I expected to see (1995) tagged to the end of this article.
I personally know 3 people who run their own money ( <5 million ) who do this as their sole form of income.
Having said that, this isn't exactly easy. You need to know
1) if a stock is going into the index
2) when its going into the index
3) how much the index will buy
4) how much the index buy will affect the price of the stock
the first 3 are trivial for some index funds, though most have rules that allow them some leeway here so there aren't always sure things.
The 4th is where you make your money.
And it isn't like there aren't other's doing this, the article makes it seem much easier than it actually is.
If you play the game theory through you'd realize that if you knew the stock is going into the index then you are probably too late to profit from it as someone else will speculate the stock is going to go into the index the week before and already move the stock.
Funds can't really avoid this, and to be honest they don't really care to avoid it. It doesn't affect them at all, they are just supposed to mimic the index. Though you do start to get into a strange feedback loop whereby the index fund that is supposed to track the index starts to dictate how the index moves, we'll call this the "index inception" effect:)
I'm sure you are aware of this and decided not to go into the details, but for the benefit of others it's even a bit more convoluted than that. The index does not "buy" anything, there's a company that manages the index and just decides on the weights of each stock. There are then several mutual funds and ETFs that track that index who will actually have to buy/sell stock. So 3) is really
3a) how much the index weights will change
3b) which funds are tracking the index, and what's their total market cap
3c) what are the net outflows into each stock resulting from previous 2.
And sometimes a stock might be entering an index but leaving another (e.g., moving from Russell 2000 to Russell 1000), so the net result might be opposite to what you'd naively expect.
So yes, it is possible to make money doing this, but it's not a sure thing.
The very act of noticing that something is a good strategy, and beginning to trade on it, will over time drain away the utility of the strategy, until it is useless or worse than useless.
Tracking indexes is "big", and has some brute simplicity about it, but eventually the market will eliminate that as a viable investment mechanism. (But that won't stop your metaphorical Dad from swearing up and down you need to buy index funds....)
> But that won't stop your metaphorical Dad from swearing up and down you need to buy index funds....
The argument isn't that passive index investing is some kind of perfectly optimal investing strategy, it's that it's the most practical strategy for 98% of normal small, individual investors. If you don't have millions of dollars to invest, and you have a real job that prevents you from spending all your time researching investment opportunities, then you are probably better off just buying the market, instead of flailing around paying fees and trade commissions trying to beat the market.
If you believe in the weak form of the Efficient Market Hypothesis, and you are not a professional investor, then you should probably be in index funds.
Fees are the other key factor. Most investors are really using 401k accounts with captive choices, not a real broker with access to funds and free ETFs.
You're almost always better off with an index than the "HR Director Got a Kickback Growth Fund"
You seem to be misunderstanding the implication of anti-inductivity and/or the point of index funds. Anti-inductivity only holds that strategies that return better than average can't work when applied broadly. There is nothing that implies that a broadly-applied strategy can't give you the market average. Index funds are supposed to give you the average return, that's their objective. There is no reason to believe they won't continue to be successful in doing that (if everybody just invested in index funds, everybody would make the average return...)
Bogle started the First Index Investment Trust on December 31, 1975. Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in the United States as of 2009.
The strategy is so passive that it will simply always follow the index. So in order to break it, the indexes themselves would have to break. I suppose it's not impossible, but it is very improbable.
Show me an actively managed portfolio that consistently beats an index fund and I'll believe it. Until then, you guys can pretend to have all the inside information you want, but numbers don't lie.
There are many private portfolios that "beat the market." Of course, you can extend the timeline or find myriad other ways to exclude them. It's very hard to be a hedge fund and beat the market because they do not have the luxury of sitting out poor market conditions.
I'm not suggesting "anybody can do it" but the study that concludes money managers underperform the market often gets stretched into "nothing beats index funds".
Yes, the top funds consistently outperform the market. No, the top funds are not the same year-to-year. Predicting which funds will out-perform is the hard (aka impossible) part.
Don't be fooled by randomness and survivorship bias. Those aren't the same funds each year. Thousands of funds trying to beat the market at a seemingly-random game? A small few will get lucky.
I would be more interested in whether it will outperform in the future, and whether it will outperform before I start moving into more conservative investments. Given that I'm going to be around a while, consistent but middling performance will eventually outperform inconsistent great performance. I would hate to invest in a managed fund only to have it underperform for several years.
I actually found $20 on the ground yesterday as I left the Bart. It just sat there, contradicting fundamental economic axioms like it wasn't no thang. And yeah, sure, I picked it up, but I'm also not quitting my day job.
Much riskier proposition because you have no idea of the timeframe of WHEN their positions will be divested. Your margin might get called before it happens and you lose or lose alot. With the long position buying the stock prior to its entry to the index you have a much more reliable indicator that you'll make profit.
Honestly the simplest thing to do is just monitor the big houses and whatever they do en masse do the same. Most giant purchases have to be announced and 10M shares aren't just bought on a whim.
I personally know 3 people who run their own money ( <5 million ) who do this as their sole form of income.
Having said that, this isn't exactly easy. You need to know
1) if a stock is going into the index
2) when its going into the index
3) how much the index will buy
4) how much the index buy will affect the price of the stock
the first 3 are trivial for some index funds, though most have rules that allow them some leeway here so there aren't always sure things.
The 4th is where you make your money.
And it isn't like there aren't other's doing this, the article makes it seem much easier than it actually is.
If you play the game theory through you'd realize that if you knew the stock is going into the index then you are probably too late to profit from it as someone else will speculate the stock is going to go into the index the week before and already move the stock.
Funds can't really avoid this, and to be honest they don't really care to avoid it. It doesn't affect them at all, they are just supposed to mimic the index. Though you do start to get into a strange feedback loop whereby the index fund that is supposed to track the index starts to dictate how the index moves, we'll call this the "index inception" effect:)