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Comment by lottin | Hacker News Reader

This is not very good advice. An index investor is exposed to systemic risk, that is, risks that affect the market as a whole, but the problem is you can't escape systemic risk by investing in individual stocks, because individual stocks also have the same systemic risk... in addition to other risks which are collectively known as idiosyncratic risk. In short, stock-picking is always inherently more risky than index investing. Also Warren Buffet may or may have not beaten the market (depending on who you ask), but even if he has that doesn't mean that value investors, on average, tend to beat the market.

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Indeed.

Index funds or any investment choice are not just about return, they are about return on investment. And the investment I'm considering here is my time and energy.

Grant the OP the fact that value investing is a good idea. If I don't want to invest time and energy on evaluating businesses (and the author makes the point that it is really hard to do, with his examples of malls and Smith and Wesson), then what are my options?

* Trust someone else to do this. But he makes the point that active investors almost always underperform the market.

* Buy everything (aka an index fund) and hope the winners outgrow the losers.

* Stay out of the market and invest in other sectors which might have good returns (my skills, real estate). These have their own risks and costs.

The alternative is to try to best the market as a part time investor, which to me feels like a loser's game.

>individual stocks also have the same systemic risk

What do yo mean by the "same" systemic risk? Yes, all stocks have some systemic risk, but at varying levels as measured by beta. I wouldn't say that's the same. That's like saying all sports have the same injury risk. Sure, there's some inherent risk in every sport but at varying levels.

There's an older investment technique called "betting-against-beta" that selects individual stocks due to the lowered systemic risk.

He probably means that a systemic risk is a risk for the whole system, like the Russian and Ukranian stock markets now that they are at war.

Oh, ok. That's confusing because systemic risk in finance is the measure of how much a stock tracks the market. E.g., if the market goes down X, how much will my index fund go down.

I read the comment as "an index fund perfectly tracks the market". Some are designed to do that, but others are not. Saying they all have the same systemic risk is demonstrably untrue because they don't all have a beta = 1.0

His point is that value stocks are less affected by those systematic risks

We had a systemic risk March 2020. Which companies were able to throw money at the problem? Which companies were able to deal with supply chain issues better?

The companies that are considered value stocks don’t have billions in the bank to weather storms (Apple) or a cloud services business to offset expenses on the retail side.

Even if he does beat the market, and you manage to pick the same stocks as he, at the same time, it doesn't mean you will also beat the market.

Investing is heavily biased for favoring large players. A normal person has to take that bias into account too.

"Investing is heavily biased for favoring large players"

How?

I assume it's because large investors move huge amounts of money. When they trade, they cause ripples all over the market. When we trade, the price barely changes.

That is an advantage for the little guy though. If I sell 10 shares when the price is $100, then I'll get $100/share. A huge investor selling 1,000,000 of the same shares might move the price to $98 and average $99/share. Obviously these are made up numbers, and you don't sell a million shares by using just one market order, but the principle is the same. Large investors do have advantages, like better information.

Where do they get better information?

A CEO will answer Blackrock's phone call, not yours. Hedge funds can afford to hire analysts and buy information because they have many orders of magnitude more under management than you or me.

It's not really about where, it's that they do it at all. Are you really going to spend 100 hours researching a company before you make a $1000 investment? If you are going to spend millions dollars on a single company long term you're going to spend hundreds of hours on research before you close the deal.

In Buffett's case, he sometimes gets to buy investments at discounts not available to the general public, and then the stock goes up on the news that he bought them.

Yes, but Buffet doesn't then turn around and sell at that higher price, and even if he did the price would start going down as he sold his position. If his purchase is bad, in the long run the market will punish him, even if the stock price goes up in the short-term due to the positive signal from his purchase.

I certainly agree that Buffet can make moves that normal people can't, though. Goldman Sachs in 2008 is a great example.

Value investing (promoted by Benjamin Graham and adopted by Buffett) is largely about understanding when you're buying at a discount. Getting a discount is better even if you buy and hold.

It's harder to do these days because everyone does it, so there are fewer bargains. But Buffett can still do it more often, due to the halo effect.

He makes deals to limit his downside risks.

https://www.forbes.com/sites/adamhartung/2014/11/19/why-you-...

If you have 1000$ to invest and it appreciated 7%, that made you a 70$ profit, which is not much from a coat of living perspective. If you had 1,000,000$ to invest, that gives you 70,000$ profit, which is pretty good at covering living expenses, bit not leaving you much else. Now if you have 10,000,000$ to invest that yields 700,000$ in profit, that is marginally way more and covers living expenses, plus gives you room to invest in other actives, thus improving your chance to grow your wealth.

TL;DR—being rich is better than being poor.

Between fixed cost fees, things that are sealed behind an accreditation process, investments that need real person to person negotiation, opportunities that aren't widely published, and even data that isn't shared with anybody that shows up, I'm really surprised that anybody can be even be mildly surprised by that phrase.

There is absolutely no investment transaction where it's not obvious that larger players have it better. Even when entering in a shared fund, more money means lower fees.

> There is absolutely no investment transaction where it's not obvious that larger players have it better. Even when entering in a shared fund, more money means lower fees.

Fees are so low on index funds that I'm not sure this is really true any more. VTI, the largest broad US stock market ETF, has fees of 3 bp (0.03%). Fidelity even offers some zero fee funds like FZROX (presumably actual expenses are subsidized by other products, though).

Yes, ironically one of the forms of investment that maybe isn't biased (or isn't as much biased) is the same one you should favor because of the bias.

There are probably a few others exceptions. For sure they are hard to find, but it's very likely that they exist.

OTOH, as soon as you're a very big investor, you can't really invest a ton of money in, say, a small, discounted stock. Let's say you have ten billions to invest and you find that cute little company at an incredible discount, with a market value of 100 million bucks. Just investing 0.5% of your capital in that stock would mean buying half the company, which would make its price raise dramatically (if it were at all possible). But if you only had 100 millions to invest...

I'm pretty sure I've seen Buffett say more than once something like "if only I didn't have all those billions to invest, I would be able to make more money".

One advantage that small investors might have is that you can go after investments that are too small for larger investors to bother with. You need some way to find out about them, though, and some way to avoid averse selection where you only see deals that more sophisticated investors passed over.

Smaller players may sell their assets to supplement their income or must pick one specific asset class (often a house) because they don't have enough money to diversify.

A billionaire that already has absolutely everything he wants will simply get richer automatically while retirees funding their retirement by selling stocks will see their wealth diminish year by year.

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