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Comment by AnthonyMouse | Hacker News Reader

> There are always profits, and losses, to be had through attempting to beat the market.

In this context the problem is that buying into an index fund does beat the market, because it simultaneously creates and then takes advantage of a bubble in the price of stocks in the index. The price of indexed stocks goes up because index funds are buying them. Then people buy into index funds because they're going up.

In theory non-index investors will then sell the indexed stocks once they're overpriced, but they can see the feedback loop. If more people are expected to invest in index funds in the future then the future demand for indexed shares will be even higher and the indexed shares will be worth even more tomorrow, so they become part of the bubble instead of correcting it.

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> an index fund does beat the market

market = index fund (S&P 500 based).

How can an index fund beat the market, if an index fund IS the market?

The article and discussion confound indexes with markets with sector investment strategies.

The SP500 is not the market or even a market, its a small sector selected by backwards view of the recent past top 500 large caps.

So buying an index fund that tracks SP500 means some churn as previously successful large companies are added, and recently unsuccessful large companies are removed.

A trivial example of SP500 beating the market (of all stocks) would be new regulations or whatever resulting in increased costs and harm to small cap stocks. Its not hard to imagine... a fixed cost of regulation that might shut down your local independent gas station might be a rounding error at BP. Imagine an accounting change that costs the same to implement no matter if you're talking about thousands or billions. Or PCI/DSS change. Anyway in that situation the small caps would drag down the market average but have no effect on the large caps in SP500, so the SP500 "would beat the market" easily.

Well you just turned the point from a financial to a semantic one.

What really is the market?

We could discuss it for hours, but the reality is that (US )"market" in finance does refer to the S&P500. So "beating the market" always means beating the S&P500.

An index fund is not its index. The distinction is important because the latter does not include management fees, transaction costs, and financing. From here it's easy to see how an index fund might beat the market.

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