100% Equity vs Equity/Bond

jdw2000

Eco_Miser wrote: »

You will notice that plenty of people did exactly that.

I read that article, but didn't make a comment, not because I agreed with it, but because I didn't think I could structure a elegantly reasoned rebuttal that would contribute to the debate.

Passive investors obtain the market return (beta), but that return, in particular the change in valuation, is influenced by the activity of the active investors.


You should also note that The Investor (founding contributor to Monevator) is an active investor who doesn't actually practice what he preaches. That doesn't stop the blog being useful and informative, but it should tell you that things are not as clear cut as you seem to believe.

I have not read anybody suggesting that an active investor who really knows what he/she is doing can't "beat the market" and make more money than a passive investor. Of course they can.

Monevator's "The Investor" (and of course the likes of Warren Buffett) are people who clearly know enough about investing to be active investors and take advantage of alpha gains.

But what Buffett, 'The Investor', the Vanguard article I just posted above, and other sources I have read/seen all agree on is that passive investors beat MOST active investors.


But if somebody is an active investor who spends lots of time and lots of money (OCFs) chasing the alpha then you're hardly going to be comfortable entertaining this concept, and I fully understand that.

chockydavid1983

Passive investments 'should' have lower fees than active so on average they will return more than active, which means some actives will beat passives but more will lose.

jdw2000

chockydavid1983 wrote: »

Passive investments 'should' have lower fees than active so on average they will return more than active, which means some actives will beat passives but more will lose.

Actives also incur trading charges.

jamesmorgan

It is fairly easy to demonstrate that active investing is not (necessarily) a zero sum game. Take a very simple example, that all traders invest in passive funds. One investor decide to break from this and just buys one share. If that share outperforms the market average, he has gained relative to everyone else. Who has lost?

Eco_Miser

jdw2000 wrote: »

I have not read anybody suggesting that an active investor who really knows what he/she is doing can't "beat the market" and make more money than a passive investor. Of course they can.

That wasn't the argument I was refuting.
I was refuting that the activities of active investors affect only active investors, when in fact the passive investors come along for the ride as well.

Eco_Miser

jamesmorgan wrote: »

It is fairly easy to demonstrate that active investing is not (necessarily) a zero sum game. Take a very simple example, that all traders invest in passive funds. One investor decide to break from this and just buys one share. If that share outperforms the market average, he has gained relative to everyone else. Who has lost?

Who did he buy that share from?

jamesmorgan

Eco_Miser wrote: »

Who did he buy that share from?

Passive funds often have to buy/sell shares to meet the rules of whatever index they are trying to follow.

Companies regularly issue new shares.

So he either buys from passive funds or from newly issued shares. Just because I make higher return than a passive fund, doesn't mean that someone else has made an equal loss.

Or if you want to imagine a closed system. Investor A decides to sell his portfolio of passive shares, but decides to sell one share to Investor B. Investor A goes away and happily spends his money. Investor B makes higher returns than the rest of the market. Still not sure who has lost?

jamesmorgan

IanManc wrote: »

That doesn't work.

If "all traders invested in passive funds" then the whole market would be in those funds, and there wouldn't be a single share available to buy. So your analogy immediately fails.

Secondly, even if there was one single share that was available and the rest of the market was in passives then all the holders of the passive funds would be the losers as they wouldn't have gained the increase in value of the whole market but only the increase of value of the whole market minus one share.

For every gain someone makes there is a loss someone makes relative to the performance of the whole market. There cannot be a greater gain than the gain of the whole market, or a greater loss than the loss of the whole market, that's why it is called a zero sum game.

That is only true is you treat a "passive fund = whole market". The two things are different. Passive funds are a subset of the market. In the simple example I gave, the active investor has out-performed the market. The passive fund has under-performed the market. Have the passive investors lost money? Their relative returns may be lower than the market, but this is not the same as a loss which is implied in a zero sum game.

In a zero sum game, I can only make a profit if someone else makes a loss. The stock market doesn't perform like that. In theory everyone can make a profit (or everyone can make a loss!). That is quite a different concept from looking at a distribution of returns and observing that for every return above average, there needs to be a corresponding return below average. That is just a mathematical fact and nothing to do with zero sum games.

jamesd

jdw2000 wrote: »

Anyone who doubts this should take it up with Monevator

With you because you're the one repeating that rubbish.

The Monevator case ignores the real world where what will be bought and sold by trackers can be predicted and front run by active investors. Which has been explained to you already.

This isn't a place where just repeating rubbish is likely to be very persuasive. There are too many people around who recognise that when they see it and won't let it fly and mislead others.

Stop being a patsy for tracker-only fans and start learning more about the subject. Including that Monevator is not a perfectly reliable source.

jamesd

grey_gym_sock wrote: »

i don't think it's at all obvious that one should avoid holding shares which are in the middle of a takeover fight. you suggest it's a bad idea to buy in that situation; but do you think one should also automatically sell if one is already a holder?

Depends on the specific situation and how many buyers and sellers are involved. Neither always a bad idea to buy nor always a bad idea to sell or short.