Insider trading has been rife on Wall Street, academics conclude

Buying an index fund composed of 500 large U.S.-listed companies is pretty diversified. I suppose you could diversify internationally, but no need to stray from index funds if you're not managing your money full-time.

I mean it's better than picking stocks yourself, but what isn't? As long as it's equally easy to choose a good option and a less good option, why not choose the one that's better?

That's the best I've managed to suss it out anyway, If you meant something different I'd be interested to hear it!

The methodology is published, but largely defines eligibility; it isn't completely systematic. Even if it was, it'd still be liable to change (eg. changes to exclude some classes of shares from the float).

The indices S&P provides are used for a number of things, not all of which are retail ETFs tracking them. If you think benchmarks are never manipulated by some of the larger stakeholders, see what happened to Libor.

If you're buying from pure DD, you'd either better know something special about the targets financial situation, know some synergy or externality you can exploit, or know the business better than management (be careful, sijnce that's often only possible because their MBAs are ignorant). You're looking for a fool, and if you can't spot him, it's you.

Why are the P/Es of FANG so high? Because the market hopes they are monopolies.

They are auto buying into these companies without considering financials or anything else. When someone buys into those funds, money is automatically allocated into those shares.

The next crash is going to be pretty heavy because if a large portion of people those those funds try to pull out their money, it's going to pull the entire market down.

I find the same to be true in engineering. Often simple questions sound stupid, but they lead to improved communication. Because more often than not everybody thinks they're on the same page. Especially experts on some topics tend to this kind of thinking. However a lot of the things they think "everybody knows" are not known by others. Simple questions bring this to light.

That said I knew of a person working as a trader who was one a team of 20 young guys taken on fresh from uni - at the end of the year the company sacked the 18 guys who lost money and told all their clients about the 2 whizz kids who had just had an amazing year. If the professionals all knew so much I'm not sure why those 18 people would have failed to turn a profit.

For any profession, i'm pretty sure i can find you a crackpot who is convinced they know more than the pros.

The fundamental difference is that trading is partially an art. Medicine is too, but like two hedge fund managers will have pretty different outcomes, but two surgeons will have similar outcomes.

Hell, there's even jokes about it, mostly involving Web MD and/or Holiday Inn Express.

What does interest me is individual comments. It appears to my curiosity about ranking things (like ELO and such in games and sports).

Really what people should remember is that insider trading laws aren’t to protect the rest of the market. They are to protect the existing investors. Illegal insider trading happens when you have fiduciary duty to someone else (other shareholders) and you steal from them.

Worked for a marketing department once. My boss had a monthly report on consumer product orders and sales. Cost $500,000 a year. That would be exactly the sort of thing an investment manager might have access too that a small time investor does not.

No? Then too bad.

Because "equality of opportunity" in the US is only available to those who are more equal than others.

There is no evidence that I'm aware of suggesting that active management "generally' outperforms the market. In fact, most evidence points to the majority of active managers performing worse than the market in the long run.

Also market timing is hard and subject to many factors (such as those you pointed out) that one doesn't have knowledge and awareness of. It's better to just buy, and hold. When the market goes down, buy some more, but don't expect to access that money for many years.

Edit: I think I get your larger point though, runaway deficit spending of the kind we've had in recent years does destabilize the riskiness of holding US assets / currency.

AKA instead of paying your mortgage at 4% interest, you invest it in something that make 5.5% and gain an additional 1.5%-a few percent in taxes+a few tents of a percent in taxes on the 4% interest.

Frankly, its a good theory, but given the volatility of the markets, its hard to guarantee your going to actually come out ahead. Particularly since interest rates are generally computed by people who are looking at the risk/reward factors, and the interest rates have to be high enough to attract the risk adverse capital.

The one thing that is for sure, is that you should never really be sending early payments to your mortgage company despite all the financial advisors telling you to to do so. If you want to pay your mortgage off early your better off putting the money in a low risk investment and then paying it off when the outstanding mortgage balance falls below the value of your savings. That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.

There is also a diversification problem. Paying off a mortgage could tie up a large part of someone's wealth in their house.

Related to the point right above, paying off a mortgage ties up a large portion of cash in a fairly non-liquid investment.

I agree - this is why it’s a particularly important caveat that even if you have the skill and wherewithal to beat the market, you’ll need to also do it without a team or software infrastructure. I’d generally recommend that people interested in this learn as employees of an established firm, then go out on their own if it makes sense.

And unfortunately, doing it as a hobby for the fun of it, isn't a workable compromise, precisely b/c beating the market requires so much work.

No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling.

> In order for you to win someone else has to lose.

Single trades imply a zero sum game in which one counterparty has to lose for the other to profit, yes. But the market itself is not a zero sum game. The net, aggregate result of trading activity is positive value.

> "But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey.

You’re doing both, if we’re being frank about it. This is a positive statement - it’s plainly true and follows from reasonably agreed upon definitions. You can assign a normative (moral) value to the concept of arbitrage in zero sum games one way or the other, but that’s not really relevant to the discussion at hand. If you don’t want to participate in active trading, you don’t have to - you can invest in passive index funds, which is a perfectly sane and well-reasoned decision.

Professional traders don’t try to disguise the fact that they profit from a zero sum activity between consenting adults. But that has nothing to do with the process of price discovery, which is a well-recognized economic concept that is facilitated by active trading. Price discovery is not a moral imperative, it’s just a thing that happens through economically incentivized asset exchange.

Please explain why this is necessarily true in the stock market.

You buy X at $Y. Then sell X to me for $Y+1. You won.

I then sell X to someone else for $Y+2. I won.

Hence in that transaction, we both win.

Also, as a self-employed person you can contribute up to $55,000 in the year depending on your income, in what's called a SEP IRA.

That's where the lifetime cap comes in I guess. £1M isn't that crazy over a ~40 year timeframe for someone on a high income who isn't necessarily 'rich' and, at current annuity rates, won't buy you absolute luxury in retirement.

What's the argument for having two different tiers of retirement accounts? Just let everyone contribute $18k to an IRA and end 401Ks entirely. The selection of funds in most company 401K plans is meager and the funds are expensive because the contributors are, in effect, a captive market.

Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such.

But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in.

So that's one consideration.

Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments.

There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something.

Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth.

And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day.

That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".

A company has a product, which is sold to consumers. A company has a structure, which includes employee counts, capital expenses, and so forth. A company has a roadmap. And dividends.

It's not "zero risk" but to suggest that it's no different than tossing chips on a roulette number or a blackjack dealer is completely absurd.

2 - that's an extreme perspective, since there's value in learning that doesn't have an hourly cost. The TOC of my time may or may not be higher than what a fund manager would cost (or the index fund approach being discussed). Then again, monitoring the portfolio 3-4 times a day for a couple of minutes isn't that bad. Initially finding the stocks of interest and doing some basic research does take time.

[edit: grammar]

This is just based on a quick spot check, but I’m worried the passive investment craze has weakened the link between business fundamentals and pricing for the stocks in the most popular indexes.

If so, that increases correlations in the pricing of assets that were explicitly chosen because their prices have no or negative correlation with each other.

There are plenty of hedge funds which beat the market so significantly and so consistently over long timespans (even decades) that choosing any single one of them would have handily won the bet. But the bet was for a “fund of funds” approximately tracking the aggregate hedge fund industry, not any particular one. Buffett wouldn’t have taken a bet involving any of the single superlative funds because he understands this point already.

The core thesis vindicated by that bet is simply this: most participants in the market don’t do well. You didn’t really need a public bet with a famous investor to prove this - the stats have been available for quite a while. Buffett obviously believes people can beat the market, or he wouldn’t be in the business he’s in.

Therefore, the point stands. It’s dogmatic to act as though beating the market is impossible. It’s not necessarily advisable to try it because it’s quite difficult, but throwing around citations of Buffett’s bet don’t really improve honest education. Most people aren’t going to become pro athletes either, so you shouldn’t bank your future on it. But that doesn’t mean it’s impossible or that you can’t (responsibly) pursue it.

Those FDA trials are expensive. Those companies have many experts in the field that believe those trials have a reasonable chance of success. Otherwise, they would not proceed with them. Even the FDA itself believes those trials have a good chance of success. There are plenty of Wall Street analysts who are also evaluating these trials. Regular Joe is not going to outsmart all those people.

Your points about index funds getting worse as they get bigger would apply to Vanguard too. And the whole idea that risk can be measured & mitigated in the first place requires predicting the future. Bankers in 2008 believed their portfolios were not overly risky either. Measuring risk is almost a contradiction, risk is the residual uncertainty that can't be measured after measuring/predicting everything else.

Overall, you are describing the modern economic portfolio theory approach to investing. Yes, its backed by some prestigious people but no one can predict how it will do going forwards. Its important to remember that uncertainty. In 20 years we might see inflation has swallowed up the returns of those investors and only people who invested in stock X made any money. We might see the reverse. Who knows?

https://www.forbes.com/sites/robertlenzner/2013/11/25/the-fe...

Why don't they exist as ETFs? This is a good question. It's probably only a matter of time before we see such products. Especially that given the current pace of things, there is a new ETF everyday in the US. I've personally looked into building target date ETFs through my work as well.

There's no simple answer. There might be a right answer, but so far no consensus view has lasted for long. Most of the arguments I've seen have been heavily dependent on bond yields at the time the arguments were made, and are therefore not universal advice. For example, 50/50 made a lot more sense when treasury bonds were paying more than 7% per year.

There's absolutely a middle ground here, folks. One can have a portfolio of conservative picks (index funds), self-selected individual picks, cash, bonds, so on and so forth.

This should hopefully be picked up by n-gate to make a mockery of us.

Joking aside, I'm curious what some of you who are actually paid to write front office software by Wall St. think of all of these threads.

That's stupid.

But picking companies YOU think might succeed, either because you've used their products, have a good feeling, read a news article, worked there, read magazines on the niche industry, or a million other things, is perfectly legit.

You don't need to time the market. You can invest long-term in your picks.

You CAN time the market, if you notice patterns and feel like you can ride them.

Not everyone who isn't conservative is necessarily a child "playing" with a brokerage IRA. Some ARE beating the market.

The transition away from pension plans leaving people unprepared for retirement was probably a much bigger issue than the state of the stock market at retirement.

Here's how this works for those that haven't even bothered to read anything related to retirement planning.

You slowly move from high risk/volatile investments to those that are lower risk. Something like Bonds might work. You also have your own small hedge with things like precious metals (less than 10% typically).

One can also move their money to assets that typically appreciate but also generate reliable income (real estate for example, but annuities, etc., are options).

Hell, even read the cheat sheet and you'll know more than most people (seemingly): http://www.dummies.com/personal-finance/financial-help/perso...