clutch

Does the aggregate return (IRR) of the stocks I choose differ from chance. I can't figure that one out so I've settled for does the distribution of returns for individual stocks differ from chance. In an ideal scenario, 1) You compute the mean and variance of your individual stock returns. 2) You compute the mean and variance of the S&P 500 individual stock returns. 3) Compare the two distributions using t-test or another appropriate test based the characteristics of the distributions. I don't know an easy way of performing 2), though. There must be a data service (Bloomberg?) where you can obtain the return of individual stocks for a given time period?

What are the exact hypotheses that you want to test?

What's the tiger that you are speaking of? One problem could be increased government pension to support the retired, which could be a significant burden on the young working generations.

+1 I'm not so sure. I thought the same thing when they announced the Vancouver tax but Vancouver seems to have calmed down some since then. Impact of B.C.'s foreign buyer tax wanes as March sales surge almost 50 per cent http://vancouversun.com/business/local-business/impact-of-b-c-s-foreign-buyer-tax-wanes-as-march-sales-surge-almost-50-per-cent

This makes me think. What if home ownership should not be the norm for most people? If an average person is priced out to buy a house, but can still afford renting, is that really a problem?

(I don't know if this is appropriate to ask) Does anyone here live in Toronto / Vancouver AND has enough savings to buy a condo / house, but is waiting for the market correction to buy a condo / house? Curious to know...

Get HELOC, invest, and profit! ;D

I actually hear more people talking about how this market is a bubble than people downplaying it - including the majority of the media, people around me, or even real estate agents. Sure, the direct participants of the real estate market may be still crazy, but it seems like everyone watching it has identified that it is a massive bubble. So this makes me wonder if there would be any obvious shorting opportunity at all...

Decided to take some bets on retail: LB, RL, DEST (thanks to wrister)

Do you have evidence of this? Curious to know.

By "passive" I meant an investor who invests money on entire or a big chunk of market based on some predefined capital allocation scheme. When I say a "market participant" it is every individual that holds some equity in the market. My point is that the passive investors as I defined above, take advantage of the market created by all the market participants as a whole.

I thought a bit more about this topic... So here is an interesting observation. Passive investing only works IF there is enough people who are actively investing! Let's assume that active investors (most of them) are trying to allocate their capital into the most productive companies. As a group, they create the market, and this market seems to be the most efficient way of allocating capital, based on the free market principles (I'm not saying that the market is efficent in the absolute sense as in the efficient market theory. Obviously there are a bunch of irrational behaviors. I'm just saying that as a whole it's more efficient than any other system...e.g., government dictated allocation). So we have this relatively efficient market created by active investors. What passive investors try to do is take advantage of this, without "actively participating" in the market. I put in quotes "actively participating" because if the money put in by passive investors is small enough, it won't affect the market much. What would happen if everyone becomes a passive investor? And let's say they all buy the cap weighted index fund - such a case would result in a totally irrational market where more capital goes to companies with bigger market caps, which in turn make their market caps bigger, which in turn attracts more capital and so on...a vicious feedback loop that becomes completely detached from the business fundamentals. So I see the concerns expressed by others in this thread. Basically, when the money contributed by the passive investors becomes significant, it starts making the market more inefficient. I don't know what's the portion of passively invested money in the total market right now...but it certainly looks to be growing more and more. Then, is passive investing just another market destroying mechanism? Currently, it could be, but that's because the majority of passive investing vehicles simply attempts to track the market. It does not allocate capital based on the business fundamentals. However, we are already starting to see a variety of ETFs being created every year, some of them based on business fundamentals (e.g., there are value-oriented ETFs) or even tracking some "guru" investors. My feeling is that we are going to see more passive investing vehicles that not only try to track the market but also participate in making the market in such a way that it maximizes the total market return. If that is possible, it will now create a virtuous feedback loop that allocates more and more capital to the most productive businesses! And this obviously would benefit the society as a whole - capital is allocated in the most efficient way possible to the companies and the investors equally take advantage of this productivity. Now this might be a pipe dream and seems incomprehensible at this moment... but as we become better and better at leveraging the computational power / "intelligence" of machines to solve more complex problems... Maybe this is another problem we can crack in the future! ;)

BTW, the variance I stated here is the variance of the returns of all investors. Higher variance would indicate more people are using leverages, derivatives, concentrating bets, etc. In contrast, if everyone bought the same index ETF, the variance would be zero.

I (nor the passive investing recommenders) would ever say that passive investing is safe. Again, it just guarantees the normal (average) return. And it's just as dangerous as the whole market. There is nothing safe about that! Maybe most people don't recognize this, and assume that passive investing is safer. And perhaps you are suggesting that this delusion causes a mania. That could be true. The scenario you are describing (mania induced buying and panic induced selling) is not really specific to ETF / passive investing, but is true with many other investing strategies. So I don't see that as a valid argument against passive investing. But I do think there are specific characteristics of passive investing that could induce a market crash, which I pointed out in my previous post ...

Well, at least one could argue that the alternative (human-driven process) have been proven to not work against passive investing... What is the proof that active investing is not as good as passive investing? I don't think I've ever seen compelling evidence proving either side is better. I'm not sure why there would be evidence proving passive > active investing. With a sufficiently representative sampling, we should expect passive outperformance relative to active would be capped at around the difference in management fees charged. I've seen studies that show both active > passive or passive > active in short time periods or specific long-term periods. Vanguard's own study on active v. passive shows that the answer is almost certainly inconclusive. This is the answer I would expect. I think pushing passive investing helps remove risk for large institutions and it's why you see so many news articles about it. If they can convince everyone to invest passively then economies of scale becomes the only thing that matters and the incumbents will guarantee profit streams indefinitely. Otherwise, the large institutions have to compete against small up-start firms (like they always have) on numerous variables (better temperaments, cultures, analysis and risk management skill, and so on). https://personal.vanguard.com/pdf/ISGACT.pdf I think this passive/indexing thing is way overblown and the hype is being driven by the long bull market. We've had very few downturns over the last 8-9 years. Lets see how much people believe passive > active after the S&P 500 takes it on the nose for a prolonged period. Yeah, This strategy is setting up for the mother of all crashes. First, something will happen to precipitate a downturn. Then the cascade of effects will set off a negative feedback loop, and here we go, 1987 all over again, but perhaps way worse, with so many more automated systems, all feeding off data from the other "smart" algorithm. This all rhymes with 1987, long term capital, Nasdaq 5000, and the 2007/08 financial crisis. Blackrock's institutional clients will get hit but they wont bail to the same extent as all the dumb money that has piled into ETFs at a rate of a half tillion a year. Right now, all we need is a catalyst that will reassert the stock cycle. Its anybody's guess as to what that will be, and when it will happen. Buffett and John Bogle will have alot to answer for. Too much of a good thing, well it can be a bad thing. I find this whole notion of passive investing causing a market crash really fascinating. First, if you are arguing that automated (trades made by computers) investing can cause a crash, I suppose that it will and it has happened before. But that is not equivalent to passive investing. Passive investing is not a good or a bad thing, it's a just normal (average) thing. It's basically analogous to saying "I will take the mean of the probability distribution of all performances as my expected outcome". So when more people decide to do passive investing, it will simply make the probability distribution of performances taller and taller around the mean and reducing the variance. I'd argue that in general, the greater the variance in performances indicates the greater the irrationality in the market. So I don't think making the probability distribution more normal itself increases the chance of a market crash. One could argue that passive investing does not allocate the capital in a "free market" manner, because it either distributes the capital according to the market cap (if cap weighted) or just equally (if equal weighted). Especially in the former case, one could foresee a bubble developing because more and more money will be allocated to larger companies if everyone becomes a passive investor. So how would we prevent the above scenario? It seems obvious to me that cap weighted investing is not the most efficient capital allocation method for the society. Perhaps in the future we will see more variety of ETFs that invests in the overall market but with different composition methods that maximize the return on capital for the whole market (and hence the society), i.e., allocating more money to more productive companies. These allocation methods could be devised by experts or learned by computers... I'd bet that the latter is more likely. So imagine that, an ETF that not only tracks the total market return but also maximizes that return by an optimal capital allocation! Now, the argument about dumb money being piled in and that's a bad thing... so one could also conjecture that passive investing has caused more people to invest in stocks, and this has made all the stocks expensive as a whole, which increased the likelihood of a crash. So what then, should a society discourage passive investing to make stocks cheaper? Why not just discourage people from investing all together so that we don't make the entire market overvalued? So I don't think that argument is convincing at all.

Well, at least one could argue that the alternative (human-driven process) have been proven to not work against passive investing... What is the proof that active investing is not as good as passive investing? I don't think I've ever seen compelling evidence proving either side is better. I'm not sure why there would be evidence proving passive > active investing. With a sufficiently representative sampling, we should expect passive outperformance relative to active would be capped at around the difference in management fees charged. I've seen studies that show both active > passive or passive > active in short time periods or specific long-term periods. Vanguard's own study on active v. passive shows that the answer is almost certainly inconclusive. This is the answer I would expect. I think pushing passive investing helps remove risk for large institutions and it's why you see so many news articles about it. If they can convince everyone to invest passively then economies of scale becomes the only thing that matters and the incumbents will guarantee profit streams indefinitely. Otherwise, the large institutions have to compete against small up-start firms (like they always have) on numerous variables (better temperaments, cultures, analysis and risk management skill, and so on). https://personal.vanguard.com/pdf/ISGACT.pdf I think this passive/indexing thing is way overblown and the hype is being driven by the long bull market. We've had very few downturns over the last 8-9 years. Lets see how much people believe passive > active after the S&P 500 takes it on the nose for a prolonged period. Ok, I only conjectured from Buffet's famous bet, and admit that's no proof. Let's say that it's inconclusive ... then it still makes sense to look for alternative strategies (e.g., AI driven / guided) that could work better than either one of them. Not sure if that's the case for Blackrock's algorithms, but they could have found enough evidences that algorithms work better than the both active and passive strategies.

IMO, this really is the key ;)

I agree with all of the above. Some people take "averaging down" as a means to dig themselves out of a false thesis instead of realizing that they were wrong...

Well, at least one could argue that the alternative (human-driven process) have been proven to not work against passive investing...

Interesting. But unfortunately not a feasible strategy for those lazy and unmotivated ;)

It seems there is no obvious way, and also timing this seems impossible. But I'm hoping to load up on the bank stocks if they tank when the bubble bursts.

I said "But if you consider real estate as pure investment". I was considering a scenario when you already own a house and looking to buy additional properties for investment. Hence, I didn't consider about living in it nor the capital gain tax exemption. And this assumption is very valid in Toronto where you have an increase number of people buying houses as pure investment, not to live in them.

That's an appropriate argument for buying vs. renting. But if you consider real estate as pure investment, why can't we compare it to stock market? Although for Toronto in the past 5 years, you'd come out ahead investing in a house (if you took any leverage) vs. investing in S&P500. No leverage, I think it's a wash, ~100% for both investments. But could anyone have predicted this outcome (not just predicting non-collapse, but skyrocketing of hosue prices)? p.s. If your share drop 30% you might still have same intrinsic value of the business. ;)

If the bubble is as big as it looks like and the popping of the RE bubble in the US is any guide, than you don't need to time this perfectly, in fact t is probably better to wait after the prices have turned down for a while. US RE went from red hot to cold in fall/winter 2005 and it took until 2007 to play out. Can't generalize from one data point

Interesting. Could you point to any websites or materials that talk about these mortgage packages for new comers? (edit) Nevermind, I found this: http://genworth.ca/en/products/new-to-canada-program.aspx