hi Maurice,
i think that's the best post you've ever written. normally i disagree with you, but here i generally agree with you and admire some of the nuances you've added (although i of course take issue with some things, just to keep it fun :)
The reason that indexed investments do better than traded investments is because of the costs of trading - the spreads and fees and costs of switching around learning about different investments.
in the aggregate, this is definitely true. all the trades are zero-sum minus the cost of the trades, and the indexes back out the costs, therefore they will always be better than the aggregate return of investors. more generally, it is true that the more people trade, the worse they do.
But if everybody indexed, then there would be no mechanism to price the indices. There has to be somebody to get out on the edge and do the dirty work.
i have thought about that "if everybody indexed" idea, but obviously it can't happen, not in a free market. and in fact, indexes are still minority players, especially once you get away from the large-cap indexes like the SPX.
What the argument really means is that it doesn't take many people to keep the price of shares on the straight and narrow, when considered overall
actually, just because some people will be nonindexers does not mean the number of nonindexers will be small. in fact, the number is not small at all, nor is it at risk of being small. why? because Wall Street is a huge profit machine for active investors. even a piddly mutual fund manager makes 500K a year (for not beating his index), while pension managers can rake in 10 million a year. other than acting and sports, Wall St. is the best-paid profession out there. the irony is that it is the best paid and yet what active investors deliver to their clients is, in the aggregate, worse than the indexes.
Of course, one can't really know what proportion is luck and what is being right,
i agree. and in spite of what i say about indexing, i am not entirely into indexing. i have some active percentage and some indexed. in general, i believe there is no point to trying to actively invest in things like corporate bonds, REITs, and highly liquid large-cap stocks. and although some have argued for indexing even in less-liquid markets, i still believe those are the areas that nonindexing has the best chance of succeeding.
why do you bother trying to figure out whether QUALCOMM is a good price right now?
well, imho it is not a good price. a very simple spreadsheet can show that to me. what is more difficult to figure out is why it is not at a good price, and if it will ever return to one. and that is why it is interesting to hold discussions with people who believe (mistakenly, imho) that is is a good price.
I think we are doomed to think
ROFL, good line. and true.
I suppose what it means is that 95% of people should just invest in a mutual fund following the index. But there has to be somebody out there battling away. 5% maniacs out on the bleeding edge is probably enough.
i think the real world numbers are about the opposite. (5% indexers and 95% active.) |
