That’s what I meant by return capital (isn’t it what dividends are?).
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Speaking of passive vs active we had a thread about this:
Return of capital differs from dividends
- Return of capital (ROC) is a payment, or return, received from an investment that is not considered a taxable event and is not taxed as income.
- Return of capital occurs when an investor receives a portion of his or her original investment, and these payments are not considered income or capital gains from the investment.
Nice of you to bring up this valuable quote. I guess in a situation, where more and more people switch to indexing, the last hope of large scale smart investors to milk the dumb investors would be the pump and dump scheme. That is, inflating the market, luring investors in, then causing a crash, hoping for indexers to lose their nerves and sell, so that they can buy cheap. Then repeat the cycle.
The easiest way to cause such a crash, that I can imagine, would be to raise the interest rates. But I guess as long as the governments have to pay interest on their debt, they will do what they can to prevent it.
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…or start a war 
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Regarding Renaissance Technologies and the Medallion Fund, there was a book by Gregory Zuckerman: The Man who Solved the Market. It tells the story of Jim Simmons and how they set up their fund and their arbitrage philosophy (although no detail is given on the actual strategies used).
Find the gross (before fees) and net (after fees) performance of the fund in the table below.
They let the fund compound until a point where they choose to not let it grow anymore and just return the gains to shareholders ever year. So for instance if you have invested one million USD in the Medallion Fund, you would receive on average every year 390’000 USD after fees.
They limited the size of the fund because past a certain size, the fund would be too big to exploit the market inefficiencies they are specialized in.
Funny anecdote: at the beginning, the outrageous 5% management fees were not due to greed. They were just there to cover the costs of all the computer equipment needed to run the fund strategies. Of course this has changed afterward.
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Mind blowing stuff. Ok, they’re not infinitely scalable, but they manage to keep an edge over the market for over 30 years. Todays smart watches are more powerful than high end PCs back then. There is the internet, deep learning. Still, they are able to make 80% return in one year. Crazy!
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If there is no compounding and a limit, what’s the point.
With 1M invested, you get a nice 400k per year (that you can then invest in a low cost index fund for example).
Also they managed to make it part of their pension plan, so all that income is tax free…
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Many asset classes don’t compound. Gold doesn’t compound, real estate doesn’t compound, bonds don’t compound (without active reinvestment) etc. What’s the point of all that to you?
I’m 100% into stocks.
I have a feeling, right now you’re just trying to stay negative just for the sake of it. If you could invest $1 million in an investment which returns 66% every year, wouldn’t you? You seriously don’t see the point? The point is, you take this money and invest it elsewhere, or spend it, 66% is an incredibly good return.
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You do know that stocks represent businesses, and that the economics of the business will never compound to the sky? For any company, there is always a point where putting up more capital does not equal more profits.
It is the case with Rentech, and it is also the case with a huge proportion of the companies contained in your beloved ETFs.
The difference being that Rentech is a superb business creating a perpetual annuity of $4 billion for its owners, after fees. You don’t find a lot of businesses returning 40% on invested capital…
Ok, as just about everyone is having an argument and getting nowhere, wishing I hadn’t bothered starting thread, will turn off notifications and leave you too it!
Well, for the entire economy (or big index that represents it), it’s more likely that external factors will lower returns - like demographics, trade wars, normal wars, etc. It’s unlikely that people will just stop consume products and services from private companies because they will turn into hippies. If we’ll meet that situation in our lifetimes we’re gonna be screwed anyways - not only with our investments. Besides, one can diversify into real hard assets (real estate, gold, rare stamps, ammunition, etc) for doom scenarios.
FYI a recent article on the fund: https://www.institutionalinvestor.com/article/b1k2fymby99nj0/Famed-Medallion-Fund-Stretches-Explanation-to-the-Limit-Professor-Claims (it quotes Zuckerman)
All these arguings are just upon shorttermism. I wroete it at another threth too.
As Simon Edelsten of Artemis Global Select fund put it, “Buying and selling shares on the basis of valuation seems suddenly to have become unfashionable”. Expecting the current party to continue ‘to infinity and beyond’ is a pie in the sky dream as the market tends to move in cycles where the dominance of greed is followed by the era of fear. This time will be no different.
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do you think that investors who are buying the index that is full of overvalued names have decent downside protection ?
With the Shiller PE ratio above 31
More likely than not, mean reversion will work its magic again, and I certainly don’t want to be caught with a stock portfolio full of garbage.
Howard Marks says, “The more enthusiasm there is in the world, the harder it is to live up to people’s expectations and the easier it is to disappoint. When a stock goes from great optimism to the optimism sobering up, it’s very painful for investors.
What you really want to know is how much optimism is in the price. How much optimism do you think is baked into that 30+ Shiller PE?
It is very difficult to follow a value approach unless you have sufficient confidence in it.
Outperforming or underperforming a market index is not something that bothers me on a daily basis. Ben Graham’s lines echo in my head: “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”
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Good luck with leaving out the “garbage” in your portfolio.
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Buying top-quality stocks at reasonable valuations is a defensive strategy and it does show in the results at a time when the market goes down. And usually does not outperform at the time of overvalued market.
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