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  • Why I Prefer Index Instruments [View article]
    Lowell, well done. Another firestorm to your credit.

    In following all the threads pro and con your thesis, I am reminded by William Poundstone's wonderful book-- "Fortune's Formula", and a must-read for all investors, about one of the most successful stock market players. Claude Shannon, an information theorist, beat almost all mutual and hedge fund professionals with a 28% per year return for 35 years. And he did so without ever investing in an index fund, mostly by properly applying the Kelly criterion.

    This anecdote aside, here's my take on the controversy, the Dunning Kruger effect notwithstanding.

    Although index funds are passive, index fund investors should not be. Timing arbitrage and market sector value predominance awareness is essential in the effective rotation of index fund positions in order to maximize return. Your "Ivy Portfolio" rule is an example of timing arbitrage. But timing arbitrage rules also apply to many other kinds of investments as well, including option plays. Here again, as one of your readers pointed out, the larger market cap and trading volume index funds, provide another kind of effective trading platform.

    Indeed, when I have no cost trading, I move in and out of so-called passive instruments, with long or hedged positions several times a week. The index funds may be passive, but my approach to investing in them certainly is not.

    Where I disagree with you is over the premise that investing primarily in index funds, regardless of trading perspective, along with an infrequent foray into individual stocks, is the only way to achieve an acceptable IRR. For those investors who have an edge, bets on individual stock or option plays makes sense.

    Here's my disclaimer. You are the more talented polemicist. So, I give up any rejoinder in advance.
    Feb 2 11:50 PM | Likes Like |Link to Comment
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