A smart individual retail investor is statistically unlikely to “beat” those people, and should buy index funds.
It's not a zero sum game necessarily. A stock picker approach that you have as a retail investor that many trading shops do not have is this: time. You can make your bet, and if it fails in the short term you can hold onto the stock long term, unless the company is going bankrupt (which hasn't been a common occurrence up to now, given the overall number of stock symbols). Traders are individuals and groups with books, quarterly numbers to meet and yearly returns to care about. They'll beat you if you're a day trader, sure, but I think it's a false dichotomy to say, you're either a) a day trader or b) a boglehead.
It is, actually. William F. Sharpe laid it out in the 1991 paper "The Arithmetic of Active Management":
* https://web.stanford.edu/~wfsharpe/art/active/active.htm
* https://www.jstor.org/stable/4479386?seq=1
Sharpe won the 1990 Economics Nobel for other work:
* https://en.wikipedia.org/wiki/William_F._Sharpe
The more active a trader is, over a longer time frame, the more likely they are to underperform the market. This has been shown through SPIVA over 15+ years, at least in the US and Canada:
* https://www.tma-invest.com/spiva-data-reveals-15-years-of-ac...
* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...
As of the end of 2019, internationally active managers didn't do too well either:
* https://dividendstrategy.ca/what-is-spiva/
This has been known to varying degrees since at least the 1970s:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
The question is how high the share of passive investment can go before we see misallocation.
Someone could make their own "index fund" with 10% of it allocated to FAANG, maybe 20% of it in the largest tech names overall, and then a distribution of the largest market cap names, and lo and behold, one has an s&p 500 "index fund". Tesla's about to be added to the S&P 500. There are strong opinions on both sides - it's going up, no, it's going down. You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
There are index funds of every publicly traded company in the US:
* https://en.wikipedia.org/wiki/Russell_3000_Index
Vanguard themselves have changed things so that employees no longer have the option of choosing the S&P 500 fund in their own retirement accounts, but rather the Total Market fund:
* https://www.marketwatch.com/story/vanguard-thinks-its-own-em...
* https://www.marketwatch.com/story/bogle-explains-why-vanguar...
> You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
Anyone investing in equities is just in it for the ride, as it is impossible to predict what will happen:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
An individual's best bet, long term: buy as much of 'The Market' as you can. The greater, the better. The S&P 500 is simply a smaller portion of the market, and while not bad, may not be ideal:
* https://www.pwlcapital.com/should-you-invest-in-the-sp-500-i...
So people like Jim Simons are merely the luckiest people alive?
The average person earns the average market return, less fees; that's a tautology. Unless you have some reason to believe you aren't average, most people are better off following your advice. It's what I do, personally.
But the idea that no one is winning at this game flies in the face of a lot of evidence.
No one reasonable, not even Fama and French who came up with the Efficient Market Hypothesis, claim that the market is 100% efficient.
And given that no one knows anything about Jim Simon's Medallion Fund, we actually have no idea how successful they are. But given the quantities and/or trading volumes possibly involved, they don't have to be right very often.
In a perfectly efficient market, it's 50/50 whether you'll get the better end of the deal. Now think of a casino: for many games the house's edge is only 1.5% (e.g. blackjack, baccarat, three-card poker).
* https://www.gambling.com/ca/online-casinos/strategy/10-casin...
* https://wizardofodds.com/gambling/house-edge/
But that's still enough for a casino to make make money.
It may be the Simons et co have just an edge of a few percent points, but they make up their profit on volume.
> But the idea that no one is winning at this game flies in the face of a lot of evidence.
There are plenty of people that are winning. It's just the people that win one year rarely win a few years in a row (never mind 10+):
* https://www.tma-invest.com/spiva-data-reveals-15-years-of-ac...
But of course, a properly diversified index fund portfolio contains much more than just the S&P500. Mine has some thousand global stocks, on the order of 5000.
SPY is hardly diversified. A far better and pretty easy portfolio consists of a global financial assets allocation: US stocks and bonds, developed world ex-US stocks and bonds, emerging markets stocks and bonds, real estate and commodities. 10-12 ETFs will do it.
I recommend you read up on the following (from me elsewhere on this topic):
> So what would happen if the majority of investors started to buy the market and stopped trying to beat the market?
> Mispricings would start to develop regularly, and the people that had continued to try and pick stocks would be able to profit. The profits that these people made would attract other people, and eventually everyone would return to chasing the dream of beating the market. Behavioral finance plays a huge role in market efficiency; nobody wants to accept being average by taking what the market gives them when there are hot shot managers that promise to consistently beat their benchmark. There is a lot more emotional attraction to investing with the guy, or to being the guy that can beat the market.
The concern that passive/index investing will ruin The Market is just not something we need to worry about.
Jack Bogle made the claim that even if 90% of the market went passive, the remaining 10% would probably be enough to keep things going:
* https://www.forbes.com/sites/greatspeculations/2019/02/12/a-...
* https://www.ft.com/content/4594f554-ba1a-11e7-9bfb-4a9c83ffa...
I'm less worried about the issue of market and price efficiencies, and more about shareholder votes and company management decisions. How do passive, potentially 'non-opinionated' index funds vote on various measures?
Some of your links are for active fund managers versus passive fund managers. Again, a red herring. No, there's not JUST a choice between bogleheading and day trading, and none of us here are active fund managers? Are fund managers (who have clients) compared to the likes of you and me ?
Some individual stocks you buy for the long term, others you trade short term. And sometimes, you can long a stock but only trade a percentage of the holding. You can keep it for a day or for years.
Yes, it is the same:
* https://awealthofcommonsense.com/2020/07/the-nifty-fifty-and...
* https://theirrelevantinvestor.com/2018/11/26/the-nifty-fifty...
* https://en.wikipedia.org/wiki/Nifty_Fifty
* https://etfdb.com/history-of-the-s-and-p-500/
* https://www.qad.com/blog/2019/10/sp-500-companies-over-time
That's the definition of the S&P 500: the largest five hundred companies publicly traded companies.
> with money printing,
I do not think this actually does what you thinks it does:
* https://www.youtube.com/watch?v=K3lP3BhvnSo
* https://rationalreminder.ca/podcast/109
> […] Talk shows about stocks and news algorithms pumping stocks to the masses?
Please see the 1990s and "irrational exuberance". I live in Canada: ask anyone here above a certain age (40s) about Nortel and Bre-X.
> Are fund managers (who have clients) compared to the likes of you and me ?
Fund managers have more resources than you and me, and thus probably have better information to base decisions on. Unless, of course, you are using satellite imagery in your investing workflow:
> Currie’s prediction proved correct. As word spread that satellite images were a reliable predictor of corporate profits, a range of investment funds began buying retail-traffic data from RS Metrics. In the following years, the company expanded, tracking not just parked cars but solar-panel installations, lumber inventory at sawmills, and the mining of metals worldwide.
* https://www.theatlantic.com/magazine/archive/2019/05/stock-v...
What "index funds" are you referring to? The S&P 500? Dow Jones? NASDAQ 100?
If you purchase a Russell 3000 index fund you are purchasing a piece in every publicly traded company in the US:
* https://en.wikipedia.org/wiki/Russell_3000_Index
Any 'pricing irregularities' are discovered, then they will be pounced on any few remaining active investors. I recommend you read up on the following:
> So what would happen if the majority of investors started to buy the market and stopped trying to beat the market?
> Mispricings would start to develop regularly, and the people that had continued to try and pick stocks would be able to profit. The profits that these people made would attract other people, and eventually everyone would return to chasing the dream of beating the market. Behavioral finance plays a huge role in market efficiency; nobody wants to accept being average by taking what the market gives them when there are hot shot managers that promise to consistently beat their benchmark. There is a lot more emotional attraction to investing with the guy, or to being the guy that can beat the market.
Some people upvote or downvote because they agree or disagree. They view it as a "vote" for the opinion.
Others upvote or downvote because they thing the argument is strong or weak, or maybe because someone said something nice and positive to another person or someone said something mean or hostile to another person.
I strongly favor the second approach.
One of the early slurs was that index funds were communism (pretty daft, but probably effective in the US). The latest is this scaremongering "what if all investment were into index funds" (answered several times in this thread).
From the perspective of index fund advocates, unsophisticated investors are systematically getting ripped off and the daft propaganda only adds to the offense.
This is probably why you're picking up an aggressive preachy vibe from advocates.
The empirical data is however unambiguous and there is now a lot of it.
Personally, I think that as more people put their money into index funds, active funds may look more attractive as they can potentially exploit market misprices quicker than passive funds can, but that's just me.
Probably an interesting number itself knowing what the fractional amount of money flowing through Vanguard is as a proportion of the total.
The reason that I'm personally an index fund skeptic is that I like to understand what I'm invested in. If you look through the S&P 500 members, there's dozens to hundreds of companies basically no one's ever heard of, and companies that I personally don't see a big future in. If index funds didn't exist, why would I take $100 of Fifth Third Bancorp or TechnipFMC when I could get $100 of Apple or Slack instead? The former is what you get when you invest in the S&P, while the latter are products I use everyday, and I feel that I understand how they make money.
If you hang around investing subreddits long enough, it starts to feel like everyone's parroting the same 5 sentences about expense ratios and diversification, with no analysis or critical thought put into what the actual investments are.
Because you don't know which one will become the next Apple or Slack and will invest before they are valued as the next Apple or Slack benefiting from all their growth. Some of them will die, but the effect on the overall holdings will be small given their small size.
You are basically investing in the idea that:
‘On average, these companies are run by people who want the company to succeed, and as long as the population of the world grows, and the middle class grows, this will make money’
Everyone could invest in index funds, and this would still be true, because if the stock price gets too low, it would be rational for the company to purchase its own stock on the cheap which would set the price floor.