Author Topic: S&P indexing is moronic right now  (Read 9879 times)

fareastwarriors

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Re: S&P indexing is moronic right now
« Reply #10 on: November 10, 2017, 09:45:30 AM »
What do you recommend then?  They buy expensive mutual funds? Not all of them can be successful stock pickers.


thepupil

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Re: S&P indexing is moronic right now
« Reply #11 on: November 10, 2017, 09:50:29 AM »
And since when is it a good thing if your equities earn 3% more than treasuries?

Since about 1967 (3.4%)

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Sullivcd

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Re: S&P indexing is moronic right now
« Reply #12 on: November 10, 2017, 09:51:12 AM »
If the index earns 140 next year, one estimate I found, you are making 5.4% on your investment compared to 2.4% if you buy ten year treasuries.
That's a ridiculous comment. Why would you compare the index relative to bonds as opposed to other equities? And since when is it a good thing if your equities earn 3% more than treasuries?

Because the ten year is typically thought of as the risk free rate of return.  The current spread is probably slighter lower than average historically, but there doesn't seem to be a consensus opinion on that. I'm not saying I think this makes the index a good investment, just guessing at why its being made by people.

Gregmal

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Re: S&P indexing is moronic right now
« Reply #13 on: November 10, 2017, 09:55:18 AM »
IMO indexing is always moronic. But IMO most people are in fact morons; at least in terms of their ability to make investment decisions. At best, indexing is just lazy. But most people are also lazy. So maybe it's for the best...

Nomad

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Re: S&P indexing is moronic right now
« Reply #14 on: November 10, 2017, 10:06:23 AM »
IMO indexing is always moronic. But IMO most people are in fact morons; at least in terms of their ability to make investment decisions. At best, indexing is just lazy. But most people are also lazy. So maybe it's for the best...

I do think, for the average person, that indexing is probably the way to go if one understands its purpose and limitations (which, admittedly, few do). To paraphrase Churchill, for the man on the street, buy-and-hold indexing is probably the worst form of investing - except for all the other forms that have been tried.

Sullivcd

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Re: S&P indexing is moronic right now
« Reply #15 on: November 10, 2017, 10:07:24 AM »
In my opinion, the problem with indexing is you are taking on huge, unknowable macro risk through what is being sold as a safe, highly diversified investment.  If rates rise suddenly, tax cuts fail, earnings slow or stall the index could get crushed.  How can you make a bet on something with so many seemingly random and highly important variables? 

no_free_lunch

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Re: S&P indexing is moronic right now
« Reply #16 on: November 10, 2017, 10:18:04 AM »
US equities are expensive in general right now, not just the S&P 500.  So I think no matter what you are over-paying. 

As far as trying to buy individual companies vs an index fund, I will just point out how many have under-performed the indexes over the last 10+ years.

Liberty

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Re: S&P indexing is moronic right now
« Reply #17 on: November 10, 2017, 10:23:50 AM »
IMO indexing is always moronic. But IMO most people are in fact morons; at least in terms of their ability to make investment decisions. At best, indexing is just lazy. But most people are also lazy. So maybe it's for the best...

I do think, for the average person, that indexing is probably the way to go if one understands its purpose and limitations (which, admittedly, few do). To paraphrase Churchill, for the man on the street, buy-and-hold indexing is probably the worst form of investing - except for all the other forms that have been tried.

Indexing is brilliant. It would be a huge waste for society if everybody had to spend as much time and energy as we spend on investing. Just like not everybody should have to learn to perform surgery on themselves, know how to design sewer-systems in CAD software, file appeals at the supreme court or maximize crop yield on a multi-acre field. Specialization is a great win for humanity. And if the alternative to cheap indexing is expensive mutual funds that don't generally outperform the indexes or to not own pieces of busineses at all, then indexing is even better.
« Last Edit: November 10, 2017, 11:57:14 AM by Liberty »
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Packer16

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Re: S&P indexing is moronic right now
« Reply #18 on: November 10, 2017, 10:24:48 AM »
Indexing is the best solution for most of the "no-nothing" investors portfolio & probably for the most others who do not have an edge.  It provides low cost exposure to the growing equity markets.  In terms of valuation, IMO we are not over valued as the ERP is 4.7% (see Damodaran's home page) at discount to the historical average of 6.2% (see link to Damodaran page).  At market tops (late 1960s and 2000), the ERP was closer to 3% (late 1960s) or 2% (late 1990s).   The only reason stocks appear expensive is the assumption that interest rates will revert to the historical mean of 5% versus 2.5% today.  If you chop 2.5% off 4.7% you get 2.3% which is quite low.  So the question is do you think interest rates will stay at 2.5% (market fairly valued) or will they go to 5% (market expensive)?   IMO interest rates will stay low as the forces that got us here (excess capital creation with no large capital destructive event (war, famine, epidemic)) are likely not going to change. 

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Nomad

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Re: S&P indexing is moronic right now
« Reply #19 on: November 10, 2017, 10:29:21 AM »
In my opinion, the problem with indexing is you are taking on huge, unknowable macro risk through what is being sold as a safe, highly diversified investment.  If rates rise suddenly, tax cuts fail, earnings slow or stall the index could get crushed.  How can you make a bet on something with so many seemingly random and highly important variables? 

This is a very salient point. S&P indexers are right when they say that over time, they will match the returns - minus fees - generated by a broad cross-section of American business. The problems arise when we start asking: (1) what those returns are likely to be; and (2) how long the "long run" is. The first is inherently unknowable and subject to dramatic secular shifts, as you point out.

For instance, what happens if Piketty is right and we have reached a secular turning point where returns on capital will be markedly lower going forward? What if the years of fiscal and economic mismangement in the developed world finally come home to roost and businesses find themselves in a vicious macro environment for 30 years? There are many, many more scenarios one could envision.

On (2), the long run: Consider the perspective of a Japanese investor in 1989 - if you bought a Nikkei index in December of that year, you would still not even be close to your nominal cost basis decades later. One can also think of Russian investors in 1917, Chinese investors in 1949, and holders of a basket of Confederate States of America bonds in 1865. The long run can be very long, and there is no guarantee that there will even be a "long run."

That being said, I still hold a portion of my portfolio in indices. It is a low-cost, low-effort strategy, and if I am wrong about my ability to generate alpha - which I very well may be - then I am hedged against my own arrogance and stupidity.
« Last Edit: November 10, 2017, 10:41:13 AM by Nomad »