it's just another Tuesday.
True heroes. God love em.
Risky activities tend to hurt more investors than they help, and lead to a small number of big winners and many losers. You can't just increase risk and increase reward for everyone.
Regarding the predicament Gen Z is in, just remember that the older generations - one of which is very large - will need to sell their assets at some point. I know it's hard to hear, "Be patient" when you are young and have already been patient, but demographics is working against asset values in the next twenty years or so.
As someone who is about half way towards retirement, how is it best to work with this?
My future retirement income seems to be mostly dependant on having the right selection of investments for my pension account to grow in time for when I stop working. It's currently split between a few low cost, broad indexes. But if we expect asset values to go down as older generations sell off, am I going to see this pension pot fail to meet what I need it to in order to cover my retirement.
My pension advisor just seems to blindly follow the script of 'passive beats active', and expects 5% annual return. Which I just go along with, mostly because I have no idea what else to do. Am I being too pessimistic when I really can't see 5% return being likely.
How do I go about making sure my retirement is provided for. It kind of annoys me I have to seemingly be constantly figuring out the market situation to make decisions on what's best. Why do I need to be a stock market expert to manage my pension. What I'd much rather do is pay for a future pension more like an insurance plan. I pay monthly now, and some experts who know what they are doing worry about the investment strategy, and I just get a fixed pension payment.
Preferably wait till this period is over and rates rise. If there’s a salesman eager to speak to you, you’re looking at the wrong product.
I can't find the link now but I saw a recent paper that showed retirees aren't really spending down their investments in old age. Rather many of them will end up with more when they finally fall off their perch.
Probably not all of their assets though. Most people don’t get a death date after 65. I guess if people want to blow most of it before 80 that might make sense but you never know when you’re going to go. Still need to hedge against inflation.
Some of their assets (mainly houses, I’d expect). Anything they don’t sell can pass to their heirs and likely will even get a tax break (step up in basis) instead of a tax hit (estate tax exclusion is huge, at the federal level).
While the idea behind passive investing may seem like a good one, people often forget it's a double edge sword. By this I mean, when you invest into an ETF or index fund, that money in turn goes into everything underneath it. All too often that money isn't invested in the underlying equities in any intelligent way, and so some of it ends up in ridiculously bad equities. Because of this, there are complete zombie companies that are worth multi billions today, which sell no more than 2 widgets a year and haven't seen growth for nearly a decade... They are only worth so much because money keeps flowing into them from being apart of a hot ETF.
How do active traders make money? Easy, they make money off of volatility and volatility increases as the market size increases. So greater passive share means more profit potential for active traders.
What is even the function of a trader? A trader is providing liquidity so that buyers and sellers can get fair prices for the thing they want to buy. Who are buyers and sellers? People who believe in the company or in the case of an index fund, people who believe in the index and expect it to net a return in the future. If there are not enough active traders then index funds will pay unfair prices and that is a loss for the index fund.
Now lets get to the meat of your post, zombie companies or rather low productivity companies are a function of interest rates and interest rates are set by the market and usually they are set based on inflation + desired margin. Inflation is low, or at least not high enough, so interest rates are relatively low. The Fed does control the interest rates to some extent but it does so for inflation targeting. However most of the time the Fed rate is slightly above the actual market rate, this is especially the case with negative interest rates where a lot of central banks want to stay above 0% if it is feasible. If inflation goes up the Fed will normalize the interest rates.
High interest rates are a barrier to companies with low returns. If your company makes a 2% return every year and your interest is 3% you will go out of business. If your company makes losses and obtains a 0%-1%% loan then it can stay afloat thanks to the debt.
Now the obvious problem is, if the Fed is doing everything it can to increase inflation and subsequently raise interest rates then why on earth do we see very low inflation? If interest rates are lower than inflation it means everyone (including foreign entities) is putting their money into savings. After all, if people spent it on consumer goods it would drive up prices and therefore inflation. So it isn't going there.
Actually, there is a way for consumer spending to increase savings. China is running a trade deficit by pegging their currency to the yuan. This means the government just outright buys USD so you can exchange them for yuan and the government stockpiles the USD in US treasury bonds. In my opinion they do this because China has an aging population, it's basically a retirement fund, when China is doing poorly they are hoping the US economy is doing well.
Ok, China (and pretty much everyone exporting in USD) is saving. Who else is saving? Retirement funds. The US has an aging population that puts money aside for retirement. It also has a retirement motto that everyone is supposed to save for themselves so even the working population is putting money aside. Rich people save a disproportionate percentage of their salary. They simply cannot spend all of it because they are simply that rich. Think of Bill Gates. A lesser effect also applies to city dwellers in top cities. They get paid a lot more than the countryside. Think of all the people on HN with stock compensation or people on HN who put their excess money into stocks. This portion is growing bigger over time. Automation plays into savings as well. Higher productivity means you can put more money into capital via machines that merely consume electricity instead of spending your money on workers who must consume food and water.
If everyone is saving and nobody is spending then how are workers supposed to get paid for their work? It's clearly impossible, unless that money is being invested and new jobs are being created. This is why people shouldn't put money under a mattress or why we don't want deflation. It will cause unemployment. Give it to your bank and your bank will give it to a company that creates jobs. But since interest is so low or in theory negative (banks don't pass negative interest on) the banks are basically telling you that they don't want your money and you should put it elsewhere.
Enter the stock market and housing market. Low yields in conventional markets (bank accounts, treasury bonds, mortgage bonds, etc) cause investors to flee these markets and enter riskier markets. They will spend it on stocks instead, they will also spend it on housing directly. That's where all those speculators that don't want to rent the house out come from. They aren't looking for a good investment, they are looking for an investment that isn't worse than conventional assets.
It's almost as if we have run out of good investments.
I'm also not sure that I buy the argument made elsewhere in this thread that you need active to make passive work. Indexes upon which funds are based often have a system of rules for how individual stocks are added and removed from the index that are based on the companies financial performance which is what ultimately drives the stock.
It's not so much about time-frames but rather familiarity with the details of a company or sector, but the term you're looking for is probably value investing.
Um, yes. Retail investors as a class lose money.
Remember, you're betting against people for whom this is their day job, work in a business that drops the losers, and have far more money than you.
Incorrect risk management from investment bankers, treating highly-variant finance as deterministic physics, and a fanciness of extremely smart people to invent extremely complex solutions, which obfuscate the ever-increasing assumptions and are less robust to black swan events. This illusory superiority bias over the common man, giving too much authority and decision-making power to a set of mathematical functions, and a culture of financial optimism and realization that you are too big to fail. This is what caused the big crash of 2007-2008.
The common man, as a class, lost money from that crash. In response, Bitcoin and fractional stocks were introduced. New markets emerged, where wearing a suit or MBA seems a negative, not a value add. Now, as a class, you at least have the possibility to win money. Else you always lose (but maybe that's the natural way it is supposed to be, not everyone can be the queen ant, or has the adaptation capacity to become one). BTW: every hedge fund that opened their data to the public, saw better, more accurate, models being build on that, than any of their elite quants in-house was able to beat. The masses, when harnassed, are no match for even the biggest hedge funds.
Post-IPO investing is essential to the IPO which is essential to VC which is essential to startups.
The pricing of post-IPO stocks is responsible for trillions of dollars of capital allocation, since the amount that public companies can raise is linearly proportional to the stock price.
It's not an unimportant problem to get right, unless you think it doesn't matter whether billions of dollars get allocated to GME versus MRNA.
A clown show where GME gets all the funding (due to its high stock price) and real companies don't is not going to lead to a productive and healthy economy.
The longest stock I've held is Boeing (40 years).
But there's a limit on how much you can contribute to an IRA. A serious investor will find the IRA contribution limits make it inconsequential. You also wouldn't want to fund the IRA with money you'll need before 65.
I think we are reaching the end of that era. I guess we shall see.
Long trade is definitely still around, just wait till everyone has other things to do
That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run.
> has catalyzed a lean-in mindset around investing, particularly among Gen Z.
And it will burn them, just like it burned penny stock traders in the 80s and Internet stock traders in the late 90s.
The reality is Gen Z'ers are desperate at this point and they're turning to gambling in the hopes of making up lost economic ground. And if that happens en masse, it's not gonna be pretty.
Some of the math surrounding the derivation of the weakest forms of EMT also relies on the assumption that everyone has access to the same information, which is patently false in the world we live in. Even retail traders sometimes have an information edge (e.g. working at a biotech company or a specialized industry like semiconductors)
Now, the initial assumption could very well hit a wall.
https://web.stanford.edu/~wfsharpe/art/active/active.htm
That doesn't mean there haven't been long-running active strategies that have worked. But those have overperformed by grabbing returns from other actives underperforming, not the passives.
There are hundreds of opportunities to do this every day, so you just jump on the most painfully obvious ones, and avoid anything uncertain.
If you have a real job, and can’t watch the market all day, every day, you don’t stand a chance. Without fail, the biggest losses in our group would come when someone tried to hop into a position while half watching the market, and then get sucked into their real work.
Once you’ve got entry down, the hardest part is training yourself to exit at the right time.
If we could I'd make a 20 year wager that every one of those people will fail to beat the market in the long run.
It's very easy to make money on "sophisticated strategies" during an historic 10 year bull run.
Active trading will is more likely to have larger swings than passive trading.
In the short-run the good times will be better and the bad-times will be worse.
In the long-run, statistically the majority (not all!) that play the game will lose over the long run to passive investors.
None of this is to argue for one of doing things over the other so long as people understand the risks that they're opting into.
1) confirmation bias. Many people have blind faith in the market and while trends are semi-reliable. There are plenty of instances that buck all trends and can take out even the most seasoned day traders accounts if the overrely.
2) a lot of times these are pump and dumb schemes, even by large hedge funds on small companies that are generally overvalued by the time the “opportunity” hits those reading the standard info sources.
So as someone simply managing my own account. A solid strategy is to avoid day trade and only place buys on something you are good to be long on and have faith in. These are big ones like Microsoft or apple or Costco.
I still invest in companies I’m very knowledgeable on but I don’t take risks on nonsense. And worst case I’m long in some stock for a while But I don’t have to monitor it to the minute nor do I have to really coughing up fees for managed funds at a massive scale.
Sure I miss plenty of plays, especially intra-day or intra-week but I also don’t lose anything on those.
There is a certain rationality to this, when you're coming from so far behind.
If you need a million dollars and you start with $200K, you set a timeline and a prudent plan.
If you need a million dollars and you start with $2K, you're so far behind[0] you may as well gamble.
I do not necessarily advocate the latter. I'm just articulating the thinking/emotion.
[0] 2000 at 7% p.a. takes 92 years to top a million if my arithmetic is correct.
If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them.
Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.
> active strategies lose out to passive ones in the long run.
It's false if we're talking about specific strategies (e.g. Medallion Fund).
There are computerized short-term strategies that print money almost every single day, deployed in a few of the large firms.
Top 1% own 38% of the value in stocks.
Nope, this is false. Please look up the historical performance of Renaissance Technologies Medallion Fund.
Traders are pretty wired.
People building long term businesses (Like 10 year horizon plus) are on a different gravity.
The average person could never compete with RenTech.
In this simple model active investors in aggregate cannot do better than the index. Adding transaction costs, fees, etc. they'll do worse - as a group.
Other winners include tech companies and a space company.
Someone explain to me why I'm an imbecile and why I should have been invested in Vanguard index funds, something I did for decades prior to thjs.
This phenomenon has been shown repeatedly in studies of trading behaviour among individual investors (e.g. [1] and [2]), who have been found to collectively destroy wealth for all other investors. Only an absolutely minuscule proportion of traders actually beat the market.
As with any casino, there are winners and losers. But usually the house wins.
[1] https://faculty.haas.berkeley.edu/odean/papers%20current%20v...
[2] https://www.sciencedirect.com/science/article/abs/pii/S13864...
Simple: you got lucky in a bull market.
Let's revisit how you're doing in the next recession or after a couple bad bets.
If you want a deeper answer you'll have to do your own digging, as it's a big topic. But it's worth starting with the efficient markets hypothesis and reading some of the work of Jack Bogle.
This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.
The Medallion fund is a whole other kettle of fish. Medallion uses extremely sophisticated models which took Jim Simons and his team of math wizards more than a decade to figure out, using vast amounts of historical data and computation. The fact that nobody else is replicating their performance should tell you just how difficult it is.
In 2019, 71% of actively managed funds lagged behind their benchmark according to the S&P. In 2020, it was "just" 57% [2]. Meanwhile, 70% of active funds have been liquidated the last 20 years. There are of course years where actively managed funds are the winners, but over time, actively managed funds tend toward the mean, either lagging or matching the S&P 500.
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185
[2] https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-y...
Closed to outsiders:
Medallion, +76%
Open to outsiders:
RIEF, -23%
RIDA, -34%
I’d rather have my AAPL over the last 5 years than VTI+BND.
...
We quickly saw that wasn't really the case.
I believe in the Boglehead philosophy..
Passive investing means doing what your bank advisor suggests. People are starting to realize that those advisors may not make smarter decisions on where the world is going than the people themselves.
Active investing refers to active equity or bond selection and investment with the goal of generating excess alpha (i.e. beating the market)
Buying a traditional, managed mutual fund is a form of active investing.
Passive investing involves buying a large, diversified portfolio of equities and bonds such that you hold a percentage of the whole market. This is "passive" because there's no attempt to select specific stocks. The goal is simply to match the market by owning a portfolio that's representative of the market.
Buying an S&P 500 index fund is a form of passive investing.
Both could be done in consultation with a financial advisor.
I see more of this kind of active investing happening (people reading Tesla blogs and going to meetups as an example, deconstructing software updates to see how the models are being ported 1-by-1 to the new framework. Financial advirsors generally don't do this in depth due diligents for products (or at least I haven't met any).
As an example I read through a part of the Bitcoin source code to see how well it's written before investing in it, and I haven't seen any financial advisor who even looked at its github repo, and they already have opinion on it.
Asset allocation is another active investment decision.
I worked in fund management: I have never seen people who were so overpaid (myself included) for doing so little. Fund managers are a net negative cost to the economy, and they earn fees to do it. Most of them, particularly personal advisors, understand nothing about investing that most people couldn't learn themselves (the only exception are the big wealth management divisions at IBs, most personal advisors likely cost clients substantially). I actually worked in the personal space too, I remember billing clients regularly ~$20k for 20 minutes work...there is no world (even inc. our costs) in which our fees made sense.
I invest actively because I have literally spent 14 hours/day researching stocks for most of the past decade. For anyone else, buy an index fund. Your performance is still going to be good, there is no way that most people get a return on time researching stocks/mutual funds themselves.
VCs have a fetish for financial idiocy that I will never understand (perhaps that is required to be a VC, no idea).
As investors in Robinhood I would imagine they love active investing.
Public is an interesting place where you can see behind the curtain of who the folks using these services actually are and what their logic is. (Trades on Public are visible to everyone by default, and it’s basically a giant message board.)
Five minutes in and you’ll see that 98% of the activity looks a lot more like gambling than anything that might be driven by a plan or strategy. That’s fine and I don’t say that to disparage Public’s users, but it’s important to be realistic about what’s going on here.
I believe Public also encourages/seeds the community with celebrities and “experts” / quasi-influencers who are clearly trying to make a name for themselves on the platform. Some of them share basic advice, while others drive short spurts of mania based on their investment decisions. Watching it all play out has solidified in my mind that active investing is a losing game all around.
The sad thing is I think this is true except that far fewer active trades than hustles make a profit...
"real world skills" is a nebulous concept. What counts as a "real world skill" and what doesn't?
>My gut tells me that finance should be automated by computers without a profit motive because greed rots the soul and our environment.
You mean some sort of planned economy? Those have not worked well historically. Even if you somehow outsource it to an unbiased computer, who sets the weights? What's the relative value of an apple compared to an banana?
Got a sprain? Call a doctor. Leaking pipe? Call a plumber. Doesn't seem nebulous at all. Conversely, speculation and greed ruining the world? Call on the populace to bail them out. Speculation doesn't build or fix physical stuff.
>You mean some sort of planned economy? Those have not worked well historically.
Because historically it has been done on inferior computers. Whereas now we have the computing power to calculate the economy n-times over. Dr. Paul Cockshott on Cybersocialism: https://www.youtube.com/watch?v=LtlZys7QOO4. That being said, I'm sceptical as well; the video leaves many things unanswered which he expands on in his books that I have yet to read. However, I welcome any ideas on how to detach humans from having to deal with money, so we can collectively pursue more lofty goals, beyond profit.
Then came an uncomfortable realization. There are multiple indices. Which one should you aim to beat and why? This question stuck with me and I didn't manage to resolve it at the time.
Then I learned about the argument that active investors cannot beat passive investors because on average these two groups will hold the same stocks in the same proportions. The active investors are just trading stock back and forth and incurring fees in the process. This seemed logical and convincing at the time.
A few years later I was trying to think on a theorethical level, how can active investors stand a chance against passive investors, if on average they hold the same things, and the passive investors don't incur fees? What I came up with was this: Stocks enter and exit indices. So even index funds have to do the occasional trade. If active investors as a group buy a stock before it enters an index, they can gain a leg up on the passive investors.
Then I thought of something even worse. A bad actor could "poison" the index by founding companies. Trade a few stocks back and forth with a buddy to establish a high market cap. If it makes it into the index, the index funds have to buy from you.*
Another thing that an index fund has to do is buy and sell when people enter and exit the fund, and when it does it has to trade with active investors. If active investors can predict in/outflows into the index-fund they can beat its cap-weighted**performance.
Recently I've been thinking about the inclusion criteria for the index. This kind of ties in with all of the previous threads I mentioned and unifies them. Every index has a bunch of inclusion criteria, this is completely necessary and inescapable or else the poison problem becomes serious. Whichever index you choose, there will be some good companies inside and some bad companies outside. Thus there is no right index to choose. And here is another opportunity for active investors as a group, trying to beat the inclusion criteria of the index. Avoiding the poison better than the index funds. And picking good companies that didn't make it inside, and of course investments that are outside the index because it's in a different region, or because they are not stock at all.
* This is a simple example. You could imagine a much more sophisticated scheme, with many different actors trading stocks back and forth, and mixing real companies in with the duds.
** An example to help the imagination: An index fund falls in value, almost everyone exit the fund. It recovers, people come back. Even though the fund is +-0, the average investor has lost money.
What’s the economic impact of this behavior though? I want to say it’s generally negative since it’s bound to grossly disrupt proper price discovery but was that even the case before this period of excess leverage? I doubt it.
I think the resurgance of retail stock trading in the last 2 years or so, is not due to the uncertain economy (again, only big players really benefit from market uncertainty), but because there really were few other places to put your money (negative interests rates, high gold prices, impossible real estate market) and the Fed printing money and keeping the market from collapsing, led to a fairly certain economy, where the Fed would garantuee your losses, but you could keep the wins. This top-down manipulation was obvious enough to trickle down to retail investors using RobinHood.
In smaller, emerging, markets, quantitative active trading has become very competitive. Some markets, still profitable to active trading, are now beaten by a "mindless" passive trading strategy. Like stocks, it makes little sense anymore.
Wallstreet bets is a non-regulated pump-and-dump group, in the upper echelons ethically worse than the owners of the biggest hedge funds (who won't take profit on some plays if they know it causes long-term damage to the economy, the economy being a matter of national security). The GameSpot play made a few of those a millionaire, lost the college funds of people too late to jump on the bandwagon, and done damage to the degree of billions, when hedge - and pension funds had to withdraw from solid businesses such as Google and Amazon, to cover the losses from this memetic war. You can also state that the drivers of the bandwagon, were doing a passive strategy spanning years. It is the active trading of the bandwagon that made their strategy worthwhile (and not a poorly-informed play based on nostalgia and potential).
Numerai also is a passive investing (3 weeks+) fund. They are not that different from a hedge fund buying prop data.
I do think the article is interesting, and adds information on a new emerging trend. But it also reads a bit too kind and objective, like a music journalist describing a new album she isn't a particularly personal fan of. Subtleties will be missed, while the overal picture still is objective and correct to the quality.
As an investor myself, both active and passive, I progressed the most when I learned how the game is played at the top level. Active meme traders should do well to investigate these top players, just like these top players are studying them. RobinHood's order book is fed to the top players. They stand to gain by promoting this active retail trend, and taking near-certified profit on top of these predictable low-information emotion-driven masses. Buy things like Tesla or social media technology, which you as a 20-year-old, see using in 10 years. That's the way to beat the 35 year old senior Goldman Sachs analyst.