Why doesn't everyone invest in index funds?

mike ross's picture
Rank: Gorilla | banana points 632

Can someone explain to me why every non finance professional doesn't just invest in low cost index funds? how can you beat the market when there are institutional/hedge fund investors that have more info about companies than you've ever dreamed about?

The S&P has beat the majority of hedge funds, and apparently Buffet keeps his kids trust money in a low cost index as well..

If you're not an investment professional, why would you ever try to pick stocks in the market when you can have a mutual fund create an index to invest in with no effort from your side?

The average S&P mutual fund index nets like ~8% a year over 30 years, if you max out a 401k and Roth IRA every year and just throw it into indexes, itll net you around $10mm USD when you're ready to retire..

Is there something I'm missing here?

Investment Banking Interview Course

  • 7,548 questions across 469 investment banks. Crowdsourced from over 500,000 members.
  • Technical, behavioral, networking, case videos, templates. All included.
  • Most comprehensive IB interview course in the world.

Comments (99)

Apr 6, 2018

AND its no effort on your end

just pick the vanguard whatever index, and sit back and watch

if you want to succeed as bad as you want to breathe, then you'll be successful

Apr 6, 2018

Most people dont have the patience... so when the market eventually comes down they'll pull the money and try to "find better investments"

Apr 19, 2018

Agree on people not having the patience. I think people expect to get rich over night by "playing the market" when they really have no idea how to invest outside of the Wolf of Wall Street. I think that's why crytpos were/are so popular, people feel it's easy money.

    • 2
Apr 6, 2018

I think many including myself put the majority into a S&P500 index then put the little left over into hedge positions. Remember when you buy the index you not only buy into the average market gains but also, the average market losses.

Best Response
Apr 7, 2018
mike ross:

Can someone explain to me why every non finance professional doesn't just invest in low cost index funds? how can you beat the market when there are institutional/hedge fund investors that have more info about companies than you've ever dreamed about?

The S&P has beat the majority of hedge funds, and apparently Buffet keeps his kids trust money in a low cost index as well..

If you're not an investment professional, why would you ever try to pick stocks in the market when you can have a mutual fund create an index to invest in with no effort from your side?

The average S&P mutual fund index nets like ~8% a year over 30 years, if you max out a 401k and Roth IRA every year and just throw it into indexes, itll net you around $10mm USD when you're ready to retire..

Is there something I'm missing here?

The average person is an idiot. If investing in an index or investing in something else was the biggest issue, that would be great for humanity. However, the bigger issue is that most people aren't really choosing between index funds and something else that's kind of comparable.....they are mostly not investing or somehow pissing their money away. If the average person invested heavily in a mutual fund that did a little worse than "the market", then that would be substantially better than where we are right now. By a huge margin. Enormous actually.

    • 14
    • 1
Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Apr 10, 2018

deleted.

    • 11
Apr 7, 2018

Not really. Most people who make some returns that think they know how to trade just get lucky. Worse, these people will start trading on margin and will experience massive losses. But most importantly, it's a huge risk if you have a family (because if you're a trader you don't have an actual job). Some family friend with a bunch of kids and a wife who doesn't work has had to ask my dad for money multiple times...lol

At the end of the day, it's almost impossible to remain consistent as a good trader, as you have to account for fees and whatnot. I've read somewhere too that if you just buy and hold vs trade daily your returns will be bigger.. just my 2c

    • 5
Apr 9, 2018

Whenever anyone tells me they made __%, trading stock over time period ___, I assume three things that will one day be referred to as Reed's Laws:

1a) Whatever basis they claim is approximately 300% higher than the amount of money they're actually trading with.
1b) Or is actually taking place in a mock portfolio.

2) Whatever time frame they're referencing when telling you their P/L is selectively chosen and sandwiched between other periods of great losses.

3) The P/L they're giving you is calculated by only including their winning stock picks and not including any trade that lost money.

    • 7
Apr 9, 2018

Sounds pretty accurate to me. I'd argue #2 is the most commonly followed rule of what will be Reed's law

    • 1
Apr 10, 2018

You always hear when people win at a casino...never hear when they lose

    • 2
Apr 16, 2018

Or maybe some actually know what they are doing, studied their strategy, and tailored it to the point where they will be profiting even if they lose slightly more trades than they win.

You Ivy-Leaguers seriously are a great representation on why many traders fail. You over-complicate everything! Not to mention bashing on people who have found success in something that is very rewarding

    • 1
Apr 17, 2018
Pump And Dump:

Or maybe some actually know what they are doing, studied their strategy, and tailored it to the point where they will be profiting even if they lose slightly more trades than they win.

You Ivy-Leaguers seriously are a great representation on why many traders fail. You over-complicate everything! Not to mention bashing on people who have found success in something that is very rewarding

You (so very painfully) don't know what you don't know. However, that's not the reason you get MS all the time. That's because of your overconfidence when spouting nonsense.

Wasn't it last summer where you were bragging about your earnings as a dishwasher? Now you're some trading guru a year later? Come on man.

    • 3
    • 1
Apr 17, 2018

so true, thank you @DickFuld

Apr 10, 2018

lol

Apr 16, 2018

Or
4.) they somehow managed to acquire insider info and haven't been cought yet.

Apr 10, 2018

Amazing. More trading wisdom from the brilliant @Pump And Dump" please enlighten us further. Thanks for adding valuable content

    • 2
Apr 10, 2018

deleted.

    • 4
Apr 10, 2018

It doesn't bother me. I really enjoy it & find it amusing.

    • 1
Apr 10, 2018

You're not really stating an opinion. You're stating what you think is fact (ie, that "trading blows investing out of the water") when that's just not true at all

Apr 10, 2018

ok

Apr 15, 2018
Pump And Dump:

deleted.

monkey shitted bc you deleted your post like a bitch

If the glove don't fit, you must acquit!

Apr 15, 2018

Eh, no point replying. I just get monkey shitted on everything I comment. End of day what I'm doing is working yet everyone here is saying otherwise. Fucking lol

    • 3
Apr 10, 2018

Agreed.

We have more people walking around who never invested/invested very little/pissed their money away than people walking around blaming their "6% return vs the market avg of ~8%"

Apr 9, 2018

Trading and investing are two VERY different things. Investing is about long term fundamentals (best companies in best industries, revenue, earnings, pipeline of product, etc. Trading is about short term technical info (moving 50 and 200 day averages, support and resistance, etc.)

Retail investing is about asset allocation, risk tolerance and goals. My fund vs. your fund (within the same asset class) really doesn't matter that much. (Per Modern Portfolio Theory). The key is to stay invested in a suitable allocation for the long term. Buying a stock on a whim or trading is just gambling. When humans are rational and invest over a long period of time, they do quite well. But humans let emotion direct their "investments" and generally chase returns, buy high / sell low because of fear and greed.

    • 1
Apr 9, 2018

From a retirement account perspective they may have limited options available to them. Some people enjoy doing some stock picking and like to see how they do compared to a benchmark.

Apr 9, 2018

Because everyone's a genius until they lose all their money in the stock market actively trading.

    • 2
    • 1
Apr 12, 2018

Nice Merchant my guy.

Oct 12, 2018

What do you possibly know about the stock market you moron

Apr 9, 2018

An alternative perspective from an investor talk a recently went to(Large Investment Firm CEO):
Indexing has been on the rise during this bull market and has been rewarded because it's a bull market, everything is going up. When it comes to a downturn, index funds won't be structured in ways to protect against downside risk.

Apr 9, 2018
SketchyFinanceGuru:

An alternative perspective from an investor talk a recently went to(Large Investment Firm CEO):
Indexing has been on the rise during this bull market and has been rewarded because it's a bull market, everything is going up. When it comes to a downturn, index funds won't be structured in ways to protect against downside risk.

Do you mean the 3% cash that most active funds own? That protects the downside by about 3%. Not percentage points, to be clear. Most active funds won't do much better than that. Maybe they will avoid rebalancing so that the 3% cash becomes 6% when the market gets cut in half. That helps, I guess.

    • 1
Apr 9, 2018

Not to talk outside my wheelhouse, but there are ways you can structure a portfolio that protect you more in downtowns than an index. Examples of this are structuring portfolios with assets that have various correlations, using fixed income assets, using other financial products.

Apr 10, 2018

Correlations aren't static, nor are they typically what you want them to be when the market shits the bed. Essentially, if things go south, your correlations are probably the only thing going up.

    • 1
Apr 12, 2018

Fixed income isn't really a hedge anymore. It is the risks. Biggest risks is the discount factor which is rates.

In a recession type environment rates are a great hedge. In current market fixed income is the risks.

Array
    • 1
Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Apr 15, 2018

What you are positing is perfectly reasonable. Indeed, Buffet has been quoted as saying that his will instructs his wife to buy VOO and hold. BUT:

  1. Most people don't save to begin with
  2. Most people are dumb - "the masses are asses"
  3. Greed is the great equalizer. By far the worst of all human characteristics and will do you in on any number of fronts.
Apr 9, 2018

As mentioned above, most people just don't understand investing well enough to choose to invest in index funds. You can lay the blame here primarily on the piss poor/nonexistent personal finance education the vast majority of people receive. There is some benefit to consulting with a professional based on your RRTTLL situation, however.

  • Risk tolerance
  • Return desired
  • Tax situation
  • Time horizon
  • Li(t)quidity needs
  • Legal situation
Apr 9, 2018

People are idiots... Saw a forum on here yesterday about a guy asking whether or not it was a good idea to trade his mom's retirement account using cryptos and penny stocks because he watched a few YouTube videos on it.

    • 3
Apr 9, 2018

I'm also a big supporter of index funds. In addition to cheap exposure I think that the rise of passive investing improves capital allocation (since bad active funds will be driven out but good ones will remain). The passive investors can't influence relative prices, since they just buy the market portfolio, meaning that the fewer but better active investors will continue to make the capital allocation decisions. On this view, lower returns of active management are a sign that prices are more efficient and capital allocation is getting better.

    • 1
Apr 9, 2018

I saw a easy way to invest. You buy index funds when the Investors business Daily has the market in a confirmed uptrend and sell when it is in a confirmed downtrend. Wonder how much you would make. Because Markets bouncing back still mean you lost all your money. If you have $100 and lose 50% and then go on to make a 75% return you only end up with 87.50 giving you a net loss.

Apr 9, 2018

I never understood why it is so common to see percentages thrown around for gains vs losses in this context. Yes, a 50% loss will take a 100% gain to recover from, but the amount of funds that would flow in or out of the stock to move it in those directions remain the same in spite of the different math. The increase or loss in market cap is exactly the same, so why does this constantly get brought up like it is some sort of revelation?

Apr 9, 2018
trabo:

I never understood why it is so common to see percentages thrown around for gains vs losses in this context. Yes, a 50% loss will take a 100% gain to recover from, but the amount of funds that would flow in or out of the stock to move it in those directions remain the same in spite of the different math. The increase or loss in market cap is exactly the same, so why does this constantly get brought up like it is some sort of revelation?

You don't understand?

Apr 10, 2018

No- as indicated in my original post.

Apr 9, 2018

I think people are sucked in by the allure of making money on their own in the markets. The way the majority of individuals invest, it is essentially socially acceptable gambling. The thrill and pride associated with saying you "picked a winner" is much more exciting than acknowledging that you conservatively placed your hard earned money in a fund that tracks the broader market.

Apr 9, 2018

In the age of commercial agriculture, humans have ample amounts of free time to pursue (arguably worthless) endeavors.

Researching / trading select individual equities (stocks) involves (and allows for) more in-depth research, analysis, and report generation. It can make one "look smarter" and/or occupy him/her for longer amounts of time.

The other (more devious) argument is that virtually all insider trading involves individual stocks/companies, NOT index funds. Much easier to "bear raid".

Keep in mind, I'm an avid (semi-institutional) trader with a relatively large trading account. So my words are honest and forthright.

Apr 9, 2018
MonacoMonkey:

I'm an avid (semi-institutional) trader with a relatively large trading account. So my words are honest and forthright.

Define "semi-institutional" and "relatively large". Why does that make it that your "words are honest and forthright."?

Separately, have you gone to see a psychiatrist recently? I hope you are not suicidal now. At a minimum, you are entertaining.

    • 3
Apr 10, 2018

semi-institutional = investing through etrade & not robinhood

    • 3
Apr 10, 2018

semi institutional = having at least 50% of trading assets in OPM (other people's money).
relatively large = bigger than yours.

    • 1
    • 2
Apr 10, 2018
MonacoMonkey:

semi institutional = having at least 50% of trading assets in OPM (other people's money).
relatively large = bigger than yours.

Hahaha....that's the fighting spirit!!!! Even if you're clearly wrong, at least I know you're not suicidal today.

Apr 9, 2018

Have you all seen the new E-trade commercials? This thread reminded me of it. Seems like their goal is to make the average joe think he can get rich by trading. Commercials like this piss me off

Here's an example

Apr 9, 2018

Can't help but laugh every time seeing that commerical

Apr 10, 2018

I'm always confused by this commercial because the tag line is "the dumbest guy in high school just bought a boat"; essentially they are saying you can be dumb and still make money (I guess that's the point)?

These aren't as bad as the shitty TD commercials; some bearded fuck telling you to trade options. Shit, is it 2007 again?

Apr 10, 2018

someone good with video/cinematography NEEDS to make a parody of this.

have a guy on a yacht prior to E*Trade. after opening his account, now cruises around in a beat up canoe.

would be gold.

    • 1
Apr 9, 2018

For me, I viewed picking my own stocks as an educational investment as much as a monetary investment. Its impossible to replicate the emotional rollercoaster building a portfolio with your own money brings in comparison to fake trading and also provides an extra strong incentive to get savvy with DCF modeling and equity analysis. I made a lot of mistakes and learned some painful lessons, but ultimately feel infinitely more prepared for long term financial success having been through those experiences over the past several years of investing. I do put the majority of my money in passive indexes these days but buy (and short) individual stocks with much more conviction and knowledge. I feel that I have slowly transitioned from being the hunted to the hunter- capitalizing on the markets impatience and over-exuberance.

Apr 9, 2018

I can't tell you how many 22-24 year olds I've met who ask me for investment advice where the story goes like this:

"How are you currently invested?"
I'm not, but I've saved a good deal of cash - XX thousand - and want to enter the market

"Well let's talk about risk and return. It's important for someone your age to invest in equities if it is for the long term"
I know, but indexes are awful - I mean, who wants to make 7-8%? It's not even worth the risk

Youth today are obsessed with immediate reward. They all want to be the next bitcoin millionaire. They don't understand that if you're making $100k at 24, and invest in index funds for 30-40 years, they'll be a healthy millionaire at retirement. They're willing to risk all that security for a 1% chance at hitting it big, with a huge potential that they earn almost nothing or lose money during their most important earning years.

Every dollar earned at 22 has 30-40 years to compound interest. This is a return of 20x at 8% if you retire in 40 years. When you think about it, your first dollar in is really your last dollar out too. At 82, that's a return of 100x before inflation. If you spend 20 years dicking around in high risk investments that return net zero, the difference you could have at 80 is the delta - 100x vs 20x.

Fuck, if you live to 100, that's almost 500x your initial inflow. It's basic math.

Just start investing, it's much more about the cash flow you put into investments when you're young, and take the 8%. When they markets crash, lever up if you really have the risk tolerance. You'll have, statistically, something like 3-5 full market cycles to pull this off in over your life.

I'm not opposed to stockpicking in a diversified portfolio, but the vast majority don't have the knowledge or discipline to pull it off and beat the market. I always suggest - if you want to stockpick, do it with 20-30% of your money, and pick good names. Don't put more than 5% into speculative shit. That way you're not risking your future to fund a gambling habit.

    • 9
Apr 10, 2018

I don't necessarily think you are wrong but I feel like the 8% return thing is bound to blow up sometime. What we are really saying is that because the historic return in equity markets has been 8%, it's going to be 8% in the future. I'm not sure this is true.

Most obvious thing first - once people start assuming they'll get an 8% return, they'll overbuy equities, to the extent that the expected return becomes 0%. Why do we assume that there will always be a 8% return available for us?

Second - the sample size for the 8% isn't that long. It's about 100 years of modern markets. This really isn't long from a historical standpoint. A lot happened in those 100 years from our perspective; but looking at it as a whole ignores that massive periods of declines that occurred - Great Depression, WWII, etc. When the clock started, there were only a few places in the world to invest in; now we can buy exposure for almost every market in the world. No one has any idea what the return will look like over the next 100 years in developing vs. developed countries or in mature industries vs. growing ones. Also had one or two events gone differently historic returns may have been 20% or 0% - it's ludicrious that we assume everything will balance out in the future just as it has in the past.

I think when you look at it this way, it makes complete sense for people to actually evaluate investments individually under the current circumstances. I do think everyone should have some exposure to "the market", but it isn't some mark of human irrationality to look at other investments. Quite the contrary actually - blind indexers may be the irrational ones.

    • 1
Apr 10, 2018
  1. The idea that equity returns are volatile and nothing is guaranteed (100% true!) does not mean that the majority of investors should avoid a diversified portfolio and go in hard on speculative investments just because they've "analyzed" them. This is also a dangerous mindset that's prevalent with today's 20 somethings - A good friend of mine of mine bought a basket of cyptos with his entire MBA signing bonus and mentioned that "all it takes is a few hours of research" - uh, no, reading 10 peoples articles on the internet is not research for a speculative investment.
  2. The 22-24 year old set I was discussing is almost 100% of the time not an investor with knowledge and skill greater than the market.
  3. If returns aren't 8%, entire markets should remain, on average, upward and positive as long as economies are growing, and should outpace modest inflation; this statement doesn't hold true for individual companies; advancing technology also helps grow the general equity market
  4. Pretty much everyone I've ever heard parrot your perspective is under the age of ~32 - i.e., has never professionally lived through an economic downturn, where speculative investments fall to dust in your hand.
  5. Again, it's all about risk and reward - and to live an "alt-truth" where you'll throw out everything we know about risk and reward in the markets to decide that broad markets are high risk and low reward, but highly concentrated investments are going to be high reward and low risk, honestly just shows a lack of experience. Maybe you're gunning to be the next hedge fund magnate and out to prove me wrong; I don't care, I'm talking about the vast majority of the population in their 20's. By definition, we can't all beat the markets.
    • 4
    • 1
Apr 10, 2018

Ha I'm 30+ my friend. Perhaps I was unclear as you took my post to be advocating for "speculative investments". Quite the opposite - I am saying presumed economic growth gets priced into equity markets and this leads to asset bubbles. How can I buy GDP growth if it's already priced into equities? Do I only see returns when there is unexpected GDP growth? Is the market constantly under-predicting economic growth?

Hence my criticism of always assuming 8% growth in equities, and my answer to the OP.

This is an argument for a defensive position, not risky ones. Not sure why you thought the opposite.

Apr 10, 2018

Because my entire post was based around young investors piling on too much risk because they don't see the risk/reward in market returns. As I stated, all about responsible stockpicking, but in your early 20's most people don't have the knowledge or discipline to do it.

Apr 10, 2018

I know - just opening up a discussion about the validity of assuming 8% return in equity markets.

Apr 10, 2018

Maybe part of the answer is :

1) volatility (vs. real-estate consistent cash-flows for instance)

2) risk of loss (vs. savings accounts for instance, or the fact that "real-estate markets always go up") : fear of market bubbles, or bankrupcy/scandals (Enron...)

3) when studying long-term market returns, a high number of people don't include dividends, thus missing out half the return

What do you think ?

Apr 21, 2018

Long term investment success takes discipline. The same discipline it takes to exercise daily, change bad habits, etc. Most people just don't have the innards for that. (think New Year's resolution club).

Compound that (pun intended) with lack of basic financial literacy and you get a world of misinformation, confusion, etc.

I work with a lot of retail investors. All walks of life (literally public school teachers with nothing to senior execs worth well in to 8 figures). To a person, you would be amazed at what they don't know. Just basic stuff including tax planning. True story- have an oncologist neighbor / friend who gets a significant 403B (non contributory) contribution from his employer (major cancer center) each yr. He tells me he's considering leaving, maybe retiring early (he's in his late 40s) and was shocked to learn he has to pay ordinary income taxes and face the pre 59.5 10% penalty on early withdrawals. He has virtually no money outside of qualified plans. Invested that in RE but nothing liquid. Thought he could just take the money and run with no consequences.

I hear this type of stuff every day. The worst part is they don't know what they don't know and make poor decisions based on a lack of information.

We should be teaching the basics in high school!

    • 2
Apr 10, 2018
BreakingOutOfPWM:

I can't tell you how many 22-24 year olds I've met who ask me for investment advice where the story goes like this:

"How are you currently invested?"
I'm not, but I've saved a good deal of cash - XX thousand - and want to enter the market

"Well let's talk about risk and return. It's important for someone your age to invest in equities if it is for the long term"
I know, but indexes are awful - I mean, who wants to make 7-8%? It's not even worth the risk

Youth today are obsessed with immediate reward. They all want to be the next bitcoin millionaire. They don't understand that if you're making $100k at 24, and invest in index funds for 30-40 years, they'll be a healthy millionaire at retirement. They're willing to risk all that security for a 1% chance at hitting it big, with a huge potential that they earn almost nothing or lose money during their most important earning years.

Every dollar earned at 22 has 30-40 years to compound interest. This is a return of 20x at 8% if you retire in 40 years. When you think about it, your first dollar in is really your last dollar out too. At 82, that's a return of 100x before inflation. If you spend 20 years dicking around in high risk investments that return net zero, the difference you could have at 80 is the delta - 100x vs 20x.

Fuck, if you live to 100, that's almost 500x your initial inflow. It's basic math.

Just start investing, it's much more about the cash flow you put into investments when you're young, and take the 8%. When they markets crash, lever up if you really have the risk tolerance. You'll have, statistically, something like 3-5 full market cycles to pull this off in over your life.

I'm not opposed to stockpicking in a diversified portfolio, but the vast majority don't have the knowledge or discipline to pull it off and beat the market. I always suggest - if you want to stockpick, do it with 20-30% of your money, and pick good names. Don't put more than 5% into speculative shit. That way you're not risking your future to fund a gambling habit.

Such a good post. I reread this and it really is excellent. Kudos.

    • 3
Apr 16, 2018

It's only 21 times at 8%. After inflation it's a 10 times return in 40 years. 2% inflation.
If you have any tax consequences your returns will be lower....(tough to go 40 years without ever having etfs change etc).

Array
Apr 10, 2018

1.) People love to gamble/get rich quick. Look at how many people jumped into cryptos who probably had no idea about them; but their buddies friend made money on them so they can too.

2.) To be a successful investor in index funds need to be consistent and do it in parts. One thing most people aren't is consistent, they don't have the mindset for it. Look at health magazines, "lose 18 pounds in week by drinking this shake" sells better than "be consistent and lose 2 pounds every week in a healthy way"

3.) Kinda tying to point 1 and 2, people think they are "smarter" when it comes to money. As a group on this forum, how many relatively "stupid" investment ideas could name from family and friends vs actual relatively smart ones.

    • 2
Apr 10, 2018

deleted.

    • 1
Apr 10, 2018

I don't hold any index funds. But am a long term investor in the following stocks along with my reasoning

KO ~ large company, with constant dividends. Even if there stocks don't appreciate in value, I am receiving dividend every quarter
BAC ~ I bought it when it was at $21 and since then I've gotten dividend and price appreciation. I plan to keep this stock for a long time
BRK.B ~ you can't go wrong with BRK
S ~ bought at $4.87 close to it's 52 week low. I figure there's no way it'll go bankrupt, and with it's potential 5G wireless capability, it is within striking distance to rise in value. I most likely won't sell, and wait for a merger to happen.

I would love to hear any feedbacks, particularly negative ones, on my holdings.

Apr 10, 2018

...You hold stocks for the dividends?....

Apr 10, 2018

Your holdings aren't the problem; your on this forum I assume you have some semblance of the market and trading.

Trading individual stocks are all based on investor needs, time period, risk profile and temperament.

The major problem is novice investor coming in and holding a portfolio similar to yours; are they really tracking their stocks, following the news, listening to the calls? Do you know what to do when the stock goes down, do they have the right temperament if their stock goes down?

Novices buying stocks is kinda like taking a golfer just starting and having them play the final round at Augusta.

    • 2
Apr 10, 2018

Most of my stocks follows Buffet and what he holds. But I took a plunge on Sprint recently when it was trading at $5.15. It dropped to $4.81 and I increased my holding, a sizable amount compared to the rest of my portfolio, thinking it was a good move since it was at the 52-week low.
Today it went berserk and shot up 20%. So I'm pretty happy with that result.

I'm aware of the stats in regards to trading vs holding; read most of the intelligent investor, and will finish it after studying for the level 2. And I don't plan on moving in and out of positions too often, but my portfolio has grown quite substantially, from when I started and I do think about whether I should just buy an index and call it a day or keep picking individual stocks.

Apr 11, 2018

From reading Cramer's books, before you start investing in individual stocks you should probably have about 10K in an mutual fund. Then start investing in individual companies.

The key is that you don't always have to be right with your picks, but you do have to be able to do the work (stay current on the stock, look at the news, listen to the calls, read the Q/K). People get in trouble when they don't do those things, that's when it becomes more gambling than investing.

Apr 16, 2018

Coca Cola and Berkshire are not great investments.

Coke is kinda boring and their primary product is in decline. 21 times pe. Just nothing special not much different than a lower volatility that will return at about the market.

Berkshire hasn't been great for a while. They are too big for Buffett's style of investing and sit on too much cash. It's crown jewel geico may face major autonomous car problems. With how big buffet is at this point it's basically just an index fund now.

I love the banks. Nice valuations there and cheaper pe than most industries. They should beat the market every year for a very long time.

Array
    • 1
Apr 20, 2018

Sold my sprint for a 23% gain. Trying to get into an index fund now, looking at admiral shares. Wish I would have bought it when it was lower XD

Apr 29, 2018

Should have held just a bit longer...

Apr 30, 2018

I sold at 6.02
Still a lot of uncertainties so I'm content with decision.

Put a lot of it in KHC if you want to sweat that with you. haha

Apr 11, 2018

As a student who's investing with some spare money that I don't really care about: investing in individual stocks is just way more fun.

    • 1
Apr 15, 2018
datakid97:

As a student who's investing with some spare money that I don't really care about: investing in individual stocks is just way more fun.

come back when you have a family.

If the glove don't fit, you must acquit!

    • 1
Apr 16, 2018
datakid97:

As a student who's investing with some spare money that I don't really care about: investing in individual stocks is just way more fun.

Sure, but is it was more fun than OTHER pursuits that you can engage in as a student? If you weren't planning to flaunt it at an interview (horrible idea, IMHO), would you still do it?

Personally, I stay away from the equities (only my IRA and it's all in SPYs), our careers are way too correlated to the market. It would suck to lose my job and lose a big chunk of my savings.

Apr 12, 2018

To answer your question: I am literally smarter than the combined brain power+physical and electronic (AI) infrastructure of of any single financial institution. In fact I am so smart that I can beat them all simultaneously. Moreover, I am so much smarter than them, that not only do I know what to do with enough lead time to enter my trade on my electronic brokerage, but they are also always such large gains that I dgaf about the several darkpools which my trade goes through before I receive my securities. Nor do I gaf about the fees paid at each one of those steps.

Apr 14, 2018

I'm curious if too many algos in the market with make humans actually better traders in the end because the AI will get fucked with too much from other AI.

Apr 16, 2018

Okay I was going to type a lengthy response to this but before I even start, do you even understand what HFTs do, and what their purpose is? I'll just keep it short, if an algorithm front running your order for pennies a share is an issue to your profitability as a trader then you severely went wrong somewhere down the line.

Apr 16, 2018

Let me answer your question with another question.

How much wood would a woodsucker such if a woodsucker was named pump and dump?

Apr 16, 2018

1/10

Apr 20, 2018

Come on that was at least an average 4-and-a-half, like most guys.

Apr 16, 2018

Hi, that is called an overconfidence bias. Most of the people think they are smart and can beat the average. But only half of them can. lol

Apr 16, 2018

Newly young 30's starting to invest here

I actually started to max out my IRA since most of my work is contracted (no 401k), so this is the viable option on my end. My wages are not high enough yet in for me to get into a decent 401k due to HCOL. I would need to be a least 55k in salary/wages to comfortably start building a 401k from literally from scratch.

As tempting as having a sports car sounds, I would rather have a comfy reserve and a nice investment into index funds. I try not to discuss retirements openly with others, seeing that everyone that I overheard is a so-called, "expert" in this industry simply reading from various forums/articles/texts...I am quite aware the lavish lives these people are also living.

@BreakingOutOfPWM - what's a decent % I should start when I get into 401k's given my age in the low 30s? Great post, as always.

@PeterMBA2018 - are you saying that Index Funds are in a bubble currently and not worth investing because potentially, there is little reward? If you are investing, what is your portfolio consists of, if I may ask?

No pain no game.

Apr 16, 2018

I am not calling a bubble. I also invest almost exclusively in index funds and treasuries.

My point is that it may be irrational to always assume 8% growth in equity markets, for reasons stated above. That figure isn't really based on that long of a sample; it is prone to boom and bust periods; political economies change drastically with time.

These are all arugments for being conservative imo. Again, if a given company's value prices in expected future growth, why doesn't the entire market price in expected future 8% gains? Just something to think about from a high level perspective.

Apr 16, 2018

This is why, at the end of the day, sales is everything in finance - and probably everything else.

Apr 16, 2018

First off, I'm curious to know how many people commenting in this thread actually have any money in the markets.

I trade actively. I am not always beating the benchmarks, but sometimes I am. I have never lagged them by much, but sometimes I outperform them by a good amount. I have never closed a trade with less than 10% profits, and I have closed others much higher - though this sometimes means I carry losers with me until they show a gain. Still, this type of carrying happens infrequently.

The conventional wisdom not to trade actively is probably good for most people. Then again, most people are of average intelligence, and many more are below, so I think it makes sense why. Intelligence aside, very few people have the interest or motivation to pick stocks and "trade", so of course they should play it safe.

But look - most people on this board aren't conventional people. You go to great schools, and have outsize ambitions. Conventional wisdom says that it's not possible to become a banker, but many of you have defied that wisdom.

Fact of the matter in my opinion is that most of the people who regurgitate index fund wisdom on this forum could probably benefit from trading more actively than they do - I certainly did.

Then again, most people regurgitating wisdom on this forum have no skin in the game, and are just trying to rack up bananas by pushing the party line on something they have no vested interest in.

For those interested in trading, recognize that you may not be the people that the conventional wisdom is aimed at. Go read books written by successful traders, and stop listening to people who've have never risked their capital tell you about the rewards that entails. While it is true that active trading can be ruinous, that's similar to saying that gambling can be ruinous. Comparing a savvy trader to a blind speculator is no more fair than comparing a drunk gambler that takes his kids' college fund to Vegas to a professional card counter with a system in place.

Apr 17, 2018

So, doesn't actively trading require a trading account with $25,000 in the bank before being allowed to trade daily?

I am certain there are traders on this forum. However, for purposes, many people feel more secured going into IBD solely due to compensation with less risk as opposed to trading (salary as opposed to comm and bonuses are more predictable). I have read a lot of traders in the past months or so, a lot of negative posts and not a whole lot of positive enthusiastic ones (as opposed to the other industries).

The reason why Index Funds are great for folks like me is that they provide a steady growth and a better chance (not guaranteed) of some return on the investment in the long run.

@Fugue - What books do you recc'd reading? I am interested in good reading material.

No pain no game.

Apr 17, 2018

I wouldn't say there's a fixed amount you need in order to trade "daily", though more is certainly better for that in my opinion.

Really, you need enough money to effectively execute whatever strategy you're pursuing. The following is by no means an exhaustive list - before entering into any strategy as a beginner, you need to sit down and consider the potential outcomes and whether you have the funds for it.

For buy-and-hold, that means a lower relative threshold - you just need enough money to buy the stocks/ETF/fund outright, and pay ~$14 in commission ($7 when you enter, $7 when you exit, or thereabouts). Crucially, you also need enough time to wait for a profit to show - sometimes you get unlucky and it takes years.

If you're going to dollar cost average, you need to have "dry powder" lying around that you can pyramid your position with over time. It isn't possible to predict how long a trend will go and how many layers your pyramid will end up having, so you need a lot more capital (relatively speaking) to effectively pursue this kind of strategy.

You also need to consider as a novice that your positions need to be sized appropriately to net you profit after commission. If you buy 1 share of a $14 stock and it goes up 100%, that's phenomenal returns - but all $14 or so of your profit is going to be eaten up by commission. So rather than 1 share, you buy 2, or 100, or 1000...realize that the transactional costs go down as the size of your position increases.

I got started trading with less than half of $25,000, so you don't need to wait.

As far as what to read, here's a few I'd suggest

Philosophy/Primary Accounts of Trading
These are books that in my opinion do a decent job of laying out the various types of philosophies that different traders use.

-The Intelligent Investor: The Intelligent Investor is a bible of sort for fundamental/value oriented investors, and (accurately or otherwise) is frequently cited as Warren Buffet's guiding principles.

-Reminiscences of a Stock Operator: Reminiscences is the fictionalized and highly entertaining biography of Jesse Livermore, one of the greatest traders of all time. Even though he started trading more than a hundred years ago, before the advent of modern markets and financial capitalism, I think (as do many successful traders) that this book is a great source of wisdom about how to trade in a way that would nowadays be described as "technical trading".

-Market Wizards - This book (written in 1989) interviews a lot of successful traders. I'm a big believer in primary source documents, and so this is great to me. In my opinion, trading is an art as much as a science. Each artist must develop their own style, but it can be helpful to try to get inside the minds of the "greats" if you want to be one as well.

Relevant Subject Matter
These are not all books (though some are), but rather subject matter that I have found interesting to read about and study as someone who trades. Reams of paper and rivers of ink have been consumed in the study and exposition of these subjects, so unless explicitly stated there isn't necessarily one book I'd read - just find one generally considered reputable and dig in.

-Economics (understand both Keynesian economics and Chicago school/monetarist economics. Understand supply and demand and how they interface theoretically and in "the real world")

-Interest Rates - this is largely a subset of studying monetarist economics, but understand how the Fed works, how open market operations work, how interest rates are set and percolate through the economy under a central bank but also under a collaborative regime like LIBOR. Understand what fractional reserve banking is.

-Game Theory (particularly the difference between Nash equilibria and Bayesian Nash equilibria)

-The Black-Scholes option pricing model

-Mean Reversion trading (Pairs trading, for example)

-Neural Networks, Support Vector Machines and other non-parametric decision models (this will help you understand what those high frequency algorithms really do)

-How ETFs are constructed and maintained

-Financial Accounting (I think Kimmel Weygandt Kieso is a great textbook on this)

-How various types of popular securities and derivatives are constructed and operate (stocks, securitized products, insurance products like swaps and options, bonds, etc.)

-The Financial Crisis of 2008: This is a subject of great interest to me, and there are many good books. The Big Short is a decent account for a layman to engage with, and a very compelling book. For a less sensationalized treatment of the subject matter, I also recommend "Fool's Gold" by renowned financial journalist Jillian Tett, which chronicles the birth, growth, and as far as RMBS is concerned, eventual demise of securitzed financial instruments. If you're into some advanced reading, I have found that financial blogger Yves Smith has some fascinating perspectives, though not necessarily ones that I entirely agree with. She compiled her analysis into a book called "Econned", which is a decent critique of financial capitalism - I particularly like her analysis of the significance of the "Magnetar trade"

-Read about historical financial collapses generally - since time immemorial, "market cycles" have existed and impacted those who participate in them. In premodern times, issues of precious-metal currency debasement were prominent (in ancient greco-roman society, for example). In Holland, you had tulip mania which was an interesting early example of futures markets exacerbating a bubble. In the 1700s, you had the emergence of the first joint stock companies and the Mississippi Bubble which accompanied them. In the 1800s and early 1900s there were panics in America and elsewhere. Following the advent of the modern central bank, we had the Crash of 1929, the S&L Crisis, the tech bubble and of course 2008 just to name a few. I think an important part of understanding market cycles is understanding the many ways in which they have crashed in the past. Though all different, the more you study these, the more closely you will become acquainted with the animal spirits that ultimately enable and then derail most bull markets.

Read financial history - Niall Ferguson is one of my favorite "financial historians".

Philosophy of Political Economy - This is less important for knowing how to trade, but I think it is great stuff nonetheless for anyone that has a passion for trading. Hobbes, Locke, Adam Smith, Marx, the list goes on.

I will add more to this as it comes to me.

Apr 20, 2018

When I saw "Game Theory" I gave a fist up! Always been an avid fan of mathematics.

Thank you for taking your time in writing the exhaustive post @Fugue . This will keep me busy until at least the end of 2018.

What stock broker do you recc'd? Or will any work?

No pain no game.

Apr 19, 2018

Hello! Being honest, I think that this kind of business is not for everyone and exactly that is why not everyone makes investments in it :)

Apr 20, 2018

Most people don't know what an index fund is.

"Work ethic, work ethic" - Vince Vaughn
Apr 20, 2018

I think at a certain point there is an advantage as well to either manually invest or paying for professional investment if you want to diversify away from only the stock market. Commodities are a decent hedge for both inflation and against stock market instability but unless you want to build a grain bin in your backyard or run the risk of holding large amounts of physical gold, they can be difficult to invest in without using futures contracts. Indexes are flawed in commodities because of backwardization and the cantango curve. Basically paying a pro or taking the time to learn how to trade futures contracts yourself might actually be your best bet.

Apr 20, 2018

Commodities suck as an investment. While volatile they should not return much more than inflation and maybe less. Owning the products though can do better.

Array
Apr 20, 2018
Apr 20, 2018
Array
Apr 20, 2018
Apr 29, 2018
    • 1
Oct 30, 2018