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1 Page Finance 📄

26 Dec, 10 tweets, 3 min read

@samdesai62

William Sharpe's "Zero Sum" explained using simple analogy of Mumbai local trains...

A thread by @samdesai62

#ETF #IndexFund #PassiveInvesting

• In a densly crowded peak hour, many commuters rush to catch window seats....

• Window seats are limited in number...

• ...the few who managed to catch window seats on a particular day, therefore generated "alpha", they outperformed, i.e.,"all other railway commuters" ( the aggregate market )

• ...as a result those hanging outside in the doorway or standing in the passage are "underperformers". ( Zero sum train journey

• ..."Index average" is that commuter who got a seat close to the window seat...

• ...Out & underperformers in the "zero sum" train journey change often, there is no guarantee that someone who caught a window seat today will consistently do it in the future too !

• ...Window seat catchers ( or alpha commuters ) simply took more risk, it wasn't really skill....

• ...the "index average" commuter did not take excess risk & at the same time did not underperform...

• ..."Index average" commuter will reach the destination in a risk adjusted fashion.

Think of investments as a train journey, let the journey be undertaken in a risk adjusted fashion !

#ETF #IndexFund #PassiveInvesting

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