Hacker News Reader

Comment by matt_wulfeck | Hacker News Reader

I love passive investing (vanguard admiral shares anyone??) but there are several things that I find lacking:

1. It's really boring. There's no earnings to follow, no products to watch, etc

2. You can't get rich from most indexes. The risk and reward is too low. It's unlikely to invest in a index that gives you a 10x return, though it does happen.

In the end I keep the bulk in a low fee composite index but I like to speculate with a little, even if I invariably lose money on the spec part. It's more fun.

View on HN

I do the same. I take 10% of total net worth and invest wherever the hell I want. I call it my 'casino fund'.

For me I don't care about #2. If you had the most boring investment in the world that returned exactly 7% every single year I would put 90% of my assets there immediately. But I'd keep trying to beat that 7% in my casino fund.

It's unlikely to invest in a index that gives you a 10x return.

Average return from S&P500 from 1928-2015 is 11.41% [ source : http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... ]

Note that this is not inflation adjusted; inflation is about 3.4% historically.

It'd take a little over 21 years to get a nominal 10x return at 11.4% average return.

Yeah, this is basically why passive is great. People say hedge funds are good in a downturn, but the odds of a downturn in any given year are not actually that high.

From the Professor Damodaran's historical returns link:

From 1928-2015, of the 88 years, 24 were down years. Probability of a down year is 27%

If you want "fun investing", go to Vegas. I personally don't think of investing as a source of entertainment.

I quite enjoy listening to the conference call for a company. It really does tell you a lot about what's happening behind the scenes, and before anyone else knows it. It's like the company telling you little secrets :-)

Investing in specific companies rather than indexes (which I assume is what everyone means by "fun investing"?) isn't very much like gambling in Vegas. With gambling in vegas you have a negative expected return with a high variance. With stock picking you have a positive expected return with a high variance (where do index funds fit in? positive expected return with low-ish variance).

Although picking stocks is still not rational if your only concern is your long run wealth, it's not irrational for the same reason as gambling. It's bad because you have the same expected return as low cost index funds, and you exert effort or pay fees for the privilege. That doesn't mean I look down on everyone who actively invests though-- they may have good reason to think they are special and can pick stocks better than average or they may just enjoy it, as the person to whom you responded said he did. And then it would be rational to actively invest at least some of the time.

I disagree that you have +EV with stock picking in general. Most companies go out of business, most stocks go to $0.

Index funds, however, do have +EV.

If you want to be sure of positive expected value, just pick randomly, with probability proportional to market cap. That gives the same expected value as an index fund, with much higher variance.

if you rebalance / repick, yes. If it's just buy and hold, I don't agree. The benefit of index funds is the failing companies are dropped before they hit $0.

That seems like a strange perspective to me. All of the theoretical justification for passive investing (you get the average return without the fees, maximum diversification, etc.) implies that you'll get the best result from holding every possible security in some proportion. You're saying that index funds work not because of any of that, but because they've observed a market inefficiency (low market-cap or recently-fallen stocks underperform the market), and make an active decision to deviate from the market portfolio in order to exploit it. Why believe that there's exactly one easily-exploitable market inefficiency, but no others?

I see the error in my thinking here. My suggestion of rebalancing loses the high end component of variance while avoiding the 0 value case.

I guess im just too cynical to believe a company can operate indefinitely with indefinite growth!

The very essence of the EMH (which is frequently oversold, but holds to some degree) is that we can't know which stocks are going to go down or up just by looking at the current state of the market. The expected value of any given stock is the same as that of an index fund, assuming it's no transaction cost to obtain it. So ignoring fees, picking stocks randomly does have the same positive expected return as holding all a small bit of all stocks at once (which is what owning an index is), just a much higher variance and thus people choose to own indexes.

I'd argue that you can get rich, just slowly.

Put 95% or so in passive, then use the rest for a few gambles. If you lose it all, no big deal, make sure you're comfortable writing it off. This way you can get the entertainment value, playing extremely risky with this money but without taking on much large scale risk. You can use leverage or options trading to maximize the risk/return for this if it doesn't feel like it's enough to be fun.

Some people say lottery tickets are the highest risk portion of the portfolio, but for people who like looking at numbers as you're describing, I think this is a better option.

If you have higher appetite for risk, take an efficient portfolio and lever it up to your desired risk level.

Reply on news.ycombinator.com