Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?
Berkshire Hathaway has under-performed the S&P 500 for >10 years now. And one of the main reasons why they're doing so well at all is probably because they have a sizeable holding of AAPL.
Note: price only comparison. S&P 500 funds generally give dividends (which can be re-invested). The (very) recent pull back has evened things out a bit:
> Over the past year, Berkshire is up 33%, double the gain in the S&P 500. The stock is now ahead of the S&P 500 over the past 10 years, 15.4% annualized versus 14.5% for the index, but still behind in the past five years, 13.3% annualized against 14.9% for the index.
The article is all about the really long overview though. It is basically arguing that the market gaining is not a given. See the Japan example starting around 1990. That was over 30 years ago. If you look at Berkshire Hathaway 20 years back, it is clearly beating out the S&P500 by a lot.
> Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
Agreed. I hope to not be very invested in the stock market when I only have 10 years of work left. Seems too risky.
How do you define volatility? How can a market weighted index of the top 500 publicly listed US companies be more volatile than a single company? Which itself is 25%+ invested in a single other company and then the rest spread out over a handful of other companies.
Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.
I believe indexes protect me from my own lack of knowledge on market operations and analysis. I have a couple of investments in indexed funds and of course I do not expect them to be resilient to bubbles or crashes.
If what the FA says was true everyone would be doing this "value investing". It's about how you balance risk vs benefits.
All completely true. The average investor should probably be using a financial advisor.
One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase.
Ultimately, investing boils down to finding something where you're comfortable. 401k investing makes people comfortable because of all the pre-tax benefits. Even if you make bad picks, you're still making the percentage of income tax every single time.
A lot of people invest directly in real estate or franchise businesses. Others in big, safe, dividend payers. Some people buy timber land.
IMO it's just going to be comfort level and experience.
No one should be using a financial advisory unless they are a fiduciary who gets paid based on the amount of assets under management.
Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day.
Most people can’t afford to max out their retirement plans. After you do that, then a fiduciary advisor might come in handy.
The 401k funds are effectively an automated advisor.
It’s tough to draw the line in a conversation like this because I completely agree with everything you said.
An advisor only comes in at the point that a person is investing their money directly and consistently. Your average person doesn’t have the market knowledge or the time to learn it so an advisor is likely the best bet for the average person in that scenario.
Anyone willing to do some research and learn will likely find their own comfort zone without an advisor.
Extremely few people can actually max out all of their tax-advantaged opportunities, including retirement plans. Some examples, assuming a married couple:
401(k): $61,000 (under 50 years old), $67,500 (50 and older) each
This is the 2022 tax year limit for all contributions, including effective deferral ($20,500 or $27,000 for 50+) plus employer matches and any post-tax contributions.
IRA: $6,000 each
Either Roth or traditional. Both are tax advantaged.
HSA (family): $7,300 (under 55 years old), $8,300 (50 and older)
These funds are triple tax advantaged when used for medical expenses.
Then you can get into treasury bonds, where interest is exempt from state and local taxes. For example a Series-I bond, which are protected from inflation (current rate is 7.12%): You can purchase a maximum of $10,000 worth of these a year.
So, just with a few tools, a family of two over 55 years old can invest up to $175,300 in highly tax-advantaged investments. A family of two under 50 can invest up to $161,300. How many families actually have enough money laying around to contribute even close to that?
If you've exhausted all that and still have money left over to invest, then you can start thinking about opening a taxable account at a brokerage and finding a fiduciary advisor.
You can't hit those 401k numbers without employer cooperation (e.g. being self-employed)... I don't think it's reasonable to say that someone paying the $20,500 annual max isn't maxing it out.
> For example a Series-I bond ... current rate is 7.12%
Entirely from the variable part-- their fixed rate is 0% right now, and since the interest is taxed when you close the bond, this is an investment that is guaranteed to under-perform inflation (even if you don't believe their variable rate systematically understates real inflation).
Yea, I'm not saying I-bonds are great investments, but they are good if 1. your investment goals emphasize tax deferral/avoidance and 2. you need to diversify an equity heavy portfolio. I agree with OP in that you don't really need an advisor if you're just contributing to your retirement plan, and I'd add "...or to other tax-deferred accounts that don't offer much choice in securities". The types of investments I listed don't require any thinking or research. Just buy-and-forget.
I would personally argue you shouldn't be touching regular taxable investments like buying individual stocks or ETFs until you've literally maxxed out every tax-deferred options, but that's a more controversial opinion over which reasonable people can disagree.
Series I bonds by definition only keep you level with inflation. Which doesn’t help if house prices, rent and healthcare continue to outpace inflation.
As you probably know, if you are above the normal IRA income limit, you can sidestep the limit for at least a Roth IRA via the Backdoor Roth [1] by converting post-tax IRA contributions to a tax-advantaged Roth. There are a few rules you need to keep in mind, but it's a good option.
You can also use an in-service distribution to move after-tax 401(k) contributions into your Roth IRA, the so-called Mega Backdoor Roth [2].
You need pretty high income and (for #2) a cooperating employer to make these work, but they're options for people who want to save even more tax-deferred. The proposed Build-Back-Better Act this year effectively removes [3] both 1 and 2, (so much for Biden's promise to not raise taxes for people making less than $400K) so this might be the last year to be able to do this.
> average investor should probably be using a financial advisor
I've known more than one person with an advisor that shuffled them into opportunities that made money for the advisor or had complicated stories so that it sounded like the advisor was providing value-- and as a result massively underperformed the market.
The best advice for the average investor is extremely simple... and not worth paying a lot to receive since you can get it for free from bogleheads. As a result there are a lot of free or cheap advisors that make their money from customers in other ways ... and not necessarily to the customer's benefit.
A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time.
So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).
The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta.
I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model
Yes, agreed. This is comparing Apples and Oranges.
Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the peak of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now.
I think it is easy to dismiss indices in a bear situation. When in doubt, zoom out and relax.
> Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the height of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now.
It should be noted that the NASDAQ is heavily skewed to one particular sector, and so less diversified. Going for the S&P 500, US Total Market (Russell 3000), or world index would spread the risk around more.
Even investing only at market peaks, as long as you didn't panic and sell, would still give results most people would find satisfactory:
Actively managed funds with low costs and a value investment style, can be a good alternative to picking stocks.
It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of value and quality investement style.
I work for a Fintech startup. We are working on a tool to do quantitative fund analysis.
Actively managed funds don't tend to come with low costs as a general rule. It's more expensive to pay a bunch of interns to sit around generating reports and a rockstar to actually pick which stocks to buy or sell at each moment than it is to simply make a few trades to keep the portfolio in line with the market.
Both adverse and averse are used to indicate opposition. Adverse, usually applied to things, often means "harmful" or "unfavorable" and is used in instances like "adverse effects from the medication." Averse usually applies to people and means "having a feeling of distaste or dislike." It is often used with to or from to describe someone having an aversion to something specific, such as "he is averse to taking risks" or "he is risk averse."
I appreciate that you're trying to be charitable to the author, but this sounds more like a retroactive justification than a new and valid usage.
Yes, I know that plenty of our words today evolved out of mistakes, solecisms, misspellings, etc. But that doesn't mean we shouldn't at least try to be kind-of correct.
> Yes, I know that plenty of our words today evolved out of mistakes, solecisms, misspellings, etc. But that doesn't mean we shouldn't at least try to be kind-of correct.
This is literally the worst misuse of the language.
(This is a joke about the way the word literally has evolved, badly)
What's different about "literally" is that people mostly do know what it means, and it's more of a rhetorical device or figure of speech than a simple mistake.
As the article you quoted says, it's "hyperbolic" and "metaphorical", not solecistic.
My uneducated guess is because they are driven to try and "win big," and they consistently overestimate they chances of doing so, and are uninterested in safe-but-boring.
I suspect there's a lot at play, including cognitive biases.
For example, value stocks tend to be contrarian plays. The stock is a good value because the price is down, meaning the majority don't have faith in it. Fund managers don't want to be holding these stocks when others are crushing it because people will look at their holdings and have FOMO. When, say, tech is flying high, people want to see that their fund manager owns tech.
Another example is leverage limits may incentivize fund managers into high-beta stocks. These are the one's that are most likely to win (or lose) by a large margin compared to the market. Over-optimism bias makes fund managers think they can disproportionately pick the winners.
Because the way to get ahead as an active fund manager isn't to deliver returns that match S&P 500, it's to deliver returns that are uncorrelated with the primary market.
Once you're in top half of that 11% who consistently beat the market that way even if by luck, survivorship bias will have customers beating a path to your door. Nobody remembers the 89%.
You're a true Boglehead like myself. That was my exact thought reading the article. Seems the crux of the problem is ... how can you pick value stocks? I'm not Warren Buffett who can spend my entire career weighing a companies value.
One thing missing from the analysis is that many index funds pay dividends. So even if your country is having a rough decade, fund holders are getting paid the whole time. Additionally index funds are tax efficient with low management costs so that has to be considered when comparing to individual stocks as well.
More saliently, (1) it’s hard to identify value stocks and (2) the time frames he was looking at are not that long. I feel fairly confident that markets will be way up in 50 years if for no reason other than technological progress
You can't look at a chart of an index price and simply say "it's down from the peak, I would have lost money". If you do that, you are forgetting that stocks pay dividends, and they aren't included in the index price.
Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).
100%. European markets are known to pay out more dividends whereas the US market is known to prioritize stock price growth. Return-wise that makes no theoretical difference.
Many but not all and that is the important detail.
Also I keep money in index funds even if I don't plan on using that money for retirement. (e.g. downpayment on a house, saving for another large purchase, financial buffer, etc.) I also keep money in index funds that are in regular brokerage accounts because 401k + backdoor roth ira isn't sufficient for retirement if you make $200k+/yr. (True for even lower amounts too but whatever)
That depends on which country you live in. In my country (The Netherlands) you pay a fixed percentage of the value of your portfolio. Dividends are not taxed.
and you have to care about where the index fund is domiciled. Otherwise you get dividend leakage. Some Vanguards are domiciled in Reland where 30% of dividends are withheld as taxes even though we need to pay just 15%. It might be difficult to get the difference back
Indeed it does. Here in Brazil, for instance, dividends are not taxed, while selling a stock (to take advantage of growing stock prices) has a capital gains tax of 15%.
Don't know why you're being downvoted; everything you've stated is true. I would just add that one should probably account for taxes. When taxes are involved: buybacks >> dividends.
If you hold your stocks in a tax exempt account then you don’t really care about this though.
Pension funds, ISAs in the UK, etc etc; most countries have something similar. The vast majority of individual savers will not exceed the limits placed on these accounts.
In Canada, it’s difficult/expensive to buy euro stocks or euro funds directly, so you end up buying a Canadian-domiciled or US-domiciled euro fund.
I wouldn’t be surprised if US retirement savers have the same issue.
While dividends from the etf are tax-free in a retirement savings, the dividends from the euro company are first paid to the etf, and the euro company still does tax withholding. From their point of view, they’re not paying out to a retirement fund.
Depends on the country. Some countries incentivize long-term ownership by taxing dividends at a lower rate than other capital gains. And in some countries, mutual funds don't pay taxes for (domestic) dividends.
This is due to the fact that European indices are heavily weighted towards stocks in low growth industries: banks, mining, utilities, cars, chemistry insurance. Lack of incentives in Europe has led to poor equity and economic growth versus the United States and this pattern will continue for decades to come.
Raw mutual NAVs and ETF prices do not include dividends, and prices fall on ex-dividend dates, but you can often find dividend-adjusted NAVs and prices that do incorporate them.
And just a clarification that some (many) ETFs also distribute dividends on a quarterly basis as they accrue them from their holdings, so technically you want to be looking at the total return indices.
> ... you are forgetting that stocks pay dividends, and they aren't included in the index price.
That depends of the index. The DAX, for example, has two versions: The performance index, which is usually quoted, includes dividends, the price index does not.
Sorry, but I must point out that if you have access to Bloomberg terminal then it almost certainly implies that your full time job is market research & investment. A Bloomberg terminal costs between $20K - $24K per year.
Whenever I hear the words “Bloomberg terminal” I get a mental image of a VT-series CRT and keyboard connected to a distant mainframe sitting off to the side of a room full of traders with men in suits waiting their turn to type in their queries.
I’ve assumed that it’s actually just software these days but it turns out that it also requires a specialized keyboard (which includes biometric authorization based on my quick skim of the webpage). It’s apparently $2000/month which is probably reasonable for those who need it and also a clear indication that I don't need it.
A Bloomberg terminal runs a full-fledged GUI app [1]. It's true that it's very keyboard-focused (with terse text commands and shortcuts for everything), and most of us probably wouldn't describe it as flashy or even modern, but it's not a text mode terminal in the sense you're describing.
The core functionality — trading, charts, financial data, news — that the Bloomberg terminal provides traders is also available from places like Schwab (StreetSmart), TD America (ThinkOrSwim), and so on, but the Bloomberg terminal is just a lot more stuff.
Interestingly, one of the things that apparently add the most value (and which competitors struggle to disrupt) is the social networking built in that allows traders to chat and gossip with each.
All accumulating ETFs track total return indices. They are not usually talked about so much, but all index providers have provide total return indices.
There's something really insidious about tying 401ks and other retirement accounts to the stock market. People including myself end up with a large portion of our assets essentially gambled on the future success of US corporations. It gives some false legitimacy to this idea that our media is constantly pushing, that if the stock market is going well then regular Americans are doing well.
I can understand that feeling but what offers average Americans a better option for growing and securing wealth than investing (most) savings in the stock market?
Unlike American corporations, it'd probably have to be decentralized, highly liquid, and ideally trustless, but I can't think of anything like that. However, another strategy could be a basket of currencies in developing countries. They won't be immune to the cascading effects of an imploding US dollar, but theoretically would rebound better.
We should be taxing people more, and guaranteeing much higher social security so we don't have to gamble our savings in a giant ponzi scheme. It shouldn't be on the individual to be lucky that a massive recession doesn't hit when they want to retire.. or depend on the market making a few percent a year just to survive.
Most 401ks are probably in funds that automatically start allocating more and more bonds as they approach retirement age. And frankly, if I could stop contributing to social security and invest it instead I would in a heartbeat. It’s effectively a Ponzi scheme that relies on more and more citizens paying in. That’s unsustainable, and by the time I retire I’m sure they’re at least going to move the age to collect up.
I've learned to relax about Social Security. I look at it as "diversification" of my retirement sources. I don't want all my eggs in the 401K basket either.
Calling social security a ponzi scheme while thinking your 401k isn't a ponzi scheme is completely backwards.
Your 401k depends way more on people continuing to inflate it upwards. And you have ZERO guarantee, anything can happen.
At least social security is a government backed program, and they can ALWAYS find more money. Maybe it's the best solution at the time, but they can. They can raise taxes, borrow, simply print more money. And don't nitpick these points, because yes I understand there are issues and it's more complicated.. but they can do it.
How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Even just increase the standard tax on people. If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
There are a billion ways to do this. I am not an expert, but I'm not clueless either. Plenty of other countries tax more and provide guarantees to the people. This country wants to make it seem like everything is a "choice" but it's completely to benefit the rich. "Oh I get to choose my healthcare and how much risk I want to take that I have to pay this year, great!" "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
> How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
Why limit this to self employed people? The cap is there for all workers. And self employed people pay double the tax - if you are not self employed, your employer is paying half of it. Self employed people already have a larger burden.
> How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Because then people won't invest in ... much. My guess is the majority of current investments that are profitable would no longer be if taxed as regular income.
That then means many businesses will stop existing since people will not invest in them.
> If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
Definitely. Even though it likely is a good solution.
The real problem is that the US government, by law, is not allowed to keep the excess SS funds they collect in an "SS bucket". If the SS payouts are less than SS tax collected, the excess is required to be spent elsewhere. We've lost decades of excess SS collections because of this.
> There are a billion ways to do this. I am not an expert, but I'm not clueless either.
The CBO exists to do such calculations. Increasing SS/Medicare tends to work. Removing incentives to invest, however, is disastrous.
> "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
There's a disconnect between saying "long term capital gains benefit the rich" and "investments are bad because I have zero control over the outcome." The latter statement is as true for you as it is for rich people. If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
>Why limit this to self employed people? The cap is there for all workers. And self employed people pay double the tax - if you are not self employed, your employer is paying half of it. Self employed people already have a larger burden.
I know, I am self employed. I didn't think there was the same cap for all workers? If there is, then I agree it should be removed (or at least substantially increased).
>Because then people won't invest in ... much
Yes they will. There are always people who still want to make more money.
>If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
And look.. the LT capital gains is not my first go to exactly.. but, I do think it's far too low and again it's something that just disproportionately advantages the rich.
Honestly that's my whole point on the investing front. This entire system was created to benefit people who already have lots of capital. My view is hoarding capital to make more capital should not be the goal of life.. but greed knows no bounds.
> Yes they will. There are always people who still want to make more money.
"There are always people" is a very different statement from "most people who invest will continue to".
Any time you lower taxes, you significantly increase investment opportunities because suddenly many unprofitable investments suddenly become profitable. In the investment circles I'm in, most people invest in things that perform lower than the S&P 500 because these are both safer, and more profitable due to the tax benefits. Remove the tax incentives, and easily 90% of the folks I know would pull out.
> I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
It's not the "default" way. You can choose not to put in any money in 401Ks and go to more traditional approaches - things like real estate and other businesses where you have much more control over the outcomes. You can even use IRA money to do this, as well as some 401K plans.
And then you'll find out you're more likely better off with the "traditional" investing.
BTW, raising SS tax to 10% to double the returns - it's still not enough. The estimate is that SS will fund only a quarter of the expenses for most retirees. Doubling the returns means it will fund only half of their expenses.
> This entire system was created to benefit people who already have lots of capital.
This should not come as a surprise. There's a reason it's called "capitalism". For pretty much forever, the system in the US benefited those with capital, and the path to riches is to find a way to acquire some capital to let it grow. Being well off just by virtue of an salary is a fairly recent trend, and always has taken the back seat with respect to capital based investments, and always will in the US. It took a while for me to realize this (in retrospect) obvious aspect of the US economy. I can whine about it and try to change the collective psyche of a whole country, or I can find another place to live, or I can make compromises and put more focus in acquiring capital.
> We should be taxing people more, and guaranteeing much higher social security
What you're saying is young working age people should pay for those who didn't save for retirement? And what happens when a recession hits anyways and the tax base takes a hit?
>What you're saying is young working age people should pay for those who didn't save for retirement?
Nice way to twist my words. If the system worked like I'm describing from the beginning, you wouldn't even be able to say that. Because you wouldn't need to save a substantial amount of money in a better system- everyone would have been paying it all along.
And a new young working age person would be paying more, but it's to benefit themselves in the future. So I don't even understand your point.
>And what happens when a recession hits anyways and the tax base takes a hit?
That should be planned for in whatever various ways it's being paid for. You pull in a little more money from taxes than you need to account for a buffer etc. This isn't rocket science.
Because surely nothing could go wrong with depending on government for your financial security. The government doesn’t need more income. Have you seen how the federal government’s budget is allocated?
>Because surely nothing could go wrong with depending on government for your financial security
Yeah because surely nothing could go wrong with having all your money in a volatile market you have no control over..
The government already guarantees social security, what is your point? If you trust the financial markets over the guarantee of the U.S. Government then I can't convince you otherwise.
The government can “guarantee” a lot of stuff. What happens when the government can no longer borrow money and either cuts benefits or starts printing money that leads to inflation?
The idea is basically the same as any insurance system: the bigger the pool of people participating, the more "shocks" can be absorbed without affecting the long term viability. If you have a tiny pension fund for just one person (e.g. your typical 401(k)), if it has invested its value in a way that makes it impossible to fund that person's retirement, then that person is totally screwed.
On the other hand, if you have 300 million people with upcoming retirements spread over a 45 year timeframe all as part of the same pool, the system can absorb short-term catastrophes without affecting the ability to pay people their expected pensions.
But you only get this by having a coordinated, centralized system. You do not get this by having every individual invest in the stock market, because there's no way to shift money from those currently well-ahead of expectations to those currently needing payout. There's also no way to "borrow" from the capital assets in the expectation that over a period of 30 years you'll be able to repay.
All of this was broadly understood in the 1930s-1980s. But then people were mislead to about the benefits of individual investing, of how their 401(k) would pay out more than the company or state pension plan. While that is certainly possible, it is also unlikely, and the side-effect is that the risk exposure to individuals is substantial. The only winner has been the financial services sector, which has made out like bandits on fees/commissions etc from managing these funds that used to be locked away in corporate/state pension organizations.
Given the way state pensions and Social Security are run in fact, the idea of an effective centralized pension scheme can’t be taken for granted.
Centralized lets you move money as you said, but it leaves a major risk that the whole system is left in a bad state by the central manager. Particularly when they can gain stature by overpromising and leaving office before it’s time to deliver. Doubly so when they look at the investment opportunities as an opportunity to exert political control over the economy at large, like CALPERS currently strives to do.
Maybe it goes up because the businesses it represents keep making more money?
And they make more and more money thanks to the exponential forward march of technology, thanks in part to the people on this forum. This has held true through thick and thin from the Industrial Revolution on
The entire system is completely broken. It is literally designed to make the markets keep going up, which as usual benefits the wealthy far more than the average person. And people who are even middle class barely really benefit from it. While the lower class and poor don't benefit at all.
I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half.
Instead of real retirement plans, higher guaranteed social security.. they have shifted nearly all the risk to the individuals and essentially forced them to just put money in the markets which artificially inflate the value of everything. And they just hope the ponzi scheme continues.
But how do you fund higher guaranteed social security? You need more money, which means either higher taxes or more people earning taxable money. The speed of population growth is declining, which is a big problem for the latter, and the former clearly has its limits.
You're saying stocks are a Ponzi scheme, but as a solution you're proposing something that constantly needs more people paying in money or it will collapse... sounds like a Ponzi scheme.
Agree with you. To be sure government and our Corporate overlords have demurred responsibility and put retirement planning on the backs of us clueless workers.
But every other proposal sounds worse or unworkable.
>But how do you fund higher guaranteed social security?
Did we forget we just changed the corporate tax rate from 35% to like 22%?
We stop taxing self employed people social security/medicare after about ~140k.. where many crazy rich people make WAY more than that, so they could continue to contribute a hell of a lot of income.
We have an insanity of tax loopholes.. including long-term capital gains which just incentivize the ponzi scheme further.
>You're saying stocks are a Ponzi scheme, but as a solution you're proposing something that constantly needs more people paying in money or it will collapse... sounds like a Ponzi scheme.
Do you consider current social security a ponzi scheme? All I'm talking is extending it.. tax people more, more money goes in, more money can go out.
I call the markets a ponzi scheme because it's literally fake valuation to a degree. I'm not saying fake as in fraudulent at all- don't get me wrong. But if the entire market valuation is let's say $1 trillion. If the S&P goes up 1% on the day, that entire valuation (and let's say the sum of peoples retirement, even though it's not nearly this simple) goes up $10 billion. Then the market drops 10% and all the sudden people lost $100 billion in retirement.
Money can literally disappear in that kind of system. That's why I call it a ponzi scheme. It only works if people keep making it go up.
I'm honestly not sure you understand what a Ponzi scheme is - it's when people at the bottom have to keep putting more money in to pay out people at the top. As you put it "tax people more, more money goes in, more money can go out." Exactly - you have to keep continually getting money from the people at the bottom (employees) via taxes to pay out to the people at the top (retirees). If you stop getting new money in the bottom, it collapses. If it collapses, people at the bottom get screwed. There is no way for a person at the bottom to make money unless more people come in beneath them.
You're describing fluctuations in the market as making it a Ponzi scheme, and you say "Money can literally disappear in that kind of system." That is incorrect. Money doesn't disappear when stock prices go down - stocks prices change based on people buying and selling. If you buy stock, your money gets transferred to the person selling it. Money doesn't disappear.
> You need more money, which means either higher taxes or more people earning taxable money. The speed of population growth is declining, which is a big problem for the latter, and the former clearly has its limits.
What's worse is that a lot (most?) countries use exactly this model. Mandatory social security contributions are the reason why income tax percentages in many EU countries are so much higher than in the US. Look at https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I4.
You mean “guaranteed social security” by a government that keeps borrowing more money and spending social security funds just as they do regular tax income?
You have a lot more faith in our government than I do.
If you choose not to invest, do you keep all of your money in a savings account that loses value to inflation?
I agree. After saying that the decisions of companies are unpredictable, it comes to me as a surprise to expect that the decisions of governments are predictable. Governments and companies are both organizations, both are run with the purpose of profit, and both can be as unpredictable.
In my country, Argentina, the state manages the retirement funds of the people.
And they have been destroying their savings for decades.
People who worked for 45 years get into retirement to learn that all their savings got destroyed by the inflation. There used to be, alternatively, private systems, but they were nationalized so the state took the retirement funds of all the people who trusted in the privates more than in the state, and now they are giving them pennies. So all that people feels that they were right by not giving their money to the state in first place.
Your retirement system might be flawed, but at least you have the freedom to decide what to do with your own money. And, thanks to that, American people is way more savvy about finances and investment, and how money works.
In my country, the average person knows nothing about basic economy, or even about how to save money. Otherwise, no government would be able to keep a 30% base of the votes despite getting us a 50% of inflation year after year.
> I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half.
If you have money, you need to allocate it in some way - how are you allocating yours in a way that isn't investing, isn't gambling and gives you control over the performance of your assets?
>If you have money, you need to allocate it in some way
Why do you "need" to allocate it? This is my whole point. Everyone acts like "oh my god, I must have my money making more money!"
What the hell do you think 80% of the country who has no substantial assets do? They can't do anything. The whole concept of getting rich off your own money is honestly sickening to me.
>how are you allocating yours in a way that isn't investing
I'm literally not. Even my house, for example.. I don't consider an "investment". Will it probably 'make money' over the long term? I guess (and well, it has substantially over the last few years, but again I had nothing to do with that- simple luck, just like it would be bad luck if it went down substantially). But that's not the point of me having a home.. I have a home as a place to live with my family.
This mentality of everything being an investment and our whole lives revolve around trying to accumulate assets so those assets can make more money... it's just sad.
My point is that not allocating it is not an option. If you have it, it's in something, and that something is an allocation decision that you've made (even if it's cash). You can decide to not participate in the stock market (and that's fine) but then your money will be in cash, in the equity in your house or in anything else you buy with that money. Picking those assets over the stock market is still an investment decision, and that decision comes with its set of risks and potential returns.
>Picking those assets over the stock market is still an investment decision, and that decision comes with its set of risks and potential returns.
I see your point, but I honestly think it's a nuance you say it's an "investment decision" to say keep it in cash instead of the stock market. Am I almost making a decision to keep money in cash instead of beanie babies? Yeah I guess, but that doesn't really change my argument.
Even from your viewpoint, you personally probably feel that you "need" to invest yourmoney to keep making money so they have more money in the future. Most people think that you have to. And hey, they aren't really wrong. The system basically forces you to "invest" in the market because that's the only way you will have any money for retirement.
But that is where I think the system is completely broken. It SHOULD be a choice, but it's not. And it's my entire point, the system was shifted from company retirement/ss to putting ALL the risk on the individual (to hopefully make money in the market) AND they artificially make the market keep going up which benefits wealthy people even more.
And I'll reverse the problem here- I don't think you are "choosing" to invest in the stock market. You are investing in the stock market because by design it's basically the only choice. That is the issue.
The only real solution to this problem is to actually let the real interest rate on certificates of deposits to be 0% and have a small demurrage fee on liquid demand deposits. The point isn't to be evil and make people lose their money, it's to make the market actually work. The positive range of interest rates tells people to save more and since people have a natural tendency to save (e.g. hoarding instincts) regardless of market conditions, politicians have tried to keep the interest rate positive through inflation targeting and fiscal stimulus (government borrowing raises interest rates). This basically means debt keeps growing endlessly since savers are guaranteed profits through loans that shouldn't exist. The negative range of interest rates essentially says that the economy has enough savings and that they should be allocated away from those who have too much (meaning they will be allocated to those who have too little savings, primarily those who are in debt which then reduces total savings and the money supply).
You don't "need" to allocate it. If you don't allocate it though, the buying power of your saved cash will decrease every year from inflation.
You can argue whether low inflation should be a policy goal of the FED in the first place - I believe it should personally, it incentivizes economic growth - but regardless, you have to take the situation as it is. Inflation exists and no amount of wishing will make it go away.
In the face of inflation, what can you do to at the very least preserve the buying power of your cash. If you do nothing, you can watch it wither away.
Currently, there are few viable options that will help you preserve cash; interest rates on savings accounts are 0, CDs are extremely low, bonds are low but starting to move up, etc. The only remaining option is equities (stocks, bonds etc).
> The whole concept of getting rich off your own money is honestly sickening to me.
What do you find sickening about it?
> Even my house, for example.. I don't consider an "investment".
I agree with this mindset. While you can take out a loan with your house as collateral, it's a bad idea to consider your home as an investment IMO. As you say, you ned a home to live in.
But housing that you own that don't live in can absolutely be considered an investment (as an alternative to equities) and this can be far more liquid since you don't need it to live in.
Not everything has to be thought of as an investment though. That's up to you as an individual to decide.
I actually agree. If you asked me 7 years ago I would have wanted to be the winner of the investment treadmill. I.e. I and my children will be living off our investments without having to do any work, while obviously ignoring the fact that other people still have to work and that the money I would earn is obviously only valuable because they are selling their time to me for that money. If everyone started living off investments no work would get done. It's clearly a hierarchical system.
> Instead of real retirement plans, higher guaranteed social security.
This comes out in practice as PAYGO, or "pay as you go". A lot of countries use this model, and it goes bad quickly when tax receipts aren't enough to cover retirement outlays. With poor demographics in almost all large economies, PAYGO plans are going to cause a lot of pain in the next couple of decades.
> They have shifted nearly all the risk to the individual...
The risk comes down to 1. is either the individual, their employer, or the state investing for that individual's retirement and 2. how is that money invested.
The US has more than 150% of its GDP invested in retirement savings. Some of these savings are invested in equities. It has to go somewhere.
>The US has more than 150% of its GDP invested in retirement savings. Some of these savings are invested in equities. It has to go somewhere.
But that's all by design, which is my point.
Let's say from.. I don't know, 50 years ago. Taxes were increased such that social security is 2-3x what it is now. Some level which basically guarantees you have descent money for retirement. Sure you should still save some more over the years, but you won't be completely fucked.
In that situation, there is no way 150% of the GDP would be invested in retirement savings. The social security pot would be massive, instead of inflating the stock market.
Trust me, I get what you are saying.. but that is also my point. It was all designed to do this, and it was designed to benefit the rich- NOT individuals.
Individuals (as a whole) would be FAR better off being able to depended on social security. And I think what's lost here, is we are discussing on HN- a place where most people (myself included) make FAR more than the median income. Like many multiples. I guess that just makes it a foreign concept- but most people in this country can't throw 10-20k a year into retirement funds. That's a massive part of most peoples income. So for the solution to be "hey, no retirement plans and low SS for you.. but don't worry, throw your money into the markets and over time it will be great!" is meaningless when you don't have a high income to begin with.
> Let's say from.. I don't know, 50 years ago. Taxes were increased such that social security is 2-3x what it is now. Some level which basically guarantees you have descent money for retirement. Sure you should still save some more over the years, but you won't be completely fucked.
Social security is, essentially, a de facto PAYGO system*. The issue with PAYGO is that you need a stable ratio of working aged taxpayers to retirees who draw income from the program. This is untenable with current US and OECD demographics, which is why countries that use PAYGO in part or in full are 1. raising retirement ages and 2. transitioning to a mixed model where income replacement comes as much as possible from savings and investments.
> In that situation, there is no way 150% of the GDP would be invested in retirement savings.
Retirement in the US is much more than social security. This figure includes pension plans, 401Ks, and IRAs. It's also a cumulative amount, so the annual input to grow the proverbial pot is significantly less than this.
However, if you were to take the expected outlays from this and, instead, fund them through direct taxes, you're likely looking at an additional 1.2T USD in social security taxes each year, which would more than double the social security tax rate. This looks remarkably similar to how much workers in countries that rely almost entirely on PAYGO programs currently pay. This is also with current demographics - the picture becomes significantly bleaker once you project out several more decades.
> I guess that just makes it a foreign concept- but most people in this country can't throw 10-20k a year into retirement funds. That's a massive part of most peoples income.
Other countries actually do require forced contributions into employer pension or invested retirement accounts. The idea being that, if you start early enough, you only have to contribute an small portion of your salary each year to replace a large percentage of your salary in retirement.
> The social security pot would be massive, instead of inflating the stock market.
Social security funds are actually invested. Government debt is an asset class and, as with everything else, a large amount of demand for an asset class has supply side repercussions. The same applies for private retirement investments. Also keep in mind that only portion of any good retirement plan will be invested in equities, and that pension plans are increasingly turning to alternative investments, such as private equity and real estate.
*The social security "pot" will be insufficient to cover expected outlays in a couple of years, which is why it's better to think of it as a PAYGO program.
Well, the stock market is a very complex PAYGO system in the sense that it doesn't solve the demographic problem at all. You still need young people working in those companies for them to maintain their valuations.
> The entire system is completely broken. It is literally designed to make the markets keep going up, which as usual benefits the wealthy far more than the average person. And people who are even middle class barely really benefit from it. While the lower class and poor don't benefit at all.
Yes and no. Inflation/markets going up is a way to prevent boomers/gen X from sitting on stacks of money hidden away as a rainy day fund. It does benefit newer generation as it allows them to be paid more than their parents and give them access to credit to do stuff like buy houses.
You want markets to keep going up, there is nothing good about deflation.
> I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half.
You need to transition your assets progressively as you get older. If you hit 60 years old and your assets are still only in the S&P500 index then you have failed to diversify and yes, your high-risk portfolio is still high-risk. That's not gambling, that's poor planning. There are securities that can offer a lot more stability, at the cost of smaller overall returns.
> Instead of real retirement plans, higher guaranteed social security.. they have shifted nearly all the risk to the individuals and essentially forced them to just put money in the markets which artificially inflate the value of everything.
I've already addressed this above.
> And they just hope the ponzi scheme continues.
The stock market is not a Ponzi. The profits of the companies are what you are buying when taking a share of said company. It's an overall straightforward understanding. If you don't want to speculate on higher-risk assets such as tech stocks, you can buy banking/industrial/natural resources stocks which usually pay dividend based on their revenues.
Well, the gold standard and any currency modeled after it, e.g. fiat is just a gold standard that can be mined infinitely, it's still expensive permanent money. You have these forced contracts that demand permanence in a world without permanence. It's a ponzi scheme because people age and die but gold doesn't.
Imagine running a ledger, you are owed 50 years of work by person A. Person A dies. You are still owed 50 years by the rest of society. Society just lost 50 years of work because person A died so the rest of society must work harder to honor your ledger. That's where the ponzi scheme originates from. The idea that you are owed something that is no longer in this world.
A gold standard is a ponzi scheme and since modern day fiat is just a stretched gold standard it is a ponzi scheme too.
I would say it adds real legitimacy to that idea. The more people who have their 401ks in the stock market, the more it is true that when the stock market rises, people are doing well.
Also, what alternative do you propose? You need an investment vehicle that can handle enormous sums of money from people who will potentially have no understanding of how it works. That doesn't leave many options.
Further, my 401K allowed for indexes tracking foreign markets, real estate....
I don't doubt that the majority of people exposure to stocks are U.S. markets, to be sure. But perhaps, to that end, the government (Feds) are more likely to respond to collapses in the U.S. Stock market than other forms of investment.
I don't know that I believe it myself, but I'm proposing that maybe the "safe" money is in U.S. Stocks.
> There's something really insidious about tying 401ks and other retirement accounts to the stock market.
Insidious? That’s a bit rich. You can allocate money in your 401k however you want. It’s self-directed. If you don’t like stocks keep it in bonds or cash.
> If you don’t like stocks keep it in bonds or cash.
This is disingenuous advice considering all financial vehicles for savers have been gutted. You can't even hedge inflation without the stock market (or real estate, if you can afford the buy-in).
The shortest maturing TIPS is 5 years. While you can sell your TIPS early, it has to be through the secondary market. And that involves transferring your TIPS to a 3rd party broker (and fees). I can't imagine its worth the trouble unless you need to get out of a 10 or 30 year TIPS. TIPS doesn't compare at all to a personal savings account.
First, my whole point is to stay out of the markets. Your suggestion to buy VIPSX is the exact opposite.
Second, go compare the past year of VIPSX vs inflation you'll see that VIPSX is shit. Inflation has steadily increased by 5%, but VIPSX has been all over the place (it was actually down 2% last month) and is currently only up 1%. This is, again, not what normal people need.
1. There's no way to hedge against inflation (you didn't know TIPS existed)
2. Having learned about TIPS you assert they're illiquid and can't be traded easily (you didn't know about TIPS funds)
3. Having learnt about TIPS funds you don't the recent returns of a specific fund (you don't know that TIPS adjustments lag reported inflation numbers)
You conveniently ignored this part of my first sentence: "...all financial vehicles for savers have been gutted." The line about hedging inflation was just a supporting detail for my main idea.
And your assertion that TIPS funds lags inflation doesn't hold water. Again, go compare the past year of inflation vs VIPSX. They don't track. By simply being a market traded product, a TIPS fund has speculation built into the price. Which, I'm arguing, is against the best interest of the average person just trying to save for their future.
> This is disingenuous advice considering all financial vehicles for savers have been gutted.
When you say "all financial vehicles for savers", you're really just referring to liquid savings products tied to the federal funds rate, right? Of course when the government stops handing out money to savings account holders, savings account holders will no longer be making money.
Corporate bonds are an alternative way to earn some interest in a low-rate environment without owning stocks.
Also, REITs are an affordable way to gain exposure to real estate without a minimum buy-in. For people who need real estate exposure but can't afford to buy a whole building, they are really underrated.
Finally, the market is pricing in several rate hikes this year, so your savings account interest rate may actually be revived soon anyways.
Yes, I am kinda referring to liquid savings products. But it doesn't have to be just that. I think people need simple products that aren't tied to all the shenanigans that go down on wall street. Which is really nothing right now; not even real estate. Someone mentioned TIPS below, but its kinda complicated and not very liquid (5 year maturity, secondary market).
I've been watching the rate hikes. The cynic in me says borrowing rates will rise, but consumer savings rates will not rise in step, nor will housing prices fall accordingly. But I guess we'll see.
US savings accounts is a very competitive industry that's traditionally been very responsive to underlying rates changes. All it takes is for a single bank to decide to raise their consumer rates in response to the rates they're turning around and getting from the fed (more accurately the inter-bank lending rates, but the fed has tight control over that market).
I agree that it would be great to add more simple savings products, but you have to ask the question of where the yield will come from. If yields don't come from the fed (dictating inter-bank lending rates), and they don't come from the private sector (wall st), then where else can yields come from? What novel yield stream could a new savings product be built on?
At the end of the day, people wake up and go to their jobs to produce things, and every penny you earn in value in a savings account (past inflation) has to ultimately come from them, but not until it filters through the wall st machine.
Well, savings have risen exponentially for a century. Maybe it's time for that to stop? I mean think about all the people that would have to be in debt for you to have savings. The economy clearly has too much debt and therefore too much savings.
If this is driven by demographics, e.g. old people saving for retirement while there are no young people willing to provide for them when they are old, then really the problem isn't the fact that the bank doesn't want to lie to you any longer (the bank is currently lying btw), it's the fact that nobody will be there to take care of you.
Most 401(k)s have around 20 options at most (of which half or more will be target date funds). My current employer's 401(k) steals $4.33/month from my account for management fees which is on top of the management fees for the individual funds' management fees.
And what about the other half? Probably options with fewer or no stocks. You can also do in-service rollover to an IRA somewhere else with more options and no custodial fees.
I don't know that I've ever had the option of an in-service rollover. I googled it and saw:
> According to the Profit Sharing Council of America (PSCA), up to 77% of 401K plans include a provision for in-service 401K rollovers. Many of these only allow plan rollovers when a worker reaches a triggering event such as reaching retirement age, disability, plan termination or reaching the age of 59 ½ years.
So even many of those who are in the 77% who have in-service rollovers available don't qualify for them.
It was super annoying when I returned to the UK with my dual UK/US wife and we couldn't invest in the same passive funds (or rather, we could, but at punitive tax rates) because US seems to like their citizens wherever they live in the world to invest in the US.
Nice bit of protectionism you got there.
Fair enough for the Maniforts/Bidens of the world wheeling and dealing on a global stage. Less fair for those of without spare thousands to burn on financial advisors.
> It was super annoying when I returned to the UK with my dual UK/US wife and we couldn't invest in the same passive funds (or rather, we could, but at punitive tax rates) because US seems to like their citizens wherever they live in the world to invest in the US.
I guess you're talking about PFIC. Are you also a US citizen? If not, iirc your wife is allowed to gift you 164K USD a year, which you can then use to invest however you see fit.
If you somehow still have access to a US broker, as far as I'm aware you're allowed to purchase and own US ETFs through them. PFIC only applies to non-US domiciled funds.
Much (but not all) of US economic activity occurs at publicly traded US corporations. Even tax revenues are reasonably well correlated to their success. A major exception is real estate, but if you own a home, then you are implicitly basing part of your retirement on that ownership already.
So what else would you base a retirement based upon? Empty promises from politicians whose have no incentive to deliver on them because their term ends long before these promises are fulfilled? We have that in the public sector already, that's why there's dozens of pension crises looming, from Sacramento to Boston and half the states in between. We also have that to a limited extent with Social Security, which is likewise heading for a major shortfall. And nobody really actually likes Social Security — I mean, they may be in favor of it existing, but everyone who can afford it has a private pension with a lot of holdings in the stock market, to supplement Social Security, and cover its shortcomings, and no one would trade that for more Social Security, because it would mean they end up with a lot less in the end.
And how do you think social security works? You either have a prefunded model, which has to still invest in something (ie. stocks), or a pay as you go model, which is essentially taking money from our children to fund our retirement.
There's always been paranoia around what you say, but now I believe it's probably propaganda by the pension fund industry. With pensions it was still tied to the stock market (but sometimes including non-public investments) but was more open to outright corruption, as a fund could just choose to invest in some bunk asset as a way of giving away all the money.
Incidentally, I'm currently reading/researching on financialization and came across this short, well accessible paper[1] on the topic. It shows how 401(k) and such retirement funds played a big role in fuelling the financialization activities.
The paper title is "Fueling Financialization: The Economic Consequences of Funded Pensions"
The author uses Buffets essay to justify value investing over index funds, but Buffet is a strong proponent of index funds for non professional investors.
Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.”
He’s even putting 90% of his own estate into index funds.
Maybe from 10,000 feet. Buffett only invests in certain kinds of companies (those within his "circle of competence"), so you only get so much diversity.
Also, because Berkshire is a conglomerate, businesses which generate large amounts of cash (e.g., insurance float, or businesses that would pay dividends if they were a stand-alone companies) can be used to fund capital-intensive businesses (railroads, energy companies, etc.) without paying taxes to move the money from business A to business B, because they're all owned by the same legal entity. Don't underestimate the power of this effect. It is not possible to achieve with an index fund.
What will Buffett not invest in today? He used to have a tight circle of competence, but if you look at his portfolio today, you'll see financials, energy companies (of various types), technology, healthcare, industrials, consumer (staples and discretionary), media, telco. And then his guys invest even wider.
You made me think. The weights of e.g. the SP500 are not ideal then.
Berkshire is in the SP500, but so are Apple, Coca Cola, Amex, BoA, etc. which are Berkshire largest investments. So if Coca Cola has an idiosyncratic hit, then you get hit twice by it: first in your KO holdings, then in your BRK.A holdings.
At the extreme, if there is a company that then invests in Berkshire and so on, you could end up overweighting a lot certain firms. Also, isn't there double counting in terms of the stock market cap?
> So if Coca Cola has an idiosyncratic hit, then you get hit twice by it
I think that is neglibile, depending on how big you define a hit. If Burger King gets hit, that will probably effect Coca Cola as the largest supplier (just saying it like that, don't know if they really have that kind of business with each other), too.
There's lots of dependency in the modern world, I don't think it really matters.
edit: If Coca Cola does well, you profit twice. Maybe see it that way... ;-)
It might be if your investment strategy was to allocate equal amounts to each sector, but that's not how most passive funds work. Instead, they allocate based on market-cap weighted basis, which means there's no double-count going on.
No. The S&P 500, like most other market-cap-weighted indexes, uses float-adjusted market cap, meaning that they exclude shares owned by other public companies when computing the weightings. So the fact that BRK.A owns shares in other companies in the index is accounted for; you don't get double counting, and so your exposure is not inflated.
The S&P considers the shares of Coke held by Berkshire to be excluded from the float. S&P's float adjustment methodology is described here [1]:
"Float adjustment excludes shares that are closely held by control groups, other publicly traded companies, government agencies, or other long-term strategic shareholders."
> The author uses Buffets essay to justify value investing
Those using Buffet's name should also look at the time and effort Buffet puts in to pick stocks. He sifts through reams of reports, cash flow statements and what not. And to top it up you need deep pockets and emotional wherewithal to not blink when your value investment bets are not doing well.
"Value investment" sounds cool but is not for a typical retail investor. As you rightly pointed out retail investors are best served picking up an index fund or 2-3 mutual funds if they are seeking to diversify.
Plus Buffet gets deals that no one else would ever be offered. The benefit is huge signal value from his investment that none of us can provide, and companies pay for that with way better terms. This value gets priced in BH shares and the circle continues.
Reading the Intelligent Investor, it is striking to see how many stocks there were with a P/E ratio under 15 and with sound financials and that paid good dividends, I.e. a value stock, in the 1950s, when the book was written. If you try to apply the value investing principles today, you will end up spending an inordinate amount of time looking for a stock like this. The risk of an index fund is less than the amount of dedicated time you would need to spend to practice value investing.
In his last published interview even Graham himself said you probably shouldn't bother with Graham (and Dodd):
>> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
> No, it's the same. Dividends add into your adjusted gross income.
Qualified dividends (most dividends for most people from public US companies) are indeed taxed at a lower rate than income. That rate is 0% for up to $41k (single) or $83k (married filing jointly), and for almost everyone it will be lower than the marginal rate on income [0].
It goes into AGI on the tax form, but comes off again with the recalculation. If you have significant dividend income, you are missing out by not doing that calculation!
The part of the argument made by looking at individual countries is much less compelling in a world where low cost total world stock etfs exist.
They are of course weighted heavily to the US just given the size of US stocks, but one can reduce that exposure by buying low cost regional etfs or even just total world ex-US.
That seems like a better risk averse approach (possibly with some allocation to a total bond etf depending on your time horizon) than trying to pick individual value stocks.
Michael Burry has two main points against index funds: 1) large-scale passive investing has deteriorated the price discovery mechanism for index funds and 2) there's a liquidity risk because trillions of dollars are linked to stocks in index funds that only have hundreds of millions of trade volume. So if there's a cascading failure, as smarter money realizes the price is wrong and begins to exit, there will be no buyers and the majority of index fund holders will be holding the bag.
A common theme that keeps popping up in this thread. People pointing out that index funds have downsides, then going silent on what's better. Heck, up thread a ways someone even said they just don't invest. Wait, what? That's the better alternative?
Suggesting alternate investments is a separate issue than a critique of index funds. Of course people will be reluctant to offer financial advice. But the author of the article is advocating for value stocks.
A more interesting argument was made by the "inventor" of index funds - Bogle (paraphrased) [1]:
Companies are no longer "owned" by people who feel ownership in the company (with some few exceptions) - they are "owned" by funds and therefore by "managers" who do not care about anything but keeping their manager job going.
When Ford is majority owned by the Ford family, the company can act the way the family wants it to act - but when it's majority owned by small investors and random funds there's no "main owner" who can make decisions against the common grain.
1. Price discovery happens at the edges. You only need a few folks out there making trades for it to happen. Further, if prices do become out of whack with reality, hot shots (or people who perceive themselves as hot shots) will go in to take advantage of the spread.
2. The last few episodes of market drama have shown few outflows out of index funds, and probably general net inflows. The folks using them are generally doing a set-and-forget strategy and won't be looking at headlines too much. Certainly less than the average gamified Robinhood account.
1) is only true if the average active investor that switches to index funds is better informed than the average active investor. If a less informed investor switches from active to passive, then price discovery is improved.
2) is only an issue if the underlying assets don't have any value or you need to sell at the worst possible moment. ETFs generally improve the liquidity of in a liquidity crisis.
> In summary, what I’m arguing is that the risks to buying an entire index are underappreciated, and that is possible to look at the financials of a company and see if they’re reasonably priced. I personally sleep better with a portfolio of companies that I think are intrinsically worth what I paid for them.
Yes, you and every other analyst out there. I'm curious to why the author thinks they have some extra informational edge over everyone else with a spreadsheet that allows him to find deals that seem to be invisible to everyone. Hedge funds are using real-time satellite imagery to try to get an edge over other market participants:
When the author does a buy or sell on a particular stock, why does he think he's getting the better end of the transaction?
Further the author brings up Graham and Dodd, which is now called value investing. While Fama and French show that there's still some premium to it (as mentioned in the article), in his last published interview Graham himself said:
>> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
I ran across an interesting observation by Nick Maggiulli about investing feedback loops:
> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about.
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?*
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
> And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even...
Article was structured a little weird (with the headings) and either proposed nothing as an alternative or was saying Value Investing is the better route.
This is kind of my beef in general, where does a normal family park cash?
Value Investing isn’t exactly easy.
I used to be big into FI/RE, but as I get older I am realizing cash flow is better (maximize your dollars in as easy and as stable as possible). Is more sustainable long-term than giant index fund nest egg… if I could choose.
Do you mean a timing mindset, where you hold cash until a market index drops a preset amount, and then immediately dump all cash into it, and if it rises a preset amount, you immediately sell all of it?
What would those presets be? Could you model this and see how that performs traditionally?
That requires hindsight. The market is frequently irrational, you'd have to know what direction it goes next. Think it's going to stop growing because it just spiked upwards? Think again, it may keep going. Think it's going to keep going because that's the trend up to now? Probably not, it'll drop like a rock for no particular reason.
I took a fun little class once on algorithmically playing the stock market. The take away lesson was that the main public stock markets have so many players, many of which are algorithmically driven, that there's nothing left for easy picking. It's basically noise. Best advice? Go play the algorithm game in smaller markets that don't have as many sophisticated players in them. E.g. some smaller betting markets, things like that. And only with play money, but your retirement money in an index fund ;-).
When I've read Graham's book or learned about value investing, I always hit a wall where I realize I'm just not willing to put in the vast amount of time it takes to research companies, scour financials and do a proper job of it. I've already got a career, I don't need a second.
Plus I'm not sure how much value I contribute to the world by spending all day picking the stocks that will make me the richest.
One can buy alternative indexes that prioritize value factors. Vanguard, Schwab, and other large brokerages offer these products. See, for example, VTV which uses a multi-factor weighting scheme to try to find stocks that are “cheap” or FNDX which weights based on debt-adjusted free cashflows.
I think the title should say “too risk-averse for market-cap weighted index investing”
On the one hand, it seems reasonable that you could do better than average by doing some value investing. On the other hand, if you had done that, you'd have missed out on the big gains in Gamestop and AMC. Would you do better by constructing a portfolio that excludes them, now we know they're meme stocks? Maybe, but they're not that big, so any gains you get by excluding them are going to be minimal. And now they have enough money to diversify and perhaps turn things around and justify their value. Better to just buy the index.
All the indices he is comparing the USA to (Japan, France, etc...) are not total return index. The S&P500 is total return (includes reinvesting the dividends). If you take the total return version of those indices, they also look exponential (but with less return than the US). So I'm not sure his point stands.
1. Invest your money. Ownership is important. Owning a private business might be best, but the public market is less work.
2. Think about how much time you want to spend on anything more complicated than stocks and cash. Three-fund portfolio? Individual stocks? Which ones? Compare the opportunity cost of you spending that time compared to something else.
3. Read https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3805927 from last year [1], and realize that a 25 year old book was based on bad data. It might be true that stocks outperform bonds right now, but that's not the whole history. It also seems to confirm that all correlations go towards 1 in crises.
I'm at (3). Not sure what (4) is, but I'm sure (5) is "Profit!!!"
If you're a coding nerd this way of thinking will naturally lead you to some sort of statistical arbitrage. Break out you favorite ML framework, get some data from somewhere, and try to test the hypotheses about whether one or another trading strategy works.
I went down this rabbithole a long time ago and I'm still in the cave.
So there's two things I don't really understand this article. Firstly, what is the difference between you "value investing" your own money, and sticking your money in a hedge fund which does "value investing" for you? Other than the fact that you're doing this in your spare time whilst the hedge fund manager is doing it full time. Surely what this article is basically saying is "89% of hedge funds underperform the index, but I think I've got a way to beat the index" when in reality, he's just taking the bad side of the bet.
The second thing is, that the author points to 89% of funds underperforming the S&P500. But in that same paper, there is another shocking statistic - 97% of large cap value investing funds lagged the S&P500 Value Index. So surely, if you what you believe in is value investing, that doesn't prevent you from using a passive index, it just means you should choose the value indexes[1], not that you should suddenly put on your boldest pin stripe suit and start picking stocks.
1) Management fees. A fund will usually get ~1% as a management fee. That means that if their allocation strategy gives return of 5%, you will see a return of 4%. Index funds have really low fees (<0.2%) so they don't have to perform as much as an actively managed fund to give better returns.
You can think of it as moving your average return up by 0.8%, that's very significant, especially when you consider that on average funds don't beat the market.
2) Correct, the article is either written by someone with a lot of time to pick stock and do due diligences or someone who convinced himself that their "gut feel" can beat the market. Either way historically those takes are not great.
EDIT: One thing I didn't add. Funds still have a good reason to exist, and that is risk management. Not all financial products want to replicate the SP500 index. You don't want your retirement fund to drop ~25% during a pandemic. That's where funds will shine. They can get you the right mix of bonds, banks and natural resources to stabilize your portfolio to +-4% every year. Some index funds do offer something similar (XCNS, XBAL) but it can still be worth having something actively managed.
On top of the management fee (which typically is around 2%, they also will take a large percentage of any returns they generate on your behalf (10% - 20%).
So if they earn $x of return, you only keep .8 * x.
This is the typical 2 and 20 quote. Sometimes it may be 1.5 and 15 or even 1 and 10 but that's the typical range.
Many funds don't try to track the s&p index. For most people the index is a better benchmark and most funds are automatically wrong, but that doesn't mean the fund itself is at fault for not meeting your goals.
In the first case, I agree. One can cherry pick past data and find some basket of stocks that outperforms the market. But in practice the funds that do this tend to underperform, so it seems like something that is unlikely to be successful in practice.
The second point is more interesting. The author is arguing the current simple heuristic for "value indexes" is over-inclusive. He cite two specific classes of stock for this: cyclical stocks (like gun manufacturers) and those in long-term decline (like malls). If the author is right, there probably is a way to revise these indexing heuristics (still not specific stock picking). I think the smart-beta wave a few year back tried some things like this.
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[ 7.0 ms ] story [ 267 ms ] thread* https://seekingalpha.com/article/4423498-berkshire-hathaway-...
Note: price only comparison. S&P 500 funds generally give dividends (which can be re-invested). The (very) recent pull back has evened things out a bit:
> Over the past year, Berkshire is up 33%, double the gain in the S&P 500. The stock is now ahead of the S&P 500 over the past 10 years, 15.4% annualized versus 14.5% for the index, but still behind in the past five years, 13.3% annualized against 14.9% for the index.
* https://www.barrons.com/articles/warren-buffetts-berkshire-h...
Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
> Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
Agreed. I hope to not be very invested in the stock market when I only have 10 years of work left. Seems too risky.
Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.
1. Find the mean of the data points
2. Calculate the difference between each data value and the mean (variance)
3. Square those variances
4. Add the squared variances together
5. Divide the sum of the squared variations by the number of data values
If what the FA says was true everyone would be doing this "value investing". It's about how you balance risk vs benefits.
One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase.
Ultimately, investing boils down to finding something where you're comfortable. 401k investing makes people comfortable because of all the pre-tax benefits. Even if you make bad picks, you're still making the percentage of income tax every single time.
A lot of people invest directly in real estate or franchise businesses. Others in big, safe, dividend payers. Some people buy timber land.
IMO it's just going to be comfort level and experience.
Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day.
Most people can’t afford to max out their retirement plans. After you do that, then a fiduciary advisor might come in handy.
It’s tough to draw the line in a conversation like this because I completely agree with everything you said.
An advisor only comes in at the point that a person is investing their money directly and consistently. Your average person doesn’t have the market knowledge or the time to learn it so an advisor is likely the best bet for the average person in that scenario.
Anyone willing to do some research and learn will likely find their own comfort zone without an advisor.
401(k): $61,000 (under 50 years old), $67,500 (50 and older) each This is the 2022 tax year limit for all contributions, including effective deferral ($20,500 or $27,000 for 50+) plus employer matches and any post-tax contributions.
IRA: $6,000 each Either Roth or traditional. Both are tax advantaged.
HSA (family): $7,300 (under 55 years old), $8,300 (50 and older) These funds are triple tax advantaged when used for medical expenses.
Then you can get into treasury bonds, where interest is exempt from state and local taxes. For example a Series-I bond, which are protected from inflation (current rate is 7.12%): You can purchase a maximum of $10,000 worth of these a year.
So, just with a few tools, a family of two over 55 years old can invest up to $175,300 in highly tax-advantaged investments. A family of two under 50 can invest up to $161,300. How many families actually have enough money laying around to contribute even close to that?
If you've exhausted all that and still have money left over to invest, then you can start thinking about opening a taxable account at a brokerage and finding a fiduciary advisor.
> For example a Series-I bond ... current rate is 7.12%
Entirely from the variable part-- their fixed rate is 0% right now, and since the interest is taxed when you close the bond, this is an investment that is guaranteed to under-perform inflation (even if you don't believe their variable rate systematically understates real inflation).
I would personally argue you shouldn't be touching regular taxable investments like buying individual stocks or ETFs until you've literally maxxed out every tax-deferred options, but that's a more controversial opinion over which reasonable people can disagree.
- I-bonds up to the amount needed for an “unemployment fund”
- max out my 401K
- max out the company managed “after tax 401K”
- max out the HSA and use after tax dollars to pay medical expenses
That takes me to $42K before I turn 50 in a couple of years.
Series I bonds by definition only keep you level with inflation. Which doesn’t help if house prices, rent and healthcare continue to outpace inflation.
L
You can also use an in-service distribution to move after-tax 401(k) contributions into your Roth IRA, the so-called Mega Backdoor Roth [2].
You need pretty high income and (for #2) a cooperating employer to make these work, but they're options for people who want to save even more tax-deferred. The proposed Build-Back-Better Act this year effectively removes [3] both 1 and 2, (so much for Biden's promise to not raise taxes for people making less than $400K) so this might be the last year to be able to do this.
1: https://www.nerdwallet.com/article/investing/backdoor-roth-i...
2: https://www.nerdwallet.com/article/investing/mega-backdoor-r...
3: https://www.asppa.org/news/crs-highlights-budget-bill’s-impa...
Most companies don’t let you do that directly. Mine allows “after tax contributions” up to 10% of base. Not to be confused with a Roth 401K.
I've known more than one person with an advisor that shuffled them into opportunities that made money for the advisor or had complicated stories so that it sounded like the advisor was providing value-- and as a result massively underperformed the market.
The best advice for the average investor is extremely simple... and not worth paying a lot to receive since you can get it for free from bogleheads. As a result there are a lot of free or cheap advisors that make their money from customers in other ways ... and not necessarily to the customer's benefit.
So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).
The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta.
I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model
Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the peak of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now.
I think it is easy to dismiss indices in a bear situation. When in doubt, zoom out and relax.
It should be noted that the NASDAQ is heavily skewed to one particular sector, and so less diversified. Going for the S&P 500, US Total Market (Russell 3000), or world index would spread the risk around more.
Even investing only at market peaks, as long as you didn't panic and sell, would still give results most people would find satisfactory:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of value and quality investement style.
I work for a Fintech startup. We are working on a tool to do quantitative fund analysis.
Yes, I know that plenty of our words today evolved out of mistakes, solecisms, misspellings, etc. But that doesn't mean we shouldn't at least try to be kind-of correct.
This is literally the worst misuse of the language.
(This is a joke about the way the word literally has evolved, badly)
How do you feel about the words "really" and "very"?
I never really understood this fad of harping on the metaphorical usage of "literally" - it's hardly a new development:
> The use of literally in a fashion that is hyperbolic or metaphoric is not new—evidence of this use dates back to 1769.
https://www.merriam-webster.com/words-at-play/misuse-of-lite...
As the article you quoted says, it's "hyperbolic" and "metaphorical", not solecistic.
For example, value stocks tend to be contrarian plays. The stock is a good value because the price is down, meaning the majority don't have faith in it. Fund managers don't want to be holding these stocks when others are crushing it because people will look at their holdings and have FOMO. When, say, tech is flying high, people want to see that their fund manager owns tech.
Another example is leverage limits may incentivize fund managers into high-beta stocks. These are the one's that are most likely to win (or lose) by a large margin compared to the market. Over-optimism bias makes fund managers think they can disproportionately pick the winners.
(Fun fact I've heard, funds beat the indices before expenses but fail after expenses ...)
Once you're in top half of that 11% who consistently beat the market that way even if by luck, survivorship bias will have customers beating a path to your door. Nobody remembers the 89%.
More saliently, (1) it’s hard to identify value stocks and (2) the time frames he was looking at are not that long. I feel fairly confident that markets will be way up in 50 years if for no reason other than technological progress
Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).
You just won’t see the tax withholdings on your statement because it shows up on theirs.
Also I keep money in index funds even if I don't plan on using that money for retirement. (e.g. downpayment on a house, saving for another large purchase, financial buffer, etc.) I also keep money in index funds that are in regular brokerage accounts because 401k + backdoor roth ira isn't sufficient for retirement if you make $200k+/yr. (True for even lower amounts too but whatever)
I wish.
But no, dividends are taxed:
https://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/...
What you probably miss is that dividend tax for non substantial holdings (less than 5% of the total stock) is withheld before being paid out.
Pension funds, ISAs in the UK, etc etc; most countries have something similar. The vast majority of individual savers will not exceed the limits placed on these accounts.
I wouldn’t be surprised if US retirement savers have the same issue.
While dividends from the etf are tax-free in a retirement savings, the dividends from the euro company are first paid to the etf, and the euro company still does tax withholding. From their point of view, they’re not paying out to a retirement fund.
That depends of the index. The DAX, for example, has two versions: The performance index, which is usually quoted, includes dividends, the price index does not.
I don't think it changes his conclusions much, the indices can easily fluctuate by more than what you bank in dividends.
Sorry, but I must point out that if you have access to Bloomberg terminal then it almost certainly implies that your full time job is market research & investment. A Bloomberg terminal costs between $20K - $24K per year.
I’ve assumed that it’s actually just software these days but it turns out that it also requires a specialized keyboard (which includes biometric authorization based on my quick skim of the webpage). It’s apparently $2000/month which is probably reasonable for those who need it and also a clear indication that I don't need it.
The core functionality — trading, charts, financial data, news — that the Bloomberg terminal provides traders is also available from places like Schwab (StreetSmart), TD America (ThinkOrSwim), and so on, but the Bloomberg terminal is just a lot more stuff.
Interestingly, one of the things that apparently add the most value (and which competitors struggle to disrupt) is the social networking built in that allows traders to chat and gossip with each.
[1] https://youtu.be/2ee-x6IXWK8
We should be taxing people more, and guaranteeing much higher social security so we don't have to gamble our savings in a giant ponzi scheme. It shouldn't be on the individual to be lucky that a massive recession doesn't hit when they want to retire.. or depend on the market making a few percent a year just to survive.
Your 401k depends way more on people continuing to inflate it upwards. And you have ZERO guarantee, anything can happen.
At least social security is a government backed program, and they can ALWAYS find more money. Maybe it's the best solution at the time, but they can. They can raise taxes, borrow, simply print more money. And don't nitpick these points, because yes I understand there are issues and it's more complicated.. but they can do it.
How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Even just increase the standard tax on people. If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
There are a billion ways to do this. I am not an expert, but I'm not clueless either. Plenty of other countries tax more and provide guarantees to the people. This country wants to make it seem like everything is a "choice" but it's completely to benefit the rich. "Oh I get to choose my healthcare and how much risk I want to take that I have to pay this year, great!" "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
No argument there.
> How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
Why limit this to self employed people? The cap is there for all workers. And self employed people pay double the tax - if you are not self employed, your employer is paying half of it. Self employed people already have a larger burden.
> How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Because then people won't invest in ... much. My guess is the majority of current investments that are profitable would no longer be if taxed as regular income.
That then means many businesses will stop existing since people will not invest in them.
> If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
Definitely. Even though it likely is a good solution.
The real problem is that the US government, by law, is not allowed to keep the excess SS funds they collect in an "SS bucket". If the SS payouts are less than SS tax collected, the excess is required to be spent elsewhere. We've lost decades of excess SS collections because of this.
> There are a billion ways to do this. I am not an expert, but I'm not clueless either.
The CBO exists to do such calculations. Increasing SS/Medicare tends to work. Removing incentives to invest, however, is disastrous.
> "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
There's a disconnect between saying "long term capital gains benefit the rich" and "investments are bad because I have zero control over the outcome." The latter statement is as true for you as it is for rich people. If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
I know, I am self employed. I didn't think there was the same cap for all workers? If there is, then I agree it should be removed (or at least substantially increased).
>Because then people won't invest in ... much
Yes they will. There are always people who still want to make more money.
>If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
And look.. the LT capital gains is not my first go to exactly.. but, I do think it's far too low and again it's something that just disproportionately advantages the rich.
Honestly that's my whole point on the investing front. This entire system was created to benefit people who already have lots of capital. My view is hoarding capital to make more capital should not be the goal of life.. but greed knows no bounds.
"There are always people" is a very different statement from "most people who invest will continue to".
Any time you lower taxes, you significantly increase investment opportunities because suddenly many unprofitable investments suddenly become profitable. In the investment circles I'm in, most people invest in things that perform lower than the S&P 500 because these are both safer, and more profitable due to the tax benefits. Remove the tax incentives, and easily 90% of the folks I know would pull out.
> I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
It's not the "default" way. You can choose not to put in any money in 401Ks and go to more traditional approaches - things like real estate and other businesses where you have much more control over the outcomes. You can even use IRA money to do this, as well as some 401K plans.
And then you'll find out you're more likely better off with the "traditional" investing.
BTW, raising SS tax to 10% to double the returns - it's still not enough. The estimate is that SS will fund only a quarter of the expenses for most retirees. Doubling the returns means it will fund only half of their expenses.
> This entire system was created to benefit people who already have lots of capital.
This should not come as a surprise. There's a reason it's called "capitalism". For pretty much forever, the system in the US benefited those with capital, and the path to riches is to find a way to acquire some capital to let it grow. Being well off just by virtue of an salary is a fairly recent trend, and always has taken the back seat with respect to capital based investments, and always will in the US. It took a while for me to realize this (in retrospect) obvious aspect of the US economy. I can whine about it and try to change the collective psyche of a whole country, or I can find another place to live, or I can make compromises and put more focus in acquiring capital.
What you're saying is young working age people should pay for those who didn't save for retirement? And what happens when a recession hits anyways and the tax base takes a hit?
Nice way to twist my words. If the system worked like I'm describing from the beginning, you wouldn't even be able to say that. Because you wouldn't need to save a substantial amount of money in a better system- everyone would have been paying it all along.
And a new young working age person would be paying more, but it's to benefit themselves in the future. So I don't even understand your point.
>And what happens when a recession hits anyways and the tax base takes a hit?
That should be planned for in whatever various ways it's being paid for. You pull in a little more money from taxes than you need to account for a buffer etc. This isn't rocket science.
I am pointing out the consequences of what you're suggesting.
> If the system worked like I'm describing from the beginning
I thought we were discussing the real world as it exists, not Narnia.
> You pull in a little more money from taxes
Even more taxes! Does it ever end?
Yeah because surely nothing could go wrong with having all your money in a volatile market you have no control over..
The government already guarantees social security, what is your point? If you trust the financial markets over the guarantee of the U.S. Government then I can't convince you otherwise.
We have already seen that in other countries.
The idea is basically the same as any insurance system: the bigger the pool of people participating, the more "shocks" can be absorbed without affecting the long term viability. If you have a tiny pension fund for just one person (e.g. your typical 401(k)), if it has invested its value in a way that makes it impossible to fund that person's retirement, then that person is totally screwed.
On the other hand, if you have 300 million people with upcoming retirements spread over a 45 year timeframe all as part of the same pool, the system can absorb short-term catastrophes without affecting the ability to pay people their expected pensions.
But you only get this by having a coordinated, centralized system. You do not get this by having every individual invest in the stock market, because there's no way to shift money from those currently well-ahead of expectations to those currently needing payout. There's also no way to "borrow" from the capital assets in the expectation that over a period of 30 years you'll be able to repay.
All of this was broadly understood in the 1930s-1980s. But then people were mislead to about the benefits of individual investing, of how their 401(k) would pay out more than the company or state pension plan. While that is certainly possible, it is also unlikely, and the side-effect is that the risk exposure to individuals is substantial. The only winner has been the financial services sector, which has made out like bandits on fees/commissions etc from managing these funds that used to be locked away in corporate/state pension organizations.
Centralized lets you move money as you said, but it leaves a major risk that the whole system is left in a bad state by the central manager. Particularly when they can gain stature by overpromising and leaving office before it’s time to deliver. Doubly so when they look at the investment opportunities as an opportunity to exert political control over the economy at large, like CALPERS currently strives to do.
The stock market doesnt keep going up because of the economy. It does so because of politics.
And they make more and more money thanks to the exponential forward march of technology, thanks in part to the people on this forum. This has held true through thick and thin from the Industrial Revolution on
That cheap labour isn’t so cheap anymore either, all those Eastern sweatshops are starting to compete for workers, driving wages up
The entire system is completely broken. It is literally designed to make the markets keep going up, which as usual benefits the wealthy far more than the average person. And people who are even middle class barely really benefit from it. While the lower class and poor don't benefit at all.
I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half.
Instead of real retirement plans, higher guaranteed social security.. they have shifted nearly all the risk to the individuals and essentially forced them to just put money in the markets which artificially inflate the value of everything. And they just hope the ponzi scheme continues.
You're saying stocks are a Ponzi scheme, but as a solution you're proposing something that constantly needs more people paying in money or it will collapse... sounds like a Ponzi scheme.
But every other proposal sounds worse or unworkable.
Did we forget we just changed the corporate tax rate from 35% to like 22%?
We stop taxing self employed people social security/medicare after about ~140k.. where many crazy rich people make WAY more than that, so they could continue to contribute a hell of a lot of income.
We have an insanity of tax loopholes.. including long-term capital gains which just incentivize the ponzi scheme further.
>You're saying stocks are a Ponzi scheme, but as a solution you're proposing something that constantly needs more people paying in money or it will collapse... sounds like a Ponzi scheme.
Do you consider current social security a ponzi scheme? All I'm talking is extending it.. tax people more, more money goes in, more money can go out.
I call the markets a ponzi scheme because it's literally fake valuation to a degree. I'm not saying fake as in fraudulent at all- don't get me wrong. But if the entire market valuation is let's say $1 trillion. If the S&P goes up 1% on the day, that entire valuation (and let's say the sum of peoples retirement, even though it's not nearly this simple) goes up $10 billion. Then the market drops 10% and all the sudden people lost $100 billion in retirement.
Money can literally disappear in that kind of system. That's why I call it a ponzi scheme. It only works if people keep making it go up.
Social security doesn't work like that.
You're describing fluctuations in the market as making it a Ponzi scheme, and you say "Money can literally disappear in that kind of system." That is incorrect. Money doesn't disappear when stock prices go down - stocks prices change based on people buying and selling. If you buy stock, your money gets transferred to the person selling it. Money doesn't disappear.
What's worse is that a lot (most?) countries use exactly this model. Mandatory social security contributions are the reason why income tax percentages in many EU countries are so much higher than in the US. Look at https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I4.
You have a lot more faith in our government than I do.
If you choose not to invest, do you keep all of your money in a savings account that loses value to inflation?
In my country, Argentina, the state manages the retirement funds of the people. And they have been destroying their savings for decades.
People who worked for 45 years get into retirement to learn that all their savings got destroyed by the inflation. There used to be, alternatively, private systems, but they were nationalized so the state took the retirement funds of all the people who trusted in the privates more than in the state, and now they are giving them pennies. So all that people feels that they were right by not giving their money to the state in first place.
Your retirement system might be flawed, but at least you have the freedom to decide what to do with your own money. And, thanks to that, American people is way more savvy about finances and investment, and how money works. In my country, the average person knows nothing about basic economy, or even about how to save money. Otherwise, no government would be able to keep a 30% base of the votes despite getting us a 50% of inflation year after year.
If you have money, you need to allocate it in some way - how are you allocating yours in a way that isn't investing, isn't gambling and gives you control over the performance of your assets?
Why do you "need" to allocate it? This is my whole point. Everyone acts like "oh my god, I must have my money making more money!"
What the hell do you think 80% of the country who has no substantial assets do? They can't do anything. The whole concept of getting rich off your own money is honestly sickening to me.
>how are you allocating yours in a way that isn't investing
I'm literally not. Even my house, for example.. I don't consider an "investment". Will it probably 'make money' over the long term? I guess (and well, it has substantially over the last few years, but again I had nothing to do with that- simple luck, just like it would be bad luck if it went down substantially). But that's not the point of me having a home.. I have a home as a place to live with my family.
This mentality of everything being an investment and our whole lives revolve around trying to accumulate assets so those assets can make more money... it's just sad.
I see your point, but I honestly think it's a nuance you say it's an "investment decision" to say keep it in cash instead of the stock market. Am I almost making a decision to keep money in cash instead of beanie babies? Yeah I guess, but that doesn't really change my argument.
Even from your viewpoint, you personally probably feel that you "need" to invest yourmoney to keep making money so they have more money in the future. Most people think that you have to. And hey, they aren't really wrong. The system basically forces you to "invest" in the market because that's the only way you will have any money for retirement.
But that is where I think the system is completely broken. It SHOULD be a choice, but it's not. And it's my entire point, the system was shifted from company retirement/ss to putting ALL the risk on the individual (to hopefully make money in the market) AND they artificially make the market keep going up which benefits wealthy people even more.
And I'll reverse the problem here- I don't think you are "choosing" to invest in the stock market. You are investing in the stock market because by design it's basically the only choice. That is the issue.
You don't "need" to allocate it. If you don't allocate it though, the buying power of your saved cash will decrease every year from inflation.
You can argue whether low inflation should be a policy goal of the FED in the first place - I believe it should personally, it incentivizes economic growth - but regardless, you have to take the situation as it is. Inflation exists and no amount of wishing will make it go away.
In the face of inflation, what can you do to at the very least preserve the buying power of your cash. If you do nothing, you can watch it wither away.
Currently, there are few viable options that will help you preserve cash; interest rates on savings accounts are 0, CDs are extremely low, bonds are low but starting to move up, etc. The only remaining option is equities (stocks, bonds etc).
> The whole concept of getting rich off your own money is honestly sickening to me.
What do you find sickening about it?
> Even my house, for example.. I don't consider an "investment".
I agree with this mindset. While you can take out a loan with your house as collateral, it's a bad idea to consider your home as an investment IMO. As you say, you ned a home to live in.
But housing that you own that don't live in can absolutely be considered an investment (as an alternative to equities) and this can be far more liquid since you don't need it to live in.
Not everything has to be thought of as an investment though. That's up to you as an individual to decide.
This comes out in practice as PAYGO, or "pay as you go". A lot of countries use this model, and it goes bad quickly when tax receipts aren't enough to cover retirement outlays. With poor demographics in almost all large economies, PAYGO plans are going to cause a lot of pain in the next couple of decades.
> They have shifted nearly all the risk to the individual...
The risk comes down to 1. is either the individual, their employer, or the state investing for that individual's retirement and 2. how is that money invested.
The US has more than 150% of its GDP invested in retirement savings. Some of these savings are invested in equities. It has to go somewhere.
But that's all by design, which is my point.
Let's say from.. I don't know, 50 years ago. Taxes were increased such that social security is 2-3x what it is now. Some level which basically guarantees you have descent money for retirement. Sure you should still save some more over the years, but you won't be completely fucked.
In that situation, there is no way 150% of the GDP would be invested in retirement savings. The social security pot would be massive, instead of inflating the stock market.
Trust me, I get what you are saying.. but that is also my point. It was all designed to do this, and it was designed to benefit the rich- NOT individuals.
Individuals (as a whole) would be FAR better off being able to depended on social security. And I think what's lost here, is we are discussing on HN- a place where most people (myself included) make FAR more than the median income. Like many multiples. I guess that just makes it a foreign concept- but most people in this country can't throw 10-20k a year into retirement funds. That's a massive part of most peoples income. So for the solution to be "hey, no retirement plans and low SS for you.. but don't worry, throw your money into the markets and over time it will be great!" is meaningless when you don't have a high income to begin with.
Social security is, essentially, a de facto PAYGO system*. The issue with PAYGO is that you need a stable ratio of working aged taxpayers to retirees who draw income from the program. This is untenable with current US and OECD demographics, which is why countries that use PAYGO in part or in full are 1. raising retirement ages and 2. transitioning to a mixed model where income replacement comes as much as possible from savings and investments.
> In that situation, there is no way 150% of the GDP would be invested in retirement savings.
Retirement in the US is much more than social security. This figure includes pension plans, 401Ks, and IRAs. It's also a cumulative amount, so the annual input to grow the proverbial pot is significantly less than this.
However, if you were to take the expected outlays from this and, instead, fund them through direct taxes, you're likely looking at an additional 1.2T USD in social security taxes each year, which would more than double the social security tax rate. This looks remarkably similar to how much workers in countries that rely almost entirely on PAYGO programs currently pay. This is also with current demographics - the picture becomes significantly bleaker once you project out several more decades.
> I guess that just makes it a foreign concept- but most people in this country can't throw 10-20k a year into retirement funds. That's a massive part of most peoples income.
Other countries actually do require forced contributions into employer pension or invested retirement accounts. The idea being that, if you start early enough, you only have to contribute an small portion of your salary each year to replace a large percentage of your salary in retirement.
> The social security pot would be massive, instead of inflating the stock market.
Social security funds are actually invested. Government debt is an asset class and, as with everything else, a large amount of demand for an asset class has supply side repercussions. The same applies for private retirement investments. Also keep in mind that only portion of any good retirement plan will be invested in equities, and that pension plans are increasingly turning to alternative investments, such as private equity and real estate.
*The social security "pot" will be insufficient to cover expected outlays in a couple of years, which is why it's better to think of it as a PAYGO program.
Yes and no. Inflation/markets going up is a way to prevent boomers/gen X from sitting on stacks of money hidden away as a rainy day fund. It does benefit newer generation as it allows them to be paid more than their parents and give them access to credit to do stuff like buy houses.
You want markets to keep going up, there is nothing good about deflation.
> I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half.
You need to transition your assets progressively as you get older. If you hit 60 years old and your assets are still only in the S&P500 index then you have failed to diversify and yes, your high-risk portfolio is still high-risk. That's not gambling, that's poor planning. There are securities that can offer a lot more stability, at the cost of smaller overall returns.
> Instead of real retirement plans, higher guaranteed social security.. they have shifted nearly all the risk to the individuals and essentially forced them to just put money in the markets which artificially inflate the value of everything.
I've already addressed this above.
> And they just hope the ponzi scheme continues.
The stock market is not a Ponzi. The profits of the companies are what you are buying when taking a share of said company. It's an overall straightforward understanding. If you don't want to speculate on higher-risk assets such as tech stocks, you can buy banking/industrial/natural resources stocks which usually pay dividend based on their revenues.
Imagine running a ledger, you are owed 50 years of work by person A. Person A dies. You are still owed 50 years by the rest of society. Society just lost 50 years of work because person A died so the rest of society must work harder to honor your ledger. That's where the ponzi scheme originates from. The idea that you are owed something that is no longer in this world.
A gold standard is a ponzi scheme and since modern day fiat is just a stretched gold standard it is a ponzi scheme too.
Also, what alternative do you propose? You need an investment vehicle that can handle enormous sums of money from people who will potentially have no understanding of how it works. That doesn't leave many options.
Further, my 401K allowed for indexes tracking foreign markets, real estate....
I don't doubt that the majority of people exposure to stocks are U.S. markets, to be sure. But perhaps, to that end, the government (Feds) are more likely to respond to collapses in the U.S. Stock market than other forms of investment.
I don't know that I believe it myself, but I'm proposing that maybe the "safe" money is in U.S. Stocks.
Insidious? That’s a bit rich. You can allocate money in your 401k however you want. It’s self-directed. If you don’t like stocks keep it in bonds or cash.
This is disingenuous advice considering all financial vehicles for savers have been gutted. You can't even hedge inflation without the stock market (or real estate, if you can afford the buy-in).
Take a look at some historical CD rates. https://www.bankrate.com/banking/cds/historical-cd-interest-...
See also: treasury inflation-protected securities (TIPS).
Second, go compare the past year of VIPSX vs inflation you'll see that VIPSX is shit. Inflation has steadily increased by 5%, but VIPSX has been all over the place (it was actually down 2% last month) and is currently only up 1%. This is, again, not what normal people need.
1. There's no way to hedge against inflation (you didn't know TIPS existed)
2. Having learned about TIPS you assert they're illiquid and can't be traded easily (you didn't know about TIPS funds)
3. Having learnt about TIPS funds you don't the recent returns of a specific fund (you don't know that TIPS adjustments lag reported inflation numbers)
And your assertion that TIPS funds lags inflation doesn't hold water. Again, go compare the past year of inflation vs VIPSX. They don't track. By simply being a market traded product, a TIPS fund has speculation built into the price. Which, I'm arguing, is against the best interest of the average person just trying to save for their future.
When you say "all financial vehicles for savers", you're really just referring to liquid savings products tied to the federal funds rate, right? Of course when the government stops handing out money to savings account holders, savings account holders will no longer be making money.
Corporate bonds are an alternative way to earn some interest in a low-rate environment without owning stocks.
Also, REITs are an affordable way to gain exposure to real estate without a minimum buy-in. For people who need real estate exposure but can't afford to buy a whole building, they are really underrated.
Finally, the market is pricing in several rate hikes this year, so your savings account interest rate may actually be revived soon anyways.
I've been watching the rate hikes. The cynic in me says borrowing rates will rise, but consumer savings rates will not rise in step, nor will housing prices fall accordingly. But I guess we'll see.
I agree that it would be great to add more simple savings products, but you have to ask the question of where the yield will come from. If yields don't come from the fed (dictating inter-bank lending rates), and they don't come from the private sector (wall st), then where else can yields come from? What novel yield stream could a new savings product be built on?
At the end of the day, people wake up and go to their jobs to produce things, and every penny you earn in value in a savings account (past inflation) has to ultimately come from them, but not until it filters through the wall st machine.
It’s not advice. It’s reality. You don’t need to hold stocks in your 401k if you don’t want to. What happens as a result is your responsibility.
If this is driven by demographics, e.g. old people saving for retirement while there are no young people willing to provide for them when they are old, then really the problem isn't the fact that the bank doesn't want to lie to you any longer (the bank is currently lying btw), it's the fact that nobody will be there to take care of you.
> According to the Profit Sharing Council of America (PSCA), up to 77% of 401K plans include a provision for in-service 401K rollovers. Many of these only allow plan rollovers when a worker reaches a triggering event such as reaching retirement age, disability, plan termination or reaching the age of 59 ½ years.
So even many of those who are in the 77% who have in-service rollovers available don't qualify for them.
Nice bit of protectionism you got there.
Fair enough for the Maniforts/Bidens of the world wheeling and dealing on a global stage. Less fair for those of without spare thousands to burn on financial advisors.
I guess you're talking about PFIC. Are you also a US citizen? If not, iirc your wife is allowed to gift you 164K USD a year, which you can then use to invest however you see fit.
If you somehow still have access to a US broker, as far as I'm aware you're allowed to purchase and own US ETFs through them. PFIC only applies to non-US domiciled funds.
So what else would you base a retirement based upon? Empty promises from politicians whose have no incentive to deliver on them because their term ends long before these promises are fulfilled? We have that in the public sector already, that's why there's dozens of pension crises looming, from Sacramento to Boston and half the states in between. We also have that to a limited extent with Social Security, which is likewise heading for a major shortfall. And nobody really actually likes Social Security — I mean, they may be in favor of it existing, but everyone who can afford it has a private pension with a lot of holdings in the stock market, to supplement Social Security, and cover its shortcomings, and no one would trade that for more Social Security, because it would mean they end up with a lot less in the end.
The paper title is "Fueling Financialization: The Economic Consequences of Funded Pensions"
[1] https://journals.sagepub.com/doi/pdf/10.1177/109579602110622...
Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.”
He’s even putting 90% of his own estate into index funds.
https://www.google.com/amp/s/www.cnbc.com/amp/2019/02/26/war...
Also, because Berkshire is a conglomerate, businesses which generate large amounts of cash (e.g., insurance float, or businesses that would pay dividends if they were a stand-alone companies) can be used to fund capital-intensive businesses (railroads, energy companies, etc.) without paying taxes to move the money from business A to business B, because they're all owned by the same legal entity. Don't underestimate the power of this effect. It is not possible to achieve with an index fund.
Berkshire is in the SP500, but so are Apple, Coca Cola, Amex, BoA, etc. which are Berkshire largest investments. So if Coca Cola has an idiosyncratic hit, then you get hit twice by it: first in your KO holdings, then in your BRK.A holdings.
At the extreme, if there is a company that then invests in Berkshire and so on, you could end up overweighting a lot certain firms. Also, isn't there double counting in terms of the stock market cap?
I think that is neglibile, depending on how big you define a hit. If Burger King gets hit, that will probably effect Coca Cola as the largest supplier (just saying it like that, don't know if they really have that kind of business with each other), too.
There's lots of dependency in the modern world, I don't think it really matters.
edit: If Coca Cola does well, you profit twice. Maybe see it that way... ;-)
"Float adjustment excludes shares that are closely held by control groups, other publicly traded companies, government agencies, or other long-term strategic shareholders."
[1] https://www.spglobal.com/spdji/en/documents/index-policies/m...
Those using Buffet's name should also look at the time and effort Buffet puts in to pick stocks. He sifts through reams of reports, cash flow statements and what not. And to top it up you need deep pockets and emotional wherewithal to not blink when your value investment bets are not doing well.
"Value investment" sounds cool but is not for a typical retail investor. As you rightly pointed out retail investors are best served picking up an index fund or 2-3 mutual funds if they are seeking to diversify.
You're comparing two different units here.
You might say "the trade off of value investing to reduce risk is a huge investment of time."
P/E of 15 is an earnings yield of 6 2/3 percent. Look at contemporaneous interest rates and that yield makes sense.
>> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
* http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Ben...
That was in 1976.
Just don't expect better than a 5% ROI.
Qualified dividends (most dividends for most people from public US companies) are indeed taxed at a lower rate than income. That rate is 0% for up to $41k (single) or $83k (married filing jointly), and for almost everyone it will be lower than the marginal rate on income [0].
It goes into AGI on the tax form, but comes off again with the recalculation. If you have significant dividend income, you are missing out by not doing that calculation!
[IANAL and this is not tax advice]
[0] https://www.nerdwallet.com/article/taxes/dividend-tax-rate
They are of course weighted heavily to the US just given the size of US stocks, but one can reduce that exposure by buying low cost regional etfs or even just total world ex-US.
That seems like a better risk averse approach (possibly with some allocation to a total bond etf depending on your time horizon) than trying to pick individual value stocks.
Companies are no longer "owned" by people who feel ownership in the company (with some few exceptions) - they are "owned" by funds and therefore by "managers" who do not care about anything but keeping their manager job going.
When Ford is majority owned by the Ford family, the company can act the way the family wants it to act - but when it's majority owned by small investors and random funds there's no "main owner" who can make decisions against the common grain.
[1] http://johncbogle.com/wordpress/wp-content/uploads/2019/08/n...
* https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
2. The last few episodes of market drama have shown few outflows out of index funds, and probably general net inflows. The folks using them are generally doing a set-and-forget strategy and won't be looking at headlines too much. Certainly less than the average gamified Robinhood account.
2) is only an issue if the underlying assets don't have any value or you need to sell at the worst possible moment. ETFs generally improve the liquidity of in a liquidity crisis.
Yes, you and every other analyst out there. I'm curious to why the author thinks they have some extra informational edge over everyone else with a spreadsheet that allows him to find deals that seem to be invisible to everyone. Hedge funds are using real-time satellite imagery to try to get an edge over other market participants:
* https://www.theatlantic.com/magazine/archive/2019/05/stock-v...
When the author does a buy or sell on a particular stock, why does he think he's getting the better end of the transaction?
Further the author brings up Graham and Dodd, which is now called value investing. While Fama and French show that there's still some premium to it (as mentioned in the article), in his last published interview Graham himself said:
>> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
* http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Ben...
That was in 1976.
I ran across an interesting observation by Nick Maggiulli about investing feedback loops:
> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about.
> It’s just like this XKCD comic: https://xkcd.com/451/
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?*
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
> And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even...
This is kind of my beef in general, where does a normal family park cash?
Value Investing isn’t exactly easy.
I used to be big into FI/RE, but as I get older I am realizing cash flow is better (maximize your dollars in as easy and as stable as possible). Is more sustainable long-term than giant index fund nest egg… if I could choose.
What would those presets be? Could you model this and see how that performs traditionally?
I took a fun little class once on algorithmically playing the stock market. The take away lesson was that the main public stock markets have so many players, many of which are algorithmically driven, that there's nothing left for easy picking. It's basically noise. Best advice? Go play the algorithm game in smaller markets that don't have as many sophisticated players in them. E.g. some smaller betting markets, things like that. And only with play money, but your retirement money in an index fund ;-).
Plus I'm not sure how much value I contribute to the world by spending all day picking the stocks that will make me the richest.
I think the title should say “too risk-averse for market-cap weighted index investing”
2. Think about how much time you want to spend on anything more complicated than stocks and cash. Three-fund portfolio? Individual stocks? Which ones? Compare the opportunity cost of you spending that time compared to something else.
3. Read https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3805927 from last year [1], and realize that a 25 year old book was based on bad data. It might be true that stocks outperform bonds right now, but that's not the whole history. It also seems to confirm that all correlations go towards 1 in crises.
I'm at (3). Not sure what (4) is, but I'm sure (5) is "Profit!!!"
[1] Credit to https://dumbwealth.com/2021/06/23/bonds-for-the-long-run/ for introducing me to the paper.
I went down this rabbithole a long time ago and I'm still in the cave.
The second thing is, that the author points to 89% of funds underperforming the S&P500. But in that same paper, there is another shocking statistic - 97% of large cap value investing funds lagged the S&P500 Value Index. So surely, if you what you believe in is value investing, that doesn't prevent you from using a passive index, it just means you should choose the value indexes[1], not that you should suddenly put on your boldest pin stripe suit and start picking stocks.
[1]: https://www.ishares.com/us/products/239728/ishares-sp-500-va...
You can think of it as moving your average return up by 0.8%, that's very significant, especially when you consider that on average funds don't beat the market.
2) Correct, the article is either written by someone with a lot of time to pick stock and do due diligences or someone who convinced himself that their "gut feel" can beat the market. Either way historically those takes are not great.
EDIT: One thing I didn't add. Funds still have a good reason to exist, and that is risk management. Not all financial products want to replicate the SP500 index. You don't want your retirement fund to drop ~25% during a pandemic. That's where funds will shine. They can get you the right mix of bonds, banks and natural resources to stabilize your portfolio to +-4% every year. Some index funds do offer something similar (XCNS, XBAL) but it can still be worth having something actively managed.
So if they earn $x of return, you only keep .8 * x.
This is the typical 2 and 20 quote. Sometimes it may be 1.5 and 15 or even 1 and 10 but that's the typical range.
The second point is more interesting. The author is arguing the current simple heuristic for "value indexes" is over-inclusive. He cite two specific classes of stock for this: cyclical stocks (like gun manufacturers) and those in long-term decline (like malls). If the author is right, there probably is a way to revise these indexing heuristics (still not specific stock picking). I think the smart-beta wave a few year back tried some things like this.