12-10-2021, 05:16 AM
"You can't beat the market", and other faux wisdom I am tired of hearing.
<!-- SC_OFF --><div class="md"><p>1) <strong>You can't beat the market</strong></p> <p>What does this mean? Is the market SPY? Is the market VTI? Is the market VT? Is the market a 65/35 Equity/Fixed Income Split? Does it mean that you can't have a better sharpe ratio than one of the aforementioned? </p> <p>Why do pension funds lend Apple money at a .7% yield? Are they morons? Don't they know that they <em>can't beat the market</em>? Why don't they just buy BND? </p> <p>The phrase "You can't beat the market" is lazy, and meant to imply that essentially any form of active selection of asset classes or assets within classes is doomed to fail. </p> <p>Wipe the phrase from your vocabulary. What you are trying to say is that the null hypothesis is that all assets are <em>priced fairly</em>. </p> <p>Different individuals have different uses for different assets. The relative value of those assets is not identical for all parties. For example - if you work in the oil industry, you should not buy XOM. Why would you just go buy SPY? Do you know how many oil companies are in the SPY? What is the purpose of double-risking your income and your portfolio allocation to them? Are you a <em>day trader</em> if you buy industry sector ETFs and leave out oil? Why don't you just <em>take the market return</em>? </p> <p>Assets are assumed to be priced fairly, and this means they are priced in a risk-neutral fashion. But you should not invest in a risk neutral fashion. If you are 18, you should seek out as much investing leverage as you can reasonably take on and afford to service. If you are 65, you should probably not be leveraged at all. When the 18 year old opens Robinhood and the 65 year old opens Fidelity, they both get to buy and sell the same stocks at the same prices - that doesn't mean that the <strong>VALUE</strong> of the asset is the same for both individuals. </p> <p>2) <strong>Just buy VTI bro, excessive Bogleheading, "Time In The Market", etc</strong></p> <p>You are living in a complete historical anomaly investing in US Markets. This "wisdom" is pervasive because this is a primarily English speaking forum. Why don't you look up the stock indexes of Italy or Japan? C'mon bro! Just Buy The Dip! Time In The Market, Bro! Everybody pile into equities, because <strong>it doesn't matter what price you buy at, because in 30 years when you need the money it will be worth more</strong>. </p> <p>There are major first world economic powers where their equity indices have performed extremely poorly. If you bought the WW1 Dip in 1916 at the age of 20, when you went to retire at 65 you had a 260% gain. Impressive! Wait. That's a 2.14% CAGR. The DJIA since 1982 is at a 7.34% CAGR. Which one of these returns you got is a fucking dice roll based on what year you were born. You are not guaranteed to win by purchasing equities. </p> <p><em>Look! He's a bear! This is FUD-posting! Tell us about all your doomsday hypotheses Mr. Bear! I'm going to laugh at your post while buying calls!</em> </p> <p>I don't have any doomsday hypotheses, I can't tell you that this is a historic bubble, it's gonna pop tomorrow because of XYZ. But what I can tell you is that there is a tremendous degree of complacency in this market - it seems the only risk priced in is COVID. And the complacency on every forum I have read my entire life discussing US equities tells me that there is something wrong. Because </p> <p>3) <strong>Risk is the source of all return</strong></p> <p>This is how assets are priced fairly - yes, someone will make lots of money selling you SPY puts 10% OTM with 1DTE, until one day when they get their ass handed to them. Yes, buying US equities in a balanced stock/bond portfolio, you get a nice 7-8% CAGR since the 1980's. Why is that, exactly? What are companies rewarding you for giving them access to capital for? After all, every time the market goes down, we have the fed put! There is no risk, is there? </p> <p>If you put a dollar in a safe, and come back in one year, it will be a dollar. If you put a dollar in the SPY, and come back in one year, sometimes it's 0.85, and sometimes it's 1.30. This scenario also applies to 30 years. If you think it doesn't, you are misinformed about the risks you are taking. If the Fed Put is true, if Daddy will always come bail us out, then the SPY's return should slowly approach the risk free rate - prices should rise until they can't anymore, because the market will slowly grind all the juice out. SPY to 800, because then the earnings yield will approach that of the 10 yr t-bond. </p> <p>4) <strong>Active management is bad! Nobody ever beats the Buffet Challenge!</strong></p> <p>There are two main reasons that large funds underperform, and neither of them is a good reason for you to be a price insensitive buyer of large cap indices over long time frames without performing any analysis. They are :</p> <p>A) The goal of someone with a 50m$ net worth is largely principal protection and gaining above the rate of inflation. Yes, there are the insane super rich who hoard returns growing their pile of cash like Smaug, and those who just get off Doing Business and so Do Lots Of Business and try to become mega wealthy. They are not the norm. If I gave you 50m right now, your mindset would not be "awesome, Im gonna put this in the SPY and turn it into 200m", it would be "awesome, I never have to work again and even my grandchildren can be rich if I set this up properly." Lots of active managers <em>are not trying to "beat the market"</em> in net returns or sharpe ratios or whatever. </p> <p>B) Having more money makes you worse at investing, because you move the market against you. You can look at a chart of PLTR and pick out which days Cathie Wood bought, because ARKK is so fucking massive that when she goes "I want my fund to be .5% more PLTR", it means she has to figure out how to buy 125 million dollars worth of PLTR. Her orders in the book shift the price. </p> <p>Your orders in the book do not shift the price. If you gang up on a stock with everyone else on reddit, they will! But if you go "I would like to allocate .5% more of my portfolio to PLTR today", you will not move the market against you. The bid will not jump 1% as you try to fill multiple orders in order to hit your target allocation. There is a peter principle in fund management, where fund managers get given more money by investors until they are ineffectual. </p> <p>But don't pretend that can't happen to the SPY just because there's no manager.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/PmMeClassicMemes"> /u/PmMeClassicMemes </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/rd0jzd/you_cant_beat_the_market_and_other_faux_wisdom_i/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/rd0jzd/you_cant_beat_the_market_and_other_faux_wisdom_i/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>1) <strong>You can't beat the market</strong></p> <p>What does this mean? Is the market SPY? Is the market VTI? Is the market VT? Is the market a 65/35 Equity/Fixed Income Split? Does it mean that you can't have a better sharpe ratio than one of the aforementioned? </p> <p>Why do pension funds lend Apple money at a .7% yield? Are they morons? Don't they know that they <em>can't beat the market</em>? Why don't they just buy BND? </p> <p>The phrase "You can't beat the market" is lazy, and meant to imply that essentially any form of active selection of asset classes or assets within classes is doomed to fail. </p> <p>Wipe the phrase from your vocabulary. What you are trying to say is that the null hypothesis is that all assets are <em>priced fairly</em>. </p> <p>Different individuals have different uses for different assets. The relative value of those assets is not identical for all parties. For example - if you work in the oil industry, you should not buy XOM. Why would you just go buy SPY? Do you know how many oil companies are in the SPY? What is the purpose of double-risking your income and your portfolio allocation to them? Are you a <em>day trader</em> if you buy industry sector ETFs and leave out oil? Why don't you just <em>take the market return</em>? </p> <p>Assets are assumed to be priced fairly, and this means they are priced in a risk-neutral fashion. But you should not invest in a risk neutral fashion. If you are 18, you should seek out as much investing leverage as you can reasonably take on and afford to service. If you are 65, you should probably not be leveraged at all. When the 18 year old opens Robinhood and the 65 year old opens Fidelity, they both get to buy and sell the same stocks at the same prices - that doesn't mean that the <strong>VALUE</strong> of the asset is the same for both individuals. </p> <p>2) <strong>Just buy VTI bro, excessive Bogleheading, "Time In The Market", etc</strong></p> <p>You are living in a complete historical anomaly investing in US Markets. This "wisdom" is pervasive because this is a primarily English speaking forum. Why don't you look up the stock indexes of Italy or Japan? C'mon bro! Just Buy The Dip! Time In The Market, Bro! Everybody pile into equities, because <strong>it doesn't matter what price you buy at, because in 30 years when you need the money it will be worth more</strong>. </p> <p>There are major first world economic powers where their equity indices have performed extremely poorly. If you bought the WW1 Dip in 1916 at the age of 20, when you went to retire at 65 you had a 260% gain. Impressive! Wait. That's a 2.14% CAGR. The DJIA since 1982 is at a 7.34% CAGR. Which one of these returns you got is a fucking dice roll based on what year you were born. You are not guaranteed to win by purchasing equities. </p> <p><em>Look! He's a bear! This is FUD-posting! Tell us about all your doomsday hypotheses Mr. Bear! I'm going to laugh at your post while buying calls!</em> </p> <p>I don't have any doomsday hypotheses, I can't tell you that this is a historic bubble, it's gonna pop tomorrow because of XYZ. But what I can tell you is that there is a tremendous degree of complacency in this market - it seems the only risk priced in is COVID. And the complacency on every forum I have read my entire life discussing US equities tells me that there is something wrong. Because </p> <p>3) <strong>Risk is the source of all return</strong></p> <p>This is how assets are priced fairly - yes, someone will make lots of money selling you SPY puts 10% OTM with 1DTE, until one day when they get their ass handed to them. Yes, buying US equities in a balanced stock/bond portfolio, you get a nice 7-8% CAGR since the 1980's. Why is that, exactly? What are companies rewarding you for giving them access to capital for? After all, every time the market goes down, we have the fed put! There is no risk, is there? </p> <p>If you put a dollar in a safe, and come back in one year, it will be a dollar. If you put a dollar in the SPY, and come back in one year, sometimes it's 0.85, and sometimes it's 1.30. This scenario also applies to 30 years. If you think it doesn't, you are misinformed about the risks you are taking. If the Fed Put is true, if Daddy will always come bail us out, then the SPY's return should slowly approach the risk free rate - prices should rise until they can't anymore, because the market will slowly grind all the juice out. SPY to 800, because then the earnings yield will approach that of the 10 yr t-bond. </p> <p>4) <strong>Active management is bad! Nobody ever beats the Buffet Challenge!</strong></p> <p>There are two main reasons that large funds underperform, and neither of them is a good reason for you to be a price insensitive buyer of large cap indices over long time frames without performing any analysis. They are :</p> <p>A) The goal of someone with a 50m$ net worth is largely principal protection and gaining above the rate of inflation. Yes, there are the insane super rich who hoard returns growing their pile of cash like Smaug, and those who just get off Doing Business and so Do Lots Of Business and try to become mega wealthy. They are not the norm. If I gave you 50m right now, your mindset would not be "awesome, Im gonna put this in the SPY and turn it into 200m", it would be "awesome, I never have to work again and even my grandchildren can be rich if I set this up properly." Lots of active managers <em>are not trying to "beat the market"</em> in net returns or sharpe ratios or whatever. </p> <p>B) Having more money makes you worse at investing, because you move the market against you. You can look at a chart of PLTR and pick out which days Cathie Wood bought, because ARKK is so fucking massive that when she goes "I want my fund to be .5% more PLTR", it means she has to figure out how to buy 125 million dollars worth of PLTR. Her orders in the book shift the price. </p> <p>Your orders in the book do not shift the price. If you gang up on a stock with everyone else on reddit, they will! But if you go "I would like to allocate .5% more of my portfolio to PLTR today", you will not move the market against you. The bid will not jump 1% as you try to fill multiple orders in order to hit your target allocation. There is a peter principle in fund management, where fund managers get given more money by investors until they are ineffectual. </p> <p>But don't pretend that can't happen to the SPY just because there's no manager.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/PmMeClassicMemes"> /u/PmMeClassicMemes </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/rd0jzd/you_cant_beat_the_market_and_other_faux_wisdom_i/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/rd0jzd/you_cant_beat_the_market_and_other_faux_wisdom_i/">[comments]</a></span>Kind Regards R