Someone who merely bought and held tech stocks, like Apple & Nvidia, beat virtually all funds since 2009. There are always ways to make money even when your competitors have such advanced tools. The world of finance is big enough that there are opportunities for players of all sizes and resources. Look how badly AQR has done despite hiring from such a qualified talent pool.
>> Someone who merely bought and held tech stocks, like Apple & Nvidia, beat virtually all funds since 2009.
This is both absolutely correct, and entirely in-actionable since it uses hindsight. The question would be...what are the two stocks to buy to beat the market for the next 13yrs.
Saturation of markets picked up pace across the 2nd half of the 20th century. Postwar, with transistors, electronic goods went to saturation over decades. Since mobile phones, a localized saturation can happen in 1-2 years. The rate Americans bought washing machines and microwaves changed to the rate americans bought iPods and phones. White goods manufacturers stopped looking like profit machines.
Apple has a huge problem now: it's eating it's own market. Believing there is an endless belt of profit owning Apple shares is to ignore the risks of consumers changing their minds about "I need this years iPhone" and sales tanking. I read more people saying "my iPhone 12/13 is still fine" than I read people saying "I want to spend $1500 on an iPhone 15"
The cost of being Apple never gets better. They now have exposure to costs they didn't have in 2009. They will have exposure to more costs (s/w complexity, VLSI in-house) and they will have exposure to more market entrants. They are also at risk of supply chain dynamics which could erode profits multi-year if bad enough: imagine if TSMC's yield drops on complex must-have chips? It's force majeure stuff.
I certainly wish I'd bought apple in the 2000s or before. I would hesitate to assume its worth owning FAANG stock now, rather than other things (including EFT)
The long-term rate of return on investment across markets is 6-7% and being above that for periods is unusual and begs questions.
It does not have to be as cherrypicked as individual stocks. Even something as broad as 'buying and holding an index fund' beats almost all funds and strategies. Doesn't quant funds also rely on hindsight? There are no guarantees that strategies will keep working.
> Even something as broad as 'buying and holding an index fund' beats almost all funds and strategies.
How do you come to believe something so blatantly false and naive? Is this due to the proliferation of the (good) advice that most Americans are best off saving for retirement in index funds?
>Someone who merely bought and held tech stocks, like Apple & Nvidia, beat virtually all funds since 2009.
This is a common misconception or a poorly phrased statement. It's not true that someone who bought/held tech stocks, or an ETF beat virtually all managed funds or that holding on to ETFs beats virtually every managed fund. It's true that passive investing, in tech or ETFs would have beat the average managed fund, and it's also true that an investor is better off investing in an ETF/diversified portfolio, but there are exceptional managed funds that significantly outperform the market.
The problem is that you are no more likely to know which managed fund will outperform the market than you are to know which stock will outperform the market. Picking a fund that will outperform the market, especially after fees, is just as hard as picking stocks, and in fact it might be even harder due to the fees.
But this does not mean that all, or virtually all funds perform worse than the market or even a segment of it.
One of the advantages of hedge funds in particular is that they can employ leverage in a way that provides almost all of the upside of leverage while protecting an investor from some of the downside. For example if I, as an individual, used leverage to trade on the market and some black swan even happens, not only would I lose the amount I invested, I could also end up in debt and have to sell my house or other assets to cover my obligations.
If I use leverage through a hedge fund, then I still get almost all of the benefits if the market moves in my favor, but if the market moves heavily against me the most I can lose is my investment.
Just because a managed fund outperformed a market doesn't mean it didn't happen by pure luck. There are lots of managed funds and most of them are not profitable. If each chooses portfolio randomly, some of them will outperform the market.
I highly doubt rustamm or anyone partaking in this discussion is remotely qualified to know whether the most successful hedge funds, including Renaissance Technologies, Citadel, or Bridgewater are successful simply due to luck.
That largely depends on the type of leverage used (not all individual margin loans have the same conditions). It's possible to get pretty good terms as an individual in some circumstances (mostly if the loans are smaller and personally guaranteed), mostly by getting loans without margin calls attached. If you own a home, you can trivially borrow against it to invest without the risk of a margin call.
It's all tradeoffs - the broader the conditions at which a bank can recall your margin, the cheaper the interest and lower personal guarantee requirements (some may not hold you personally liable for negative balances - check your T&Cs). Funds can obviously borrow more, and at lower interest rates because of that though. Obviously their loans will be wound up on the way down no matter what, because the bank can't get money out of a negative balance like they would an individual.
Funds also don't tend to all-in on three tech stocks, so the fact they are very exposed to volatility with that type of leverage is less of an issue.
Nothing you've said has any relevance to this discussion. Regardless of what kind of leverage you use, if you're the one using it then you can end up with a negative balance putting you in debt. Case closed.
As for your other comment trying to be pedantic about funds owning three stocks, there are numerous publicly traded leveraged funds that trade just a single stock, one single stock [1]. They are known as single-stock ETFs and the purpose of these funds is specifically to provide an indirect form of leverage to investors. For example, IRA accounts are forbidden from using leverage, but someone can use an IRA account to purchase a leveraged ETF including a single stock ETF.
There's definitely margin products that will guarantee you aren't liable for the debt (but correspondingly will margin call you and limit the debt/equity ratio), and there are margin products that are the opposite (no margin calls, but full recourse and liability for negative balances).
The point is it's not cut and dry that the market geared equity solution is superior (though, IMO, the individual advantage lays on the side of things without margin calls, but full recourse - you can ride through a downturn without being forced to sell, assuming you keep your job and other risks etc etc).
Those single stock ETFs are significantly more limited than full-market geared funds (1.5x rather than more typical 2-3x). Equity geared ETFs are definitely just straight up more convenient (and safer) for the vast majority of people and situations though, I agree with you on that.
Can you provide a reference for a single broker that guarantees no liability for holding negative balance in a margin account, because as-is what you've described is a violation of FINRA rules and I'm fairly certain that such a product doesn't exist but would be interested in seeing the precise details.
I don't want a fancy explanation of how it works, I would like to know the name of a single brokerage that offers this product because as I said, I don't think it exists as it is frankly a pretty basic violation.
At least in Australia, IBKR used to have a fairly limited margin product that actually precluded you from being exposed to a possibly negative balance - I've probably overgeneralised that case (or thought it was more common than it is). I can't find a reference to those particular terms anymore. Obviously being IBKR, they have very aggressive auto-liquidation if you get margin called (ie. you don't get one).
I did end up finding the specific agreement - it pertains to Australian retail clients (https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi...), and clauses 3 and 7 lay out that retail clients are not liable for a negative balance arising from a margin liquidation. Retail clients for Australia have pretty limited margin (25 or 50k iirc), so this isn't super high risk for most people regardless (can't lose that much money).
The other stuff I talk about arises from other products in Australia as well - it's possible to borrow money and buy shares without being exposed to margin calls, so long as you make repayments on the loan. It's pretty different to a traditional margin account though, and only really applies to ETFs (NAB Equity Builder). I also imagined that existed elsewhere, but really I'm only speaking from what I've seen available in Australia.
Nothing you claim is stated in that document you linked and as someone who has done a great deal of business with IBKR for the better part of 15 years now as well as one of the largest market makers on the Australian markets making up approximately 5% of all ASX and CHIX volume, I assure you there absolutely no protection provided to a client whose balance enters into a negative position.
Clause 3.A.e specifically states that trading on margin can result in a loss of funds greater than that deposited into your account and that you accept that risk.
In conjunction with Clause 7.K which states that you must reimburse the broker for any liabilities as a result of the liquidation undertaken by the broker.
You are always on the hook for the full amount of losses on margin.
Fair enough - I looked at terms 7F (retail clients) - There was more context when I read about it a couple of years ago, or perhaps I'm simply misremembering (and I'm hardly a lawyer..)
For example if I, as an individual, used leverage to trade on the market and some black swan even happens, not only would I lose the amount I invested, I could also end up in debt and have to sell my house or other assets to cover my obligations.
This is not true. The broker would try to liquidate your positions well before that happens. Failure to put up collateral means your position will be forcibly closed. It's called Maintenance Margin. The last thing the broker is going to allow is for its clients to incur a debt and be on the hook. The hedge fund instead will send you a letter that your money is gone. Same thing.
I'd be very careful to categorically state what is true or isn't true on a topic that you may not quite be an expert in.
Brokers have no ability to liquidate a position on a company that declares bankruptcy after market hours. In fact, most major events happen during times when trading is either halted or the market is closed.
As sad as it is, there are people who have committed suicide over having a negative balance including this individual who carried a -$730,000 balance:
