Investment Strategy

[-]ChristianKl10y100

Most people do better by investing in an index fund than by picking individual stocks. What makes you think you are different?

[-][anonymous]10y00

It's not just about expected value (performance), but about risk adjusted performance. Because like I said, the marginal value of normal market returns for me is negligible.

[-]Dagon10y00

Show some math behind that. Where's the cutoff between negligible and significant, and why do you think you can beat the market by all that much?

[-][anonymous]10y10

cutoff

So the cut-off for me would be at around 200,000AUD since I could buy a property in urban Australia outright then. I currently have 20,000AUD.

beat the market by that much

Actually I hadn't thought this part through thoroughly. Thanks for findind this flaw! Argh. I would need 1000percent returns on my investment to make that much...

Now my strategy seems absurd. Can you think of anything I can do to make something like that?

[-]Dagon10y00

I can think of many ways to increase your investment by 10x quickly, as long as you're willing to accept more than 90% chance to lose it all.

More likely, you'll need to supplement any investment with labor or other income. Your future earnings are (I hope) much much larger than your current savings.

[-]ChristianKl10y00

If you want to buy property the standard way is to take out a loan from a bank.

[-]ChristianKl10y00

I don't think there's reason to assume that you get better returns in this case for the risk that you take in this case.

[-][anonymous]10y00

I think that's a fair analysis on further consideration of the comments I'm reading in this thread. If pro fund managers can't do it, and even they lose to most index funds, what hope do I have?

But the question then remains: how do proprietary trading firms make their money above market rates? Is their only real strategic advantage their marketing and existing cash flows?

[-]ChristianKl10y00

There are multiple ways. The most straightforward is luck. There's high frequency trading. People like Carl Icahn make money by changing company policy. Quants have complex statistical models that sometimes pick up effects based on which they trade that are unknown to other market participants. Some companies are likely illegally trading on insider information.

[-]gjm10y00

Consider the possibility that you may be discounting the future too much. Modest returns can add up to quite a lot on a timescale of several years.

(Aside from that, I agree with Protagoras.)

[-][anonymous]10y00

So are you talking about compoound interest on an alternative investment with greater certainty (fixed bank deposit)?

Hmmm. So if I made a modest 6 percent per year on my 20k, I can expect to have 200,000 in 40 years (without added additions). That doesn't seem to match what a want, but then again that assumes I have zero net addition which I reckon is unlikely.

I get approx. 5000AUD a year from Centrelink, and don't really spend it so lowers it to 17 years till house. This is an oversimplification since I donate to charity and will probably have a job that makes more money with a lifestyle that costs money but this gives me an upper bound. If instead I can add 10,000AUD per year to my investment I can get to 200k in 10 years which seems like an attractive prospect

the principle barrier to this is that now i have my money tied up in illiquid assets that are longterm in their strategy. If I liquididate now I could be seriously damaging future gains no. Maybe it's best to wait for those stocks to appreciate then to sell them and place in an index fund (but a fixed deposit account is safer yeah?)

[-]Protagoras10y90

Over the course of a month? The reasons you give for thinking these stocks might go up aren't things that would reliably manifest in such a short time frame, and the market generally has been down recently. I don't think what you've described here is evidence of much of anything. Probably you're no good at active investing, because the evidence seems to suggest that nobody is (the winners are just the ones who get lucky), but the reason to think that is because of the general evidence for that, not because of your personal experience over the past month.

[-][anonymous]10y00

Thanks, that reads like a good analysis and good advice to me

[-][anonymous]10y60

If you want to make this a full time job, you can try to beat the market... I wouldn't bother otherwise.

[-]jacob_cannell10y40

Consider that you are competing with professionals, and the game is in some sense rigged against you.

To have an edge, you need novel insights/knowledge that allow you to predict some aspects of the future that are not yet priced in.

[-][anonymous]10y00

I think there are senses where the game is rigged in my favour too.

The fact remains; the fund more than likely owns securities that are performing perfectly fine. But due to changes in the index, securities no longer meeting the proper criteria, or even nearing its maturity, are simply eradicated. Usually this type of planned selling results in the worst possible trade execution and pricing on that day as a larger than normal sell volume hammers down bid prices. Many agile market participants have even learned to posture their portfolios to take advantage of this nonsensical behavior on the part of index funds. This is a primary reason, alongside the expense ratio, why most bond funds will underperform their indexes by a nominal amount each year.

I could just buy former index stocks that fall off the indexes, and take advantage of other such institutional edge cases that may not be efficient for pro's to capitalise on, no?

[-]ChristianKl10y00

I could just buy former index stocks that fall off the indexes, and take advantage of other such institutional edge cases that may not be efficient for pro's to capitalise on, no?

Why shouldn't it be efficient for pro's to capitalize on the effect? There are likely hedge funds out there that trade on the effect. Those hedge funds have complex computer models to predict which stocks are going to fall in the future of the index. As a result they are going to make the trade days, hours or minutes earlier than you.

The high frequency traders are going to make most of the profit that's going to be made on the effect.

[-]Elo10y00

you said you think stocks will go up; then you gave it a month. wait longer. if they are ASX200 stocks they will go up; that's what makes them ASX200 stocks. $6000 diascrepancy is a small amount. that could close up in a day or two.

[-]Lumifer10y00

if they are ASX200 stocks they will go up; that's what makes them ASX200 stocks.

Errr....

No.

[-]Elo10y20

ffs. using my words badly. What I meant is that it sounds like he is trying to index. if he is indexing then just like all other funds that index; they index because those things trend upwards. But thank you for taking that out of context and badly.

[-]Lumifer10y00

You are using words badly. The verb "to index" in this context might mean:

investing in something that will provide the returns of an index
replicating an existing index
constructing a new index

Clarity is doing none of these things. What it sounds like he is doing is trying to have a more-or-less diversified portfolio of stocks. But that has nothing to do with indexing.

just like all other funds that index; they index because those things trend upward

And that is what my original "no" referred to. It's still no.

If you interpret "those things" which "trend upwards" as financial assets that (usually, over the long term, are expected to) produce positive returns -- in other words, are not zero-sum -- then there are whole asset classes like that, for example equity (stocks). All stocks are "things which trend upward", and it has nothing to do with indexes or indexing.

"Funds that index" are funds which invest in a portfolio that replicates the performance of some index. They do this because there is customer demand for such financial products, not because indexes, and there is a great variety of them, have a particular tendency to trend upward.

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Investment Strategy

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