Comment by dave1619 | Hacker News Reader

Comment by dave1619 | Hacker News Reader

I added a comment on Matt's blog post but it's waiting moderation so I'll post it here to hear other folks' input.

"Hi Matt, I usually enjoy your posts but I felt this one lacking in a major way.

Investing is something that has huge potential (ie., 100 fold). This is something that I’m sure you’re aware of as an early Google employee (you were invested in the company via stock options, etc). On the other hand, investing has huge downside as well (you can lose all your money).

Many people are advocating people to take a mindless approach to investing by investing in low-cost index funds. I personally think this is decent/good advice for most people who don’t have the time, energy, experience, skills to make investing a lifetime passion. In other words, for the typical person who just wants to focus on his 9-to-5 job and other hobbies and not deal with the world of investing, then sure low-cost index funds are the way to go.

However, there are some people who can benefit in huge ways by becoming experts in investing (whether this be in stocks, real estate, businesses, etc). A few disclaimers first… becoming an expert investor is extremely difficult and most people underestimate what it takes. It’s not about “picking” stocks or getting lucky. Rather, it’s about accumulating the skills, experience and expertise to evaluate investment opportunities in a wise and discerning manner, and to do it exceedingly well. I think it requires an immense amount of time and dedication. And I don’t think 98% of the people out there practically have the time, energy, motivation or focus to develop such skills. But for the 1-2%, I think it’s a possibility if they treat it as a serious lifetime endeavor."

Perhaps you're right; perhaps 1-2% of people (if that) could potentially beat the market in their investments. And the majority of people think they're in that 1-2%.

Meanwhile, index funds have the lovely advantage that you can't do worse than the market.

If you have extra energy to spend investigating investments, use it to diversify into a handful of minimal-overhead index funds rather than just one. And if you fancy yourself an investor as a hobby, take a small fraction of your savings and play with it, and congratulate yourself if you manage to do better than "buy high and sell low".

But in general, most people would greatly improve the status of their investments by just throwing the whole thing into a halfway decent index fund. That's the most sensible general advice when talking to a large audience of people; get them there first, which takes far less effort, and then let people who really think they can do better attempt to do so.

This is such a spot-on answer--thanks.

With index funds, you always do slightly worse than the market.

In markets like real estate and private business, I agree with everything you wrote. In a liquid, public market like publicly-traded stocks though, I'm not so sure. I don't disagree that if you devote your life to it, you could possibly find an edge - although it will likely continue to get more difficult as institutional players become ever better at exploiting (and thus removing) any inefficiencies. But even if we accept that it's possible, you would almost certainly have to accept significant volatility to do so. And even if you didn't, you would ultimately be devoting your life to winning a zero-sum game. (Similarly it is possible to become good enough at poker or (with more difficulty) blackjack to make a living from them. Even a good living, potentially. But you're going to have to weather some downswings along the way, and you won't have any consolation in the fact that you're creating something of value - as you would starting a business for instance.)

So I guess I don't disagree with anything you wrote, but I question whether it makes sense for a person to devote the majority of their energy to playing the stock market. (And I definitely agree with you that it would indeed take the majority of one's effort over the long term to have any reasonable chance of success beyond pure luck.)

Edit: I should add that I would consider some proven, passive strategies such as tilting to small and value to be exceptions. These do theoretically allow for slightly superior returns without life-consuming effort, at the likely expense of taking on some additional dimensions of risk. I personally keep a moderate small/value tilt.

Hey Dave, I approved your comment over on my blog--sorry about the delay. I also wrote a response which I'll paste below:

Dave L, I concede that someone who is willing to put in the time and effort, they may become good at selecting stocks. Then again, they may not: I have friends who have spent a lot of time and effort studying individual stocks without much to show for it. And don’t even get me started on the financial press that’s there to distract and mislead investors into bad choices–yikes!

In short, I believe that a passive index fund will outperform a majority of professional active money managers, and it’s the best choice for the vast majority of people.

Furthermore, who would most people name as the greatest investor of the last 50 years? Probably Warren Buffett. Well, guess how Warren Buffett wants his money left to his wife when he dies? Buffett wants the money in an index fund (!). Here’s the article: http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/24/w... and I’ll just quote a bit:

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers."

So you have to ask yourself: are you smarter than Warren Buffett? Because Buffett is counting on an index fund when he dies.

> Because Buffett is counting on an index fund when he dies.

That's completely irrelevant. Nobody is going to get Buffet rich from index funds. After Buffet dies he won't be around to decide what to invest the money in so he picked index funds because they're a good conservative decision that will outperform most investors.

That does NOT mean that you can't do much, much better than that by, like Dave said, becoming an expert investor.

Investing 90% of a portfolio in a large-cap US index fund and 10% in short-term treasuries is not considered a "conservative" asset allocation. It's missing a lot of low-hanging fruit in terms of portfolio diversification. For example:

The suggested portfolio isn't diversified with an International stock market fund. The S&P fund isn't exposed to small-cap and mid-caps, like Vanguard's Total Stock fund. The bond component is small and has no exposure to intermediate/long-term bonds or corporate bonds.

A more conservative portfolio would be, for example:

  60% Total US Stock Market
  20% Total US Bond Market
  20% Total International Stock Market

http://www.bogleheads.org/wiki/Three-fund_portfolio

Edit: I'm not saying that Buffett's suggested portfolio wouldn't outperform a conservative three-fund portfolio. Just that his 90/10 portfolio is very aggressive with a large-cap tilt.

Index funds are an extremely conservative strategy relative to trading individual stocks, many options strategies, futures, futures options, etc, etc, etc. Index funds are conservative because they aren't high risk or high reward.

Edit: Conservative is just a relative word. Sure index funds aren't conservative relative to the the things you listed, but they are to many many other strategies that Buffet (for example) used to get as rich as he is.

I'm of the tiny, minority unpopular opinion that believes you can beat the market by picking stocks,. I have done so consistently for the past decade. Pick large cap companies with huge growth, high barriers to entry, insulated from economic trends, no debt, and high profit margins.

My favorites:

MA, V, BABA, GOOG, FB, JNJ, GILD, HD

That's not many, but these are some of the best long term investment ideas I can find. Stay away from volatile, macro-sensitive sectors like oil, materials, and retail and stick to healthcare, consumer staples, and utilities. People are getting older and wanting to live longer which is bullish for healthcare, and the web isn't going anywhere even if oil is going to $40.

Or you can try an ETF linear combination http://greyenlightenment.com/?p=1540

There are many strategies that beat the market and provide as good risk adjusted returns as an index fund .

Warren Buffett , btw, broke his on advice of avoiding tech by buying IBM, which has lagged the market considerably. most of the time Warren Buffett doesn't pick stocks in the traditional sense but instead gets special preferred shares that pay huge dividends and other perks. The performance of BRK.B is influenced more by the private companies like Geico and than stocks like Coke.

Good to hear that even if it's tiny, there is a small contingent who agrees. I took a portion of my savings in order to invest and have outperformed the index funds and basic allocations in my 401k and retirement accounts. I don't have a long enough track record (3 years thus far) to assume it can continue but my overall returns have consistently beaten SPY/DJI.

My sense is that investing is a skill and that you have to practice in order to get better. I've enjoyed the books of Thomas Bulkowski (http://thepatternsite.com/mybooks.html) and had fun doing it. Because it's not my primary retirement or savings it is less pressure and I try to minimize the gambling aspect instead relying on something more mechanistic.

With that said the current bull market keeps me humble; right now it's easy but if things take a turn I will try to be honest with myself and, if necessary, reallocate everything in index funds.

>I have done so consistently for the past decade.

We need a rule in financial threads that you can't boast about your investment results unless you're willing to prove it.

>Or you can try an ETF linear combination

Oh, brother. The guy back-tested 4 years of data (one of the all-time great bull runs) with a portfolio of 3 ETFs, one of which is a 3X leveraged QQQ fund. Do you not see the problems with that strategy?

This is why amateurs get crushed. Then they blame the financial world.

Hey Matt, I've heard the Warren Buffett argument many times but it's usually misrepresented. Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far, far better with picking individual stocks. The problem is the vast majority of people are not skilled in evaluating companies and that's why Warren Buffett suggests them to choose a low-cost index fund.

I think though the main point of my previous comment was that many people (including posts that suggest everyone invest in only low-cost index funds and bonds) tend to underestimate the vast potential of huge returns in investing if one truly is an expert in investing.

Also, I suggest reading Common Stocks, Uncommon Profits by Philip Fisher and also Beating the Street by Peter Lynch. Both books are from legendary investors and will shed light that is different than the index fund approach/philosophy.

Lately, even the experts have a hard time beating the SP500.

I don't know why this has been downvoted, I couldn't agree more.

most social news sites like reddit and digg consist of a clique of a dozen or so people who control the flow of discussion, and dissent is down-voted. such is life. That's why I work for myself so I call the shots.

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