

Index Funds Considered Harmful (Possibly Evil) - byrneseyeview
http://www.byrnehobart.com/blog/index-investors-are-evil-freeloaders-or-why-vanguard-should-pay-sac-and-paulson-royalties/

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keltex
What a load of B.S.

First off the total amount that Hedge fund managers make as compared to the
total return to the investors in an index ETF is comparing apples to oranges.
You really should compare the % returns if you are going to make this
comparison at all.

As mentioned in the original NY Times article one hedge fund manager's
"flagship fund gained more than 130 percent last year". That sure beats a 28%
return of the market index.

Secondly, hedge funds such as SAC Capital, etc. themselves are constantly
investing in indexes. They buy and sell index ETFs and their derivatives all
the time. I'm sure if you asked them, "hey should we shut down the indexes?"
the answer would be, "No."

Here's the NY Times article:
<http://www.nytimes.com/2010/04/01/business/01hedge.html>

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byrneseyeview
It's not meant to be an apples-to-apples comparison, just a reality check. One
group of people made a ton of money by betting their reputations and working
insanely hard. Another group of people made slightly more money, in the
aggregate, by listening to a compelling jingle on the radio.

Of course hedge funds trade ETFs. They're really liquid. Most market
participants can see why they immediately, directly benefit from investing in
indices--the cost is collective. It is a little bit like dishonesty; we might
all be happier if nobody lied, but everybody knows that they, personally, can
benefit from telling white lies.

I'm not calling for index funds to be shut down. That would be
counterproductive. I'm just suggesting that, in at least a Kantian sense, you
feel bad about yourself if you invest in them.

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sofuture
_I'm not calling for index funds to be shut down. That would be
counterproductive. I'm just suggesting that, in at least a Kantian sense, you
feel bad about yourself if you invest in them._

Wow, I really don't think you understand how a market works.

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quanticle
_That’s a strong defense of individual investors’ decisions to invest in index
funds. But that excess performance is only possible if active managers are
trading stocks. At some point, someone has to decide that one company is a buy
and another company is a sell—if we all invested solely in index funds, share
prices would move in lockstep (disregarding liquidity)._

Its a self-correcting scenario. If that were truly the case, then people would
start to trade actively, since trading actively would be an easy way to "beat
the market".

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praptak
This isn't even going to happen. There really are guys who can beat the
market. Insider knowledge, or just plain old expert knowledge of a particular
market sector. Not trying to beat those guys is a damn good advice. And those
guys have no reason to quit.

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damoncali
The whole idea behind indexing is that it is extremely difficult to beat the
market, so why not just buy the market.

One does not need to do "work" to invest in companies. You place a bet, and
you make your return. If you want to bust your ass deciding what bets to make,
that's your choice, but the markets would work quite well on their own.

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byrneseyeview
That's the conventional view of indexing. But I'm arguing that it's akin to
pointing out that it's very hard to pay more for Bittorrent than you do for
Netflix, thus we should avoid paying for media we like.

"The Market" is the sum of the actions of individuals, some of whom are making
actual, useful decisions. Can you describe how a market would work if
everybody thought about it the way you're thinking about it?

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stcredzero
_Can you describe how a market would work if everybody thought about it the
way you're thinking about it?_

Why should I bother? Can you describe how the world would look if everybody
just used drove diesels, or everyone stopped driving SUVs? None of these
things is ever going to happen.

That's a fallacy you're using there, BTW.

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khafra
It's both true and obvious that buying index funds externalizes the cost of
researching equities.

However, active investors engage in self-delusion that they can somehow beat
the market. Unless they have highly rare insider information, this isn't true,
and the top 25% of fund managers are simply that because the bottom 75% is
other fund managers.

So it's your trilemma--delude yourself, externalize the cost of research, or
watch inflation erode the value of your savings. I'm comfortable with my
choice.

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cma
He apparently hasn't heard of dividends.

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beoba
You're just annoyed that you made a bad decision with your money, and feel
that someone else should shoulder the blame. Yet somehow it isn't the fault of
the active investors who take all that expense cash in return for consistently
unperforming; no sir, blame the indexers! Is this what your "Financial
Advisor" told you while he was skimming 1-5% off the top?

In other news, Buggy Whip Owner Considers Cars Harmful (Possibly Evil).

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wglb
Not hn worthy.

