I am awesome at predicting the future of the stock market. I can tell you that there will be a crash at some point within the next few years. I just can’t give you the exact date…
But seriously, the S&P 500 is carrying a fairly high P/E ratio, isn’t it? Even if we allow for a “Trump bump” due to the lower corporate income tax rate?
Index funds are susceptible to corruption by companies about which investors are wildly enthusiastic, e.g., Tesla, Apple, Facebook, et al. I’m wondering why it isn’t easier to buy a profit-weighted index fund. See this article from 2003 on the subject, which claims a 59 percent outperformance compared to the S&P using hypothetical back-testing. But now there are some actual ETFs that try this approach, notably from WisdomTree (EXT, EPS, EZM, EES), started in 2007. Their EPS fund, since inception, has tracked the S&P 500 (SPTR) pretty closely, actually with slight underperformance (maybe due to the higher expense ratio of 0.28% versus around 0.1% for an S&P index?).
Readers: What do you know and/or think about this approach to index-based investing? Why isn’t the performance more different from dumb-as-bricks indexing? It can’t be that markets are efficient, can it?
The markets are that efficient, until they aren’t.
Tax-inefficient compared to cap-weighted but plausible for 401k etc.
A widely touted backtested indexing strategy gains currency and returns merely par (plus or minus noise) going forward? Happens all the time.
Readers, how can one gain wealth without work?
The trick to long term success in the financial markets is the same as in gambling: the house wins in the long run through collecting transaction costs (commissions/fees/vigourish) and laying off bets to balance the books.
Cynicism aside, building curve-fitting models is a lot of fun. Build enough of them, and some will be predictive into the future.
Seems dubious that you can (except randomly) earn an excess return by investing based on an insight that many people have — that the market weighted index is expensive by historical standards. What would be the logic for the market compensating you for that sort of an insight?
Dimensional also use a more algorithmic selection of stock weights instead of just following an index. You can only buy the fonds from approved financial advisors though.
@Jack
Expensive by “historical standards” / past returns are not indicative of future returns.
Just because many people have the same insight doesn’t mean they can execute on it – most people buy at the top and sell at the bottom.
…and FB just fell 24% in one day.
Given the negative publicity FB was receiving, the WISDOM selection algorithm should have shorted the stock and reaped a profit.
Facebook has been shitting the bed for months. The reduced numbers should have been expected. Is there a definable data signature that marks such sudden price shifts? Think of it as seismic tremors, that anticipate earthquakes. A sixty second head start on the market works as well as a three year head start, as is easier to get accurately.
It is likely that FB’s crash was triggered by automated trading rules that unloaded due to negative financials. Then negative price velocity triggered other algorithms to sell which started a positive feedback loop to short.
So, given FB’s crash, did anyone predict Twitter’s 20% fall the other day?