[zylon]

Hour and a half conversation between Jesse Felder and Steven Bregman; covers a lot of topics, but their take on ETFs got my attention.

https://soundcloud.com/superinvesto...he-greatest-bubble-ever-passive-etf-investing

 

[james4beach]

Thanks for sharing this. I haven't listened to the whole thing but it seems interesting. Here's a bit of a transcript of a little piece.


Guest: When you look at these guys (renowned investors who have a public investing record) and investment firms with good histories, if you make a list of 10 or 12 of these investors, you'll find that in 2014-2016, as a group, they typically under-performed by 10% to 20%. It's never happened before, it's unprecedented, and one of the telling aspects of this is that none of these guys uses the same methodology. There's very little overlap in their portfolios and they're really doing different things. As a mental experiment, what is the statistical probability that somehow, they all lost touch at the same time and they all got stupid together?

Interviewer: It's fascinating because you flip the discussion on its head. In the last couple years, we've seen in all the major publications that all these active managers have lost their touch. The argument behind that is that it no longer makes sense to invest actively. Your point is: what is the anomaly? Is it that all these guys are losing their touch, or is the index the actual anomaly?

Guest: Are these characters the anomaly, for underperforming, or is the market (the S&P 500) the anomaly for outperforming? It sounds bizarre to say, until the aftermath. I would propose that the market is anomalous now. Not just anomalous, but the market has never in history been this mis-priced.

 

[james4beach]

I'll add another point along these lines. Buffett and Berkshire Hathaway also suffered this same fate: this amazingly good active management team (it's not just Buffett of course) under-performed the S&P 500 from 2008-2014, also 2009-2014.

 

[My Own Advisor]

Very interesting.

I believe there is a small dark side.

For one, you get the "good stocks" and the "bad stocks". That's the fate in accepting market-like returns.

Two, if everyone indexed, then you are essentially putting your bets into all large-cap market-weighted stocks by default. This means you assume the allocation of capital (by these companies) is efficient.

Three, I think if more indexing where to occur you'd see more price anomalies over time because more the "herd" is just following everyone else.

There are more downsides to this approach but the flip-side is also true, it's an excellent way to invest because of it's general simplicity and help to avoid behaviourial biases.

 

[zylon]

Here's the link to Bregman's presentation at Grant's Conference (fall 2016) that Jesse and Steven referred to.
It's 40 minutes.

https://vimeo.com/209940152/f2154e4d3d

And the slides to go with the talk.

http://www.grantspub.com/files/pres...erence_Oct 4 2016_Steven Bregman_Final[2].pdf

A screenshot of one slide.

 

[My Own Advisor]

Cool...thanks.

 

[Oldroe]

The dark side started about 10 years ago with right to work states. All the rich business owners jump right on the Wal Mart model. Pay your employee's crap money and we will make more money.

The US economy isn't that bad just nobody has any discretionary income. Now all these middle road company's can't sell there products and Mr/Miss star ETF ceo can't show profits.

Here in Canada the biggest distributor of fishing/hunting equipment has had there business go from 90 million to 35 million. Every other major same thing.

 

[Rusty O'Toole]

Some have suggested the stock and bond markets are so manipulated and supported by central banks, plunge protection teams etc that alpha in the traditional sense hardly exists. In other words the markets have been made average, and trying for above average results is futile.

For example you can lay a ruler on the chart of the S&P from march 2009 to the present time. I don't believe the stock market has ever climbed so steadily for so long.

 

[Rusty O'Toole]

Others have suggested that mutual funds and hedge funds and the like were never anything but a scam to begin with. They promise extravagant returns knowing they can never achieve them but are happy to collect their 2 and 20 until their customers catch on, or they catch a bad bounce in the market and bust out.

 

[james4beach]

It's really an amazing climb in the S&P 500. The Shiller PE is about to exceed 30, one of the highest valuations since the 1800s. There are only three times in history when the US market was valued this highly:

1929 pre-crash
dot com bubble near the end
today

That doesn't bode well.

 

[My Own Advisor]

The next crash should be interesting...time to stash cash

 

[andrewf]

The dark side started about 10 years ago with right to work states. All the rich business owners jump right on the Wal Mart model. Pay your employee's crap money and we will make more money.

The US economy isn't that bad just nobody has any discretionary income. Now all these middle road company's can't sell there products and Mr/Miss star ETF ceo can't show profits.

Here in Canada the biggest distributor of fishing/hunting equipment has had there business go from 90 million to 35 million. Every other major same thing.

What does any of this have to do with ETFs?

 

[andrewf]

It's really an amazing climb in the S&P 500. The Shiller PE is about to exceed 30, one of the highest valuations since the 1800s. There are only three times in history when the US market was valued this highly:

1929 pre-crash
dot com bubble near the end
today

That doesn't bode well.

Sure, but there are plenty of markets that are more typically valued. And what does any of this have to do with ETFs?

 

[Pluto]

Jack Bogle says if everyone indexed, markets would fail.

https://www.bloomberg.com/news/arti...rybody-indexed-markets-would-fail-under-chaos

 

[AltaRed]

Jack Bogle says if everyone indexed, markets would fail.

That is pretty much a no-brainer, but because there will always be individual stock buying by at least some money managers, the insiders and the retail public, there will be a market. I still don't see what the problem with ETF dominance in the market would be..... particularly with cap weighted ETFs, and the presence of boutique ETFs. Indeed, it may be the proliferation of boutique ETFS, as dismayed by them as I am, that will continue to make the market work.

 

[james4beach]

Sure, but there are plenty of markets that are more typically valued. And what does any of this have to do with ETFs?

The theory goes (as in the audio clip at the start of this thread) that a heavy move into indexation has inflated stock prices and contributed to over-valuation, because people just blindly buy everything, simultaneously, without concern of valuation of individual securities.

If you look around the forum you will see many of us, including myself, recommending effectively the same thing! I have often said things like, don't think about timing or individual stocks, just go buy the index, and buy it regularly.

When lots of people do that, they push up stock prices to unjustifiable levels. The game keeps going on as long as new money flows in.

 

[AltaRed]

I don't accept that because if the cash was not going into ETFs, it would be going into individual picks or mutual funds. IOW, the flow of cash is likely more of less the same (e.g. I wouldn't have any less capital in the markets). So the overall market does NOT go up, although there could, and would likly be, some skewing of individual stock prices.

 

[Oldroe]

Well of course etf hold stocks and the economy decides what stocks are doing. If you don't study the components you don't know what they hold.

 

[andrewf]

The theory goes (as in the audio clip at the start of this thread) that a heavy move into indexation has inflated stock prices and contributed to over-valuation, because people just blindly buy everything, simultaneously, without concern of valuation of individual securities.

If you look around the forum you will see many of us, including myself, recommending effectively the same thing! I have often said things like, don't think about timing or individual stocks, just go buy the index, and buy it regularly.

When lots of people do that, they push up stock prices to unjustifiable levels. The game keeps going on as long as new money flows in.

But that is an Amerocentric viewpoint. The US market is undoubtedly at elevated CAPE levels, but much of the rest of the world is not.

 

[My Own Advisor]

https://www.bloomberg.com/news/arti...-of-mass-destruction-fpa-capital-managers-say

ETFs are WMDs...other dark side thoughts...