Hacker News Reader

> I'm of the opinion that the stock markets are now inherently unstable, and they will continue to crash every 7-10 years.

When you say "now," are you referring to the period from when financial markets were discovered until the present? Or some more specific period? As far as I knew, boom and bust are not exactly new developments.

I'm not talking bear markets, I truly believe there will be 50%+ drops every 7-10 years, which is something that you wouldn't expect pre-2000, except 1987. I think the stock market is a battle ground for amoral participants who are willing to break the stock markets in order to make as much money as they can, and the NYSE and NASDAQ don't seem to care.

So buy shorts.

I will when the time is right. Right now, I'm long.

I agree with your posts except for a couple things: - Most asset managers will try to rip you off, but Vanguard's culture and alignment with your interests makes them a different/better company than anyone else I know of. - I don't know if you were joking when talking about buying shorts, but it's really hard to time the stock market.

Actually, if there really is a 50% drop every 7-10 years, I'd be very surprised if you couldn't make a killing buying cheap, far-out-of-the-money shorts.

You can't make a killing that way.

In general, the market can stay irrational much longer than you can stay solvent. To win, you basically need more information (in the shannon information theoretic sense) than the market, on average, does. And when you actually compute it, "50% drop every 7-10 years, and not even with 95% certainty" is negligible information.

Shorts and short equivalents are either effectively marked to market (e.g. futures are marked daily, short-sales are effectively as well through margin adjustment) or have a limited time horizon (liquid puts are 3m-6m, illiquid ones can be a couple of years, but with a ridiculously large premium).

Let's say a drop of 50% happens over 1 year - then your 3m/6m "50% drop" puts don't actually net you any money, because it only drops 30% in 6 months. But they keep costing you all the time.

And if you use futures/forwards/short-sales, you might (and often will) get margin called and squeezed on earlier appreciations. Unless you have a really large margin, which -- when you actually earn some money, if ever -- significantly reduces your earning in percentage terms.

One of the nice things about Vanguard is that the fee structure is much less than 1-3% for many of their funds. I invest with them in some of their index funds and pay no more than 0.4% in fees; usually much less than that.

Vanguard is owned by their funds, so incentives are aligned with the shareholders of the funds. They are very different than most fund companies.

That's a bit of a gimmick. Management still pays themselves from the % of invested funds, not fund performance. Same issue as with a nonprofit -- the corporate profit structure is only one source of moral hazard.

Their expense ratios are really low. Wellington, an actively managed fund, has an expense ratio of .25%. Their non-actively managed funds, such as the Index500, are under .2%. Those are very low fees compared to other similar investments. To compare with doing it yourself, at retail trade rates, that's about one potential trade per year per $2-3k invested.

Vanguard actively moves clients from their baseline funds to the lower cost/higher minimum Admiral versions.

I just don't see moral hazard in Vanguard, compared to other financial firms with remotely similar capabilities and offerings.

Edit, but too late to actually edit --

The expense ratio of Admiral Index 500 is .05%, not .2%. So even better than I'd remembered.

I watched a good documentary about this a while back.

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

>I invest with them in some of their index funds and pay no more than 0.4% in fees

The fees for VTI, which is Vanguard's Total Stock Market Fund is 0.05%.

On top of that, in Canada, most brokers will allow you to buy ETFs in a RRSP or TFSA account for no fees. Very cost efficient.

> I also believe that the stock market is a game, not an investment vehicle.

So beat the day traders, quants on their own game. You dont have to trade daily, just buy stock of a good company at a reasonable price and sit back. Once you have invested in a good company then the next step is not to do anything foolish, like selling your shares just because the company had a bad quarter.

Have you read Ben Graham's Intelligent investor, if not, you should.

> I'm expecting a market crash somewhere between 2015 and 2017.

And so does everyone else who tracks the markets, exactly because markets exhibit inherently cyclic behavior and because they haven't been down in a while. An easy-peasy prediction to make.

Not only is it easy to make there is no downside to making it. If the markets don't turn down then, he can claim that they will in a couple more years, or the fed is juicing the stats, or something else.

What would be more compelling would be a screen shot of his portfolio that shows that he is much more invested in short positions than longs, or has moved his investment into something besides equity markets.

What would be downright highly profitable for him, is if he could show over a long series of years that his ability to "imagine" future market conditions outperformed a strategy of just buying the market over the highs and lows and averaging the return.

> It's because they make their money from the hundreds of billions of dollars they skim off the top of their customer funds.

The movie Trading Places nailed this, albeit in the context of commodities rather than stocks. But the principle is the same:

   Mortimer Duke: Tell him the good part.

   Randolph Duke: The good part, William, is that,
   no matter whether our clients make money or
   lose money, Duke & Duke get the commissions.

   Mortimer Duke: Well? What do you think,
   Valentine?

   Billy Ray: Sounds to me like you guys a
   couple of bookies.

   Randolph Duke: [chuckling, patting Billy Ray
   on the back] I told you he'd understand.

OP remarked, why do the mutual fund managers have yachts but none of the clients do?

It's as frivolous as asking why the executives of Nike have millions but the majority of people who buy Nikes don't.

This is a very terrible analogy. Nike is in the business of making shoes. A better analogy would be, why do Nike's customers' shoes fall apart after 1 year, but the shoes of the Nike executives last for several years?

Asset managers are supposed to be in the business of increasing their customers' wealth. However, most customer don't get as wealthy as the asset managers themselves.