Warren Buffett has said that when he dies he wants his family's money to be put into an index fund. Warren Buffett and it seems like everyone else these days is in love with the index fund. I think buying an index fund is stupid - that's right stupid (sometimes).
What is YoungShkreli on about? I mean, does he really think he knows anything? He's an idiot we all know that!
Well guys, I don't mind if anyone thinks I am an idiot because I am not a genius and I am not an original thinker here, I am just applying what I've read and understand.
Here's the deal, my brother and I did the calculations recently (seriously we actually do that) and we found that the average pe ratio of the top american companies was about 23. What does that mean to us? Well, the two books that I base my value investing ideologies (indeed warren buffet does too) are: The Intelligent Investor and Security Analysis. In those books it says that it is UNACCEPTABLE to be buying stocks above ~20 pe ratio and I agree. This doesn't mean you will lose money every time you do, it just means it's not a good strategy.
So, by Warren Buffet's own logic, the index funds are currently not worth investing in because they are overvalued. Full stop. So why does he keep telling people to buy index funds??? (hint: it's not because he is evil) It's because they are generally speaking good investments in the long run. Warren Buffett tells us this because he wants us to think in THE LONG RUN and not about speculating in short moves. It's truly a wise ideology and practical advise, but it's the dumbed down version of the truth.
My job here is not to talk down to you, it's to give you sound advice based on what I know.
SUMMARY:
Index funds are a great option for people because they are diverse and they seem to work in the long run, but the bottom line is that you can't buy something that is overvalued no matter what it is, it just doesn't make sense to do so. Let's not forget, the economy could crash 50% and it could stay below its all time highs for 20 years - what would that mean for you? A bad time.
TL;DR:
Index funds are sometimes overvalued - now is one of those times.
Hey there, really nice post and really like the mindset/writing style. I also totally agree with you in regards to index funds being overvalued -although, if we want to get technical, there are plenty of index funds, and not all are overvalued, even right now. The only thing I don't agree with is the idea that those index could stay below their all time highs for the next 20 years; maybe the consensus is wrong but most people would say just because of the value of money and the basic need for growth that all companies have, the SP500 or VT will always revert to their mean, which so far has always trended upwards.
CantorTechnologies
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@justinmischief, To be honest with you, I don't know the fundamentals of every index, but I do know about the averages of the top 500 american companies. As for the 20 years thing, I disagree and here is my source:
you'll see that since the high of 1930, the sandp comp index did not break that level until after 1950. This wasn't a blanket statement really, just a little article about how it can be dangerous to jump on an investment bandwagon even if it's something as bland as an index. And in addition, when you do have a period of ten years or more where you don't have a higher high, you've lost money due to inflation during that time and you've also lost money via opportunity cost even if the price is exactly the same as when you first put money in.
Anyways, thanks for the comment and thank you for reading. I always enjoy reading people's inputs because the exchange of ideas is as good as the exchange of goods and services in my view.
-YoungShkreli
justindanethan_
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@youngshkreli, yes, I actually thought about it right after commenting, about those long period where prices indeed didn't reach all time high. My perspective came more from a calculation of total value, because during all those years you get dividends which you can re-invest; over time the capital still is worth more, independent of prices -which is also something Warren Buffet feels strongly about. I also tend to dollar-average my investments meaning that I purchase more of those indexes periodically, this means that I would've also purchased during the low and made up some of the loss on the uptrends. Anyway, still very interesting idea to put out and I also appreciate you taking the time to reply.
justindanethan_
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@youngshkreli, Also, just to add to the conversation, at the end of the day, I think most average investors would have been better off buying into an index, reinvesting all the dividends and parts of their income over time and just kept this strategy over the next 10-20 years rather then try to pick individual stocks -even and especially when there were crashes and recessions. I think that's where Warren Buffet is coming from, rather than trying to beat the market with individual stocks, which raise your risk by so much.
CantorTechnologies
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@justinmischief, That's a very good point about dividends and dollar-cost averaging. You are definitely right about average investors being better off buying into an index. Like I said, the point of this article isn't to bash the index, it's just to put them into perspective and encouraging people to think for themselves about investments. I really enjoyed reading your comments, they were more substantial than most. Thanks for that.
-YoungShkreli
CantorTechnologies
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@youngshkreli, In my mind, that is the most useful useful aspect of an index: you don't have to think/put time into stock-picking and you will get very good returns on average.