Comments on: Cockroach Portfolio

By: All-weather Portfolio at Curious Cat Investing and Economics Blog

All-weather Portfolio at Curious Cat Investing and Economics Blog — Thu, 26 Jun 2014 17:49:16 +0000

[…] Cockroach Portfolio […]

By: Joe Tobin

Joe Tobin — Fri, 06 Jun 2014 01:15:04 +0000

Thanks; seeing past the muddle I feel a bit better now as an index investor.

By: John Hunter

John Hunter — Thu, 05 Jun 2014 23:07:20 +0000

I don’t think the logic in the first couple of paragraph makes sense. Demand levels are not a matter of how that demand is brought the market. You state the demand won’t be there if people buy index funds instead of individual stocks – that makes no sense. The investors buying index funds, buy the underlying stocks.

I do think there is an interesting issue of what happens to the success of index investing versus stock picking as the market moves to more and more index driven investing. It does seem to me such a move may open more opportunity for successful stock picking.

Certainly at the edge cases of say 99% index investing with hardly any individual stock picking it would be a very odd market. I do not think it is possible to get to that type of level because it would be so odd.

The question is as you start approaching levels where the historical evidence breaks down, what happens? And at what level is that (20% index fund investing, 40%, 60%, 80%?). Even once you reach a point where stock picking provides significantly better returns theoretically there is the question of if people can actually exploit those opportunities successfully. My guess is they can but most will actually do the opposite and fail (they won’t beat the market by enough to cover the charges to cover salaries and expenses).

But we will see what happens. My guess is we will start seeing more evidence of stock picking being a successful strategy especially for individual investors that are sensible (where you avoid huge fees charged by financial institutions). And where investors follow advice from Ben Graham, Peter Lynch, etc..

By: Joe Tobin

Joe Tobin — Thu, 05 Jun 2014 18:05:25 +0000

When I learned that Vanguard fund VTSMX has become the biggest fund, I tried to think through the implications by thought experiment: how would the market behave if more and more, eventually all, investors bought only the passive index fund.

It seems to me in the absence of market makers buying or selling particular stocks, this would freeze prices. Since individual stock prices wouldn’t appreciate, there would be no return except dividends. (There would be no more brokering industry, but forget that for the purpose of this discussion.)

Companies could only float stock offerings that promised dividend payments; this would kill the small-cap high-growth business model. Since something can’t grow from nothing (with the small exception of our cosmos,) the capital economy would be impossible.

Reductio ad absurdum. So a countervailing force to this disequilibrium: as more investors ignore fundamentals, stock picking becomes consistently profitable, which runs counter to the rationale for Vanguard-style passive index tracking. Active portfolio management gains the advantage.

Comments? Jeers? ‘Well duh?’