The Cost of Investment Hubris
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- Опубликовано: 8 май 2024
- Warren Buffett has famously said that "diversification is a protection against ignorance" and that it "makes very little sense for anyone that knows what they're doing."
This quote is often used as an argument against diversified investment strategies, but the thing is, Warren Buffett was probably not talking about you when he referred to people who know what they’re doing.
If you think that you are included in Buffett’s group of “people who know what they’re doing” you may have investment hubris, which can cost you in the long-run.
References: zbib.org/785fcdc083604e7797e7...
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I like diversification because then I can focus on eating a warm chocolate brownie with vanilla ice cream on top, and NOT be staring at a screen evaluating individual stocks.
I would diversify away from that junk you refer to as a food
This!
So you decided to get diabetes because you don't want to pick stocks? Why so extreme?
I love the way you think lol
Life is a balance between comfort and risk. Where do you settle? I always need a net. No matter what happens, I'm going to be fine.
Easy to say, hard to implement. Make a plan, then work your plan. Start small and simple. Make improvements along the way. Open a savings account. Then a checking account. Then a trading account. 🎉
Eventually you will be giving people advice, because you learned the path. Starting over sometimes means you are experiencing the mistakes that teach.
*guy with hubris:* yeah, but i’m not one of the guys with hubris
Trump Impression:
"I'm the most humble person, everyone says 'Wow! Look how humble he is. I wish I could be that humble.' It's incredible."
I witnessed this phenomenon a few years ago during the Canadian pot stock boom. I worked with a group of people that thought that that they "knew what they were doing" because they were regular pot users and could therefore predict which companies and products would be successful. They got lucky and made a bunch of money (on paper anyway). At that point they considered themselves financial geniuses and continued to invest everything into these same companies. Fast forward a few years and their investments became practically worthless and they were right back where they started - broke and ignorant.
Going back in time to the internet stock boom, it was exactly the same thing with the people I knew. The sectors may change, but human nature doesn't.
I remember something similar during 2007 crisis. I was working with this very intelligent engineer that said he has seen financial meltdown coming and made good money betting accordingly. He then proceeded to lose all his winning by making a strong bet that Bear Sterns will recover. It just shows you that even very intelligent people can fall victim to this investing hubris.
Broke, ignorant..... and stoned, DUDE! LOL
Great example.
This post would have been funnier if you said broke and stoned at the end
Love this Ben! I wish I had discovered Warren Buffett 30 years ago but was at least lucky enough to get his insights in 2015 for low cost index funds. Your vid gives me confidence that I am doing the right thing for the next 30 years. Thanks for this!!
Ben Felix - something missing from every school's curriculum. If I ever get to run a country, I am including you in the national curriculum
I can't imagine most kids caring or remembering this stuff.
which would then galvanise heightened financial literacy, gotta keep the citizens enslaved man, suppress the education 🎉
@@jasonmaguire7552 They don't. "We should teach personal finance in schools" is one of those phrases you hear often, but studies have shown that personal finance courses in high school are ineffective precisely because kids at that age do not care about mortages, taxes, and investing. They have no wealth of their own, why would they?
@@Chessmapling How unfortunate. Still, everybody should have investments and I am thinking that comparing school with work and presenting investing as a way out of having to work for a living could get them interested. School at the end of the day is the lite version of work.
God hope you never lead the country, we struggle to teach the basics of Math and general law. This is not the top priority.
Ben, I started as a real estate investor who started buying after the GFC (when everything was cheap) and rode the rising tide of the 2010s. Why would anyone invest in index funds, I scoffed.
I first came across your videos in 2018 or so, with great skepticism (and hubris). You definitely weren't preaching to the choir to me. But I kept listening and now most of my money is invested in AVGV. Thank you for putting these videos out and being a reliable source of evidence-based investing knowledge.
Beating the S&P500 in a year is one thing... but doing it consistently AND with a similar risk profile is really tough! Great video!
It's a full time job. And unless you are very fortunate, most people can't live off of their investments, so... indexed ETFs ftw.
Beating the S&P 500 as an investor is easy over time. Impossible over the short term as that would speculation.
Buffett also said that you should only buy shares of a given company at a given price if you can write an essay explaining why. That essay would include a valuation of the company, estimations of its future cash flow, its competitive advantages, an analysis of the industry, your trust in corporate leadership, competitors, and so on. It would practically be a full-time job, like it is for Buffett. Even then, you can (and most likely will) get it wrong. And all that wouldn't be worth it to _barely_ beat the market. Might as well use that time and effort to work on something else and make money to invest 😅
I'm both a Buffett stan and a Ben Felix stan. I believe that people like Buffett are incredibly skillful and I admire buffett more than I can say. I also believe that you can be skillful and beat the market.
But I am also a Ben Felix stan. I believe that most people, including myself, are better off holding index funds. I work in the active management industry, and even though I try to work my ass to find investments that outperform, the reality is that I'm way more likely than not to underperform.
Buffett also says that most people should own index funds.
@@spanishflea634 I also say that
Look up to Munger. Buffet is just as much of stock picking degenerate like the rest of us. Look up his "cigar butt problem". :)
I love how you keep hammering home the same message. It helps me put my ego aside and accept I'm not special when it comes to investments.
Ben, though I always liked your longer-form videos with all their academic rigor, I have to admit these recent shorter-form works are easier to digest and extract kernels of wisdom from. Thanks as always!
That's great! Thanks a lot for the feedback.
Agreed! I usually don’t want them because of the length but this one was fantastic
Spot on. Everyone thinks they are special, most arent. As always, the hardest thing to do is keeping things simple. Keep up the good work Mr Felix!
When the Buffet argument shows up (and it frequently does) my knowlege from previous videos from you led me to this exact conclusion already. Thanks for educating us Felix!
Another great video Ben! Thanks from down south!
I had this hubris my first 10 years of investing,,and everything i did was an absolute clusterf*ck of lost money,,if only i had put all that time and money to work in a simple SP 500 index fund back then i would of had a better head start in building my retirement nest egg..i just didn't know it was that easy back then.
I always roll my eyes when people try to argue a point with short quotes.
Gyahahaha, I love that opening "He probably wasn't talking about you". Harsh truthbombs in the first 30 seconds. Love this channel!
I joined watchers of this channel recently, but even after some time... it's priceless...
Imagine being a retail investor trading a few grand on RobinHood and unironically believing you're one of the people who Buffett - a guy who knows Graham, Klarman, Schloss, Munger, Greenblatt, Simons, Ruane, Li Lu etc - thinks knows what they're doing 😂😂😭
One of the around 10 people, to be more specific, who Buffett thought might be able to outperform the S&P500 consistently (0:58).
My interpretation of Warren's words is "if you want to pick stocks, spend the time to know what you're doing", otherwise simply invest in index funds and enjoy the rest of your life. People keep playing the lottery for fun, why not research companies/investments for fun? I think the odds are higher!
Doing your due diligence definitely pays dividends…
Another rock solid vid, thanks for posting!
This was a fantastic video! Short, but full of critical information. Thank you!
there is another video of Buffett out there where he says this line but then also says "most people don't know what they are doing".
Thank U 4 this episode. I consider myself such individual. Now, I need to reconsider the way I invest. Thank U.
My smartest moment was when I admitted to myself that I simply didn't know what I didn't know about picking stocks.
I have since switched to a Market cap index fund and added a 16% small cap value tilt.
I have learned an awful lot from the folks at PWL, all for free from helpful videos like this starting from the couch potato model.
Thanks!
p.s.
I believe that a lot of people misunderstand Buffet's quote because they equate ignorance with stupidity. They're not "stupid" so he obviously isn't talking about them... :) To me, it means that someone who isn't an expert, should in fact diversify.
Same, I'm glad others also found lots of value through these videos as it seems like I'm doing something right. I went 100% SCV but am slowly adding tilts like a profitability/conservative with a total market as research seems against my more risky play. Btw, PWL Capital also has portfolio examples they use on their site if you want to know more about specific recommendations for optimization.
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I like your final thought. In my mind I’d go a step further though. To me ignorance or lack thereof when it comes to investing would come down to knowledge of future events and how the market will react to them. As none of us can accurately predict the future , especially not all the time - we should all consider ourselves ignorant investors. Even buffet himself !
Warren also said during an annual meeting while answering a question if he was an average working man not doing any stock research then he’d invest in the S&P. He said that the S&P is the best investment for anyone who doesn’t contribute any time to researching businesses.
He’s not calling us idiots. He just thinks that if you’re a professional who knows what they’re doing then you’d be losing out on bigger opportunities by investing in an index. And keep in mind he said that he’s only found about 10 investors in his lifetime who he thought was capable of doing that.
Thank u for sharing the quick issue🌟
I'd like to share some ideas with you . Use the number
The real question is how do you if you are good or appropriate for non index investing. I think the once you know basic finance instruments, basic financial accounting, and really know a particular industry, you are good. Peter Lynch did a good job in his 1997 lecture.
There are certain characteristics that companies have that make them successful the way a boxer has certain aspects that make them good.
love the new shorter videos with cool ideas
When in doubt, listen to Ben.
hahaha I fing loved that introduction. Sick burn... and very accurate too.
Another great video - thanks Ben! I think you only blinked twice throughout the video though - you know it's allowed right? :)
👍Useful reminder.
Yo Ben, if you want to stick to this camera setup I recommend you to put it in manual focus. Line it up to you in the chair, and make note of the setting on the lens or camera in case you accidentally move it.
That way you avoid the depth focus flickering back and forth then the Auto-focus is overreacting to your head movements.
Thanks. That was driving me nuts but I was having trouble getting the manual focus dialled in. I’ll try that again next time I record.
Ben, you dont need to giggle ;) We like you the way you are.
Good as always
Interesting video! I like the core-satellite strategy.
Buffett/Munger started in a different time but made most of their money in the last couple of decades. Totally agree with you Ben. Even Nasdaq up 35% in 2023
I imagine the people who need to hear this message are the people who will ignore it, but as they say you can lead a horse to water lol
That is likely true for most of my videos, unfortunately.
I am actually thankful to all the people who do not follow this advise, because if everyone did it would not work as well for a passive investor like myself.
Fund managers are biased to tell people that they CAN'T beat the market, Finance RUclipsrs are biased to tell people that they CAN beat the market.
@@ccrider8483 yep. As sad as it is, money is relative.
Others having less means your money is worth more. Pretty selfish, I know, but I care more about my friends and family than I do about strangers.
@@Allen_Leigh_Canada You might be able to beat the market once or twice, but over time, say 10 or 20 years, most people who attempt to beat the market often lose more than they gain. Mutual funds are a prime example of this, they are hired scientists, analysts, and even AI, but they are still lost to ETFs that invest passively.
Ben Felix - I completely agree but there is one thing I was wondering about. You introduce yourself as a Portfolio manager. Are you one of the few that do outperform low cost index fund investing?
The new thumbnails are really nice
Thanks!
In Greek mythology the Gods punish men's hubris, but I am better than these men... possibly even better than the gods themselves!
Finally, investment advice for someone like me who is neither smart nor well-informed (especially if I’m compared to Warren Buffet).
The financial space is where the prideful become the humbled. Getting lucky a few times on stock picks is no different than getting lucky a few times at the roulette wheel. You can make money investing but it must be diversified and long time horizons. You can also make money trading stocks and ETFs but that's an entirely different game with different rules
Hi Ben, thanks for your video! I wonder why S&P 500? Last time you mentioned small-cap value stocks are better, so why Buffett does not recommend that kind of index instead?
Buffett is a big believer in American capitalism. I think diversification is worthwhile.
excellent video as always
I'd like to share some ideas with you . Use the number
You know more about academic finance than I do, and you have presented what academic literature has produced. Is there any study on stock returns and returns to shareholders (incremental net worth per share plus dividends)? If yes, does that translate to a strategy that would earn better than average returns? If yes, what factors influence companies to add net worth and dividends at higher than average rates? Would an investor be capable of detecting those?
Buffet has also - very clearly said - that investment funds and ETF's are great for ordinary investors. Its also on a youtube video somewhere. I have a lot of individual stocks myself - but this is also for tax reasons as very sadly I get taxed on a running basis for index fund gains and only at time of sales for individual stocks (does not make any sense imho, but the result is important to achieve tax optimized stock returns). I have beaten the market a little in average being heavily invested into IT/AI, financing and medico. Happy to accept its more luck than anything. Maybe the risk profile has also been higher in those sectors. 2022 was brutal. YMMV.
My mum has investment hubris. She thinks that she correctly identified her savings account as the best investment strategy that ever existed.
Ben Felix- as someone who watches a lot of your videos, im genuinely curious how this advice is balanced with your role as portfolio manager at PWL capital. The tag line on your website mentions serving “High net worth clients”, and your video mentions that they are unlikely to benefit from more complex investment strategies. There seems to be some nuance that im probably missing.
He has a video - what is (good) financial advice - that in summary says his job is to help people develop better goals as well as behavior management. He basically keeps the hubris in check for his clients.
Fund managers are biased to tell people that they CAN'T beat the market, Finance RUclipsrs are biased to tell people that they CAN beat the market.
Hey ben, Instead of talking about what an average investor should do, which i think could benefit from diversification, what do you do as a experienced investor ?
The small number that may be able to beat the market, would still not justify paying them a fee (eg1%).
For someone in their early 30s, what’s your opinion of dollar cost averaging into Nasdaq long term vs S&P 500? Do you think it will outperform or too risky?
Nasdaq is a more concentrated portfolio and will tend to contain companies with higher valuations, leading to lower expected returns. There are many other types of stocks in the market to consider. I talked about it here ruclips.net/video/jKWbW7Wgm0w/видео.html
Ben, I like this advice from Buffett, but you also made a great point about international stocks. Shouldn't I have some money in an international stock fund too? Also, wouldn't it make sense for me to slightly weight my portfolio towards growth focused etfs such as QQQ and rebalance?
I agree on International. I (hesitantly, given who he is) disagree with Buffett on this. He believes in American capitalism specifically.
On QQQ, I do not agree. Growth stocks do not tend to deliver higher returns in the long-run. The Nasdaq 100 has been an anomaly.
Ben Felix knows what he's talking about.
This is everything most people have to know about investing. Like John Bogle says, it's simple, not easy. But it's the easiest and probably best way to invest.
Great stuff, Ben.
My main objection to the S&P 500 index fund as a complete investment for US equities is that it is so dominated by large cap growth that when this is not in favor, the portfolio tanks. It can, in fact, go sideways for a decade. But an appropriate measure to address such possibilities is to deviate from cap weighting overall by including tilts to smaller and more valuey indexes. Even if there were no premiums for such tilts--and I think there are--my simulations show that on a yearly basis, there is a better chance that some part of the portfolio did ok. This is especially important in the deaccumulation phase.
I agree with you and disagree with Buffett on this, but that’s a topic for another day!
Vanguard has a total US stock fund VTSAX, and like the S&P 500 index funds it is also a weighted index. For me the total stock fund is enough diversity. For others there are obviously many other options.
@@ccrider8483 True, but Total Stock is also strongly dominated by large growth because of its cap weighting.
I'll bet that factor tilts will mysteriously become fashionable again when the S&P reverts to its mean. When that will happen is, of course, unknowable.
@@ccrider8483 I was going to make the same comment but you beat me to it. Well stated.
@@ccrider8483 the overlap between the total stock market fund and the S&P500 fund is close to 90%.
The Dunning-Kruger effect seems to me to be particularly rampant in the investing community. People watch a few clips of buffet and read one book and consider themselves geniuses.
Ben, I've been looking for the Buffet quote on the Mega rich not following the advice for over a year. Thanks for sharing it. Could you share the source, please? Thank you
References are linked in the description!
I don't buy stocks to beat the market. I buy them for the particular combination of growth and income prospects each offer. You can't buy a fund for that, you have to create it. You'll chose high yield/no growth, mid yield/moderate growth and low yield/high growth with the proportions that combine to give you the desired balance.
Both sides have value. It is true that for the vast majority diversification for most of your portfolio is likely most effective. But having some plays on the market is fine. Its also hubris on his part to assume hes one of only a few hundred people as smart as him, timing the market is next to impossible, but buying into the right sector at the reasonably right time etc isnt and to think only a few hundred people can do it is a bit excessive
I might be wrong, but isn't there evidence that "getting the bug" of buying stocks tends to mean that you're more likely to have more in your portfolio simply due to contributing more? I've got half my portfolio in broad market low cost ETF's and the other half in individual stocks. The jury is still out on whether I can beat the market, but I'm sure that actively managing half my portfolio makes me put a lot more money into my account than I would otherwise. Sure those boring ETF contributions are a good investment, but the dopamine hit of buying individual shares gets me saving up extra cash to put into my account every month. Very few investors can be as coldly rational as you, Ben. Isn't there value in knowing your psychology and using it to your advantage? Maybe I will give up 0.8%, but then again, maybe I wont, since my returns are almost vertical over the last month, as I spent the last year buying up undervalued assets and money is just now flowing into things other than tech. But either way, playing the game gets me to put more cash in the market.
Please review terry Smith's strategy
I am an investor. I am an investor. I AM AN INVESTOR! I AM AN INVESTOR BEN!!!
Hi Ben, I understand the message here and I truly believe it in the case of an investor trying to pick stocks from market data or news articles etc. But something I never see discussed in this context is whether this still applies in the case of a skilled veteran in a given industry picking stocks from their domain of expertise. For example, I've been in the software business for almost 20 years now and I've dedicated most of my life understanding this craft and its real world applications as well as the human dynamics inside software companies. So when I read about a press release from a company, I form an opinion based on 20 years of experience, so shouldn't I believe there to be some sort of alpha in it?
One question to ask yourself is whether your experience and insight is unique. To get significant alpha from your personal knowledge, you don't just need to beat the average market participant, you need to beat all other market participants, including all the ones who may have similar experience and background as you.
Consider this: if you go to an auction and see an item that appears to be undervalued, you might be able to get it for a good price, but only if you're the only one in the room who notices it. If two or more people notice the true value of the item, it won't sell below that true value because two knowledgeable and well-backed bidders are enough to find the correct price, even if there are thousands of people at the auction, and even if the seller or auctioneer has no idea of the item's value.
@@dglynch222 Thank you for your thoughtful response. I like the auction house analogy, but it's not a perfect analogy since an item on auction is singular, so a single knowledgeable rival can set the price, but in the stock market a small minority of knowledgeable participants in the same field probably won't have the funds (and the risk appetite) to move the price completely to its actual value. For example, the world at large learned about ChatGPT around early 2023, but it was very obvious to the practitioners since as early as late 2020 that a revolution was imminent, but the market still made its main reaction when the revolution became obvious to the public.
By the time you've read the press release, it's likely too late.
There are tens of millions of people in the world who have 20+ years experience developing software, it's hardly a niche skill. What do you know that they don't ?
@@chrisf1600 I don't have to know anything that none of them don't, it's not like if one of them had the same insight he would have the capital to correct the market all by himself. I just need to have an intuition that's better than the market's capital-weighted-average intuition.
If I think I have a solid understanding of a very specific domain, why can it not be considered arbitrage trading when I disagree with the market?
Note to self:
Peter Lynch’s view needs a greater profile, he suggested only having enough stocks as you would children.
Then there is Dunbar’s number…
MishMash these or overlap these Munger like “mental models” and the number of positions most advantageous for you to be invested is probably in between the numbers of Lynch and Dunbar…
What works Ben, me, you or whomever might not work for you or you or you but it may, be like the Borg, assimilate everything, always be learning.
New subscriber here so please excuse me if this is common knowledge.
Ben being a portfolio manager but yet is more or less recommending index funds is that kind of a conflict? I’m assuming your employer is OK with it, so are you one of the managers that can beat the index funds regularly?
I work for a wealth management firm. While portfolio management is a core part of our service, we spend a lot of time on tax, estate, and retirement planning. Our portfolios resemble low-cost index funds. I did a video on this a while ago: ruclips.net/video/TI5p8vqdjTw/видео.html
@@BenFelixCSI
Thank you, that cleared up a lot.
savage bro
2:27 Perhaps this is a somewhat dumb/off-target question, but is the magnitude of "active share" measured in terms of how much *performance/return* deviates from the relevant benchmark index, or in terms of the proportion of held shares/share types that the benchmark index doesn't include?
Active share measures how much an equity portfolio’s holdings differ from the benchmark index based on constituent weights. It can be increased by including stocks that are not in the benchmark, excluding stocks that are in the benchmark, and holding benchmark stocks in different weights than the benchmark.
Question: why would I need my portfolio managed and why do portfolio managers exist because you can just buy s&p 500?
its funny how he stated a few words before: against ignorance
and then all people jump on the quote, beeing ignorant about their true capability and ability and willingness to beat the market. its actually hillarius when you think about it.
imagine you see a professional runner and you say: yeah i can run as fast as he does, no problem!
the same thing.
The way I look at it.
By buying f.e. S&P 500 - you are somewhat diversified - but not really - you are buying 500 big companies - overwhelmingly tech on US market. If something bad happens in the US the whole market will go down. Thats why I while having most in index fund also pick few stocks in other markets - simply as to diversify risk from overrellying on US.
Great video, as usual!
Let's put it like that: with all due respect...if you are watching investment videos on youtube, chances are you do not fall in Buffett's category of "expert investors" ;-)
good one
I dabble in everything like Buffet has in his investing career
"... delivered in esoteric gibberish..." burn!😃
Something in my mind still Makes me believe that there must be Irrationality in the Market. But those premiums cover basically everything that would make me expect a Higher Return (e.g. value, size, quality and profitability). It's unbelievable to Accept that Markets can be Efficient, when at the Same time falling victims to Bubbles and Crashes in such a predictable Fashion. (Predictable as in that It will Happen, but it's only known after the fact when the Peak/through Has Been reached).
Markets can be irrational and difficult to beat at the same time. Irrational does not mean predictable in a way that they can be beaten easily.
@@BenFelixCSI That Sounds sensible.
I Just feel Like those Kinds of Asset mispricings should give speculators the Chance to Bet on the convergance closing (If it eventually raises to Levels Like the 1920s or 2000).
It Just feels Like that is a scratch in the Efficient Market hypothesis, making It Seem Like there might be More to the entire story. But I guess that There's nothing to argue about it. There doesn't Seem to be a way to Beat the Market...
Something Just Makes me believe that those systematic errors Often Seem Like they're occuring in repeating cycles that Seem to be quite similar. E.g. high momentum During euphoria before It comes crashing down even faster.
But investing in small cap value Stocks with high profitability Stocks is probably still the best. It's Just sad that Access to Low Cost Index Funds for those premiums is extremely Limited...
I’ll make a short video with a clip from one of the founders of behavioural finance explaining why index still make sense even if people are irrational.
@@BenFelixCSI That sounds like a good idea, thanks.
Maybe finance is just one of those places munger would have called "too hard to solve"...
Wondering about the current solution; this is diversify portfolios and how they will bare the future. Most of the references are considering to the past 100 years, just wondering about a future that could be very different: a) China, or other countries rises, b) effects of climate change, c) a potential decrease of population (follow Solow models or other economic models, populations growth and technologies upgrades are core for economics growth), e) technological changes (such as AI), f) as passive fund dominate the market how ownership will lead the development of companies, ....
“Please share with some who has investment hubris”
Emailed to self and saved to watch later
But the longer I keep beating the market, the more of my money I’ll allocate to individual stocks rather than index funds…
It doesn’t take that much education to make solid stock picks, though it does take some! Also Index funds and ETFs are very heavily invested in a dozen or so very large cap stocks, several with scary high PE ratios. While it is difficult for one of Buffets investment managers to shrewdly invest, due to such huge sums of money they must manage, small individual investors have much more flexibility. They can invest in smaller cap companies without inadvertently taking them over, or triggering FTC action.
Invest in SPY and BRK-B. If you have more knowledge than most investors about an industry or a company, take a position in it. Then let time do the magic.
Warren also said don't bet against the US economy, looks like he was right and five factor international diversification is lagging behind. Past results don't guarantee future returns.
Instructions unclear. I now own 50 index funds.
I went all in amzn 2015-2021 then flipped to all in nvda 2021-march 2024. I am a 41 year old retired professional after 20 year career.
So how did you pick those companies?
What do you guys think about a nasdaq etf like qqq?
Timing the market? What about simply buying dips?
Warren Buffett gets really good deals on his acquisitions and tends to buy cheap by making the deal so complex, that the target company usually doesn't know what the exact or full consequences are.
Buffett tried to acquire Dow Chemical but Dow Chemical refused after learning that Buffett was basically going to give them a raw deal.
That is not even close to the truth. Buffett buys companies on the basis of worth to Berkshire. That means those companies have a value and some times those companies are not as valuable as they think.
I mean I know exactly I’m doing. I just don’t know if what I’m doing will outperform the market 😂😂😂
How many years does it take beating the s&p to be qualified with you know what you are doing? Mind you stock market is only 15 percent of my portfolio
I fail to understand how diversification increases performance. It should just decrease variance, by giving an average over all stocks.
So if I just buy a couple of stocks, which since I have no idea what I am doing are basically chosen randomly, I'd expect the same results as an index fund. Obviously, I need to buy and hold it the same way I do with the fund and shouldn't start trading, which causes opportunity and transactions costs.
Where am I wrong? Choosing sp500 stocks in monkey dart style has the same expected performance as just buying a sp500 index fund.
Diversification increases performance in the sense that it reduces risk, the variability of your outcome, without reducing expected return. That's why it's called a free lunch.
By buying a randomly selected subset of stocks from the index, your expected return is the same, but the distribution of possible outcomes is a lot more lottery-like and much less consistent. You are less sure that you'll actually get the expected return.
The reason you'd make a concentrated investment is to make a moonshot, a big gamble with an unlikely but very lucrative payoff.
It's about risk and complex systems 😬
Nice video, glad to see I am realistically ignorant and just bought some american and world-wide ETFs and am done with it for the next 15 years.
People who bought S&P in 1999 had to wait 15 years to start getting growth.
No, portfolio manager at some investment firm I’ve never heard of… he was in fact not taking about you… my portfolio outperforms the market year in and year out
I'm curious about the upper limit on the percentage of people invested in low cost index funds, beyond which, it starts to get counterproductive.
Is there any research on this?
If 100% of investors buy low cost index funds, then price discovery flies out of the window. In such a market, the first person to break the mould and start buying/selling individual stocks, WILL make a profit.
Make a profit, not by virtue of their skill, but merely by being "different". So would the second person, and the third. My question is what % of such "individual" investors does a market need, in order to stay healthy and facilitate price discovery?
Would be wonderful to see some genuine research on this, not just conjecture.
I did this one a while ago: ruclips.net/video/ltuqXTwWsZ8/видео.htmlsi=ri0fIk0wpnhPgElu
I am thankful I discovered early in life that I don't have the time or talent to actively manage a low-diversity portfolio. As my father might have said: cheap tuition.
I believe I could be in that select few, but I don't have the time nor money to justify dumping the 20-60 hours a week into making it happen.
Perhaps in 10 years when I have enough money saved to justify the research and development on my part.
Until then, index funds it is.
So you blindly put money into a mutual fund as a justification for not carrying out basic research?
So, Ben, do you have investment hubris? Do you advise clients to invest in something other than low cost index funds?
PWL client portfolios look like low-cost index funds with some small adjustments around the edges. There is a bit of an underweight to larger and higher priced companies and an overweight to smaller and lower priced ones for the reasons explained here ruclips.net/video/jKWbW7Wgm0w/видео.htmlsi=7okCynAMcyHRkL3Y
Since the portfolios are still low-cost and broadly diversified, if we do, in hindsight, have investment hubris, any negative impact should be small.
Interesting, not sure what you mean by "looklike." I'm guessing that you are buying some sort of optimized basket of index stocks. What is the typical managemtn fee PWL charges, 100 bps? @@BenFelixCSI
We use funds that own approximately all the stocks in the market, like an index fund, but they increase the weight of smaller and cheaper companies, and decrease the weight of larger and more expensive companies. Roughly similar to an index fund, but with small optimizations.
PWL's fee for a typical client is 0.85%. It's a tiered fee though, so smaller accounts pay a larger % and larger accounts pay a smaller %. Our fee is for full service wealth management, not just portfolio implementation.
People always say "diversification is protection against ignorance", implying that it's a bad idea. But the thing is even if you are one of the people who can beat the market, you ARE still ignorant. There will be events that no one can predict that you are ignorant of and can cause your investment to crash. People would say "my investment would have done well if this XX event hadn't happened!" but those events do happen, and the fact that you didn't plan for the unexpected shows that you are not as good at this as you think
PLEASE can you specify what "market returns" means? Is that VOO or VTI or VT?!? Thank you!
VT
Thank you King! Love ya! @@BenFelixCSI
Can you make a video for exactly what we should use in a Roth IRA for a long time horizon? would 100% VT be optimal? Would you recommend adding value or dividend etfs as well? I know you say dividends are irrelevant so I wanted to know if VT is the most optimal for returns. Thanks!!!@@BenFelixCSI
Just recorded a podcast episode on this. I will do a video too.
@@BenFelixCSI ❤️❤️❤️
The irony is if people took this advice to heart, your viewership would decline substantially as there would be no real reason to watch your channel 😄
I promise Warren Buffet wasn't talking about me.
I don't index I factor invest and I am prepared to live and die by a simple model.
I CANT STOCK PICK IF I wanted too.