What happens to stock prices if everyone index invests?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
techcrium
Posts: 132
Joined: Sun Mar 24, 2013 12:09 am

What happens to stock prices if everyone index invests?

Post by techcrium » Mon Jul 29, 2013 11:19 pm

Theoretically, what would happen to stock prices if the majority of investors picks some index and invests in that and almost nobody handpicks stocks except for the small few??

Let's assume that today 20% of investments are in an index.

What if in the future, 99% of investments are in an index? What are the pitfalls of that?

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What happens to stock prices if everyone index invests?

Post by umfundi » Mon Jul 29, 2013 11:32 pm

techcrium wrote:Theoretically, what would happen to stock prices if the majority of investors picks some index and invests in that and almost nobody handpicks stocks except for the small few??

Let's assume that today 20% of investments are in an index.

What if in the future, 99% of investments are in an index? What are the pitfalls of that?
This has been discussed over and over.

the answer is, we are nowhere near that point. If everyone indexed, the markets would be inefficient, so the inefficiencies would be exploited, so the markets would be efficient ...

The common wisdom seems to be that it takes a relatively few active traders to make an efficient market.

Keith
Déjà Vu is not a prediction

User avatar
nisiprius
Advisory Board
Posts: 35444
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: What happens to stock prices if everyone index invests?

Post by nisiprius » Tue Jul 30, 2013 6:07 am

This question does not come out of a vacuum. I doubt you thought it up for yourself; I'll bet you heard or read it somewhere. It's just a standard random talking point against index funds, and a weak one at that. The idea is to suggest not merely that indexing is dangerous, but that it is wicked and selfish. It's the Kant "categorical imperative" (nope, never read Kant, just saw a bullet-point summary once :)).

No, you do not owe any sacred duty to Adam Smith to buy high-expense actively managed funds as your personal sacrifice to the greater good.

Suppose there is a goulash in the slow cooker that is supposed to be watched for twelve hours to make sure it does not stop simmering, but never comes to a boil, and needs to be stirred from time to time. Does it take a thousand people to do this? Will a crowd of a thousand people do it more accurately than a hundred? If there were a hundred people around would you assign all of them to the job or would you just tell about ninety-seven of them that it would be better for them to go play badminton or something but for heavens' sake stay out of the kitchen?

It isn't relevant to ask "what happens to the goulash if everyone leaves the kitchen?" It ain't going to happen. The questions that need to be asked are:

1) "Will it be a better use of your time to hang around the kitchen trying to shove through the crowd so that you get your chance to stir the goulash, or will you be happier and better off playing badminton and settling for what the experienced cooks come up with?"

2) "Will the goulash be better if it is tended to by a few cooks who know what they're doing, or will it be improved by the 'wisdom of the crowd' and letting everyone participate in the cooking, including your idiot uncle who puts vanilla in everything?"
Last edited by nisiprius on Tue Jul 30, 2013 7:56 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
bottlecap
Posts: 5443
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: What happens to stock prices if everyone index invests?

Post by bottlecap » Tue Jul 30, 2013 6:19 am

If everyone indexed, then there would be no individual stocks to index with. Companies wouldn't be able to issue new stock, becuase if it wasn't a part of the index there'd be no one to buy it. This is also why this scenario will never happen. If investing in an index ever becomes "too" popular, it will become inefficient and smart people will cease index investing until efficiency is restored.

The world won't get there and, if it does, the problem will fix itself.

JT

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: What happens to stock prices if everyone index invests?

Post by G-Money » Tue Jul 30, 2013 6:47 am

nisiprius wrote:Suppose there is a goulash in the slow cooker that is supposed to be watched for twelve hours to make sure it does not stop simmering, but never comes to a boil, and needs to be stirred from time to time. Does it take a thousand people to do this? Will a crowd of a thousand people do it more accurately than a hundred? If there were a hundred people around would you assign all of them to the job or would you just tell about ninety-seven of them that it would be better for them to go play badminton or something but for heavens' sake stay out of the kitchen?

It isn't relevant to ask "what happens to the goulash if everyone leave the kitchen?" It ain't going to happen. The questions that need to be asked are:

1) "Will it be a better use of your time to hang around the kitchen trying to shove through the crowd so that you get your chance to stir the goulash, or will you be happier and better off playing badminton and settling for what the experienced cooks come up with?"

2) "Will the goulash be better if it is tended to by a few cooks who know what they're doing, or will it be improved by the 'wisdom of the crowd' and letting everyone participate in the cooking, including your idiot uncle who puts vanilla in everything?"
This may have been the most entertaining post I've read since, well, since the last time nisiprius wrote an entertaining post here. :D
Don't assume I know what I'm talking about.

B. Wellington
Posts: 99
Joined: Fri Mar 30, 2012 10:10 am

Re: What happens to stock prices if everyone index invests?

Post by B. Wellington » Tue Jul 30, 2013 7:15 am

nisiprius wrote:This question does not come out of a vacuum. I doubt you thought it up for yourself; I'll bet you heard or read it somewhere. It's just a standard random talking point against index funds, and a weak one at that. The idea is to suggest not merely that indexing is dangerous, but that it is wicked and selfish. It's the Kant "categorical imperative" (nope, never read Kant, just saw a bullet-point summary once :)).

No, you do not owe any sacred duty Adam Smith to buy high-expense underperforming actively managed funds as your personal sacrifice to the greater good.

Suppose there is a goulash in the slow cooker that is supposed to be watched for twelve hours to make sure it does not stop simmering, but never comes to a boil, and needs to be stirred from time to time. Does it take a thousand people to do this? Will a crowd of a thousand people do it more accurately than a hundred? If there were a hundred people around would you assign all of them to the job or would you just tell about ninety-seven of them that it would be better for them to go play badminton or something but for heavens' sake stay out of the kitchen?

It isn't relevant to ask "what happens to the goulash if everyone leave the kitchen?" It ain't going to happen. The questions that need to be asked are:

1) "Will it be a better use of your time to hang around the kitchen trying to shove through the crowd so that you get your chance to stir the goulash, or will you be happier and better off playing badminton and settling for what the experienced cooks come up with?"

2) "Will the goulash be better if it is tended to by a few cooks who know what they're doing, or will it be improved by the 'wisdom of the crowd' and letting everyone participate in the cooking, including your idiot uncle who puts vanilla in everything?"
Classic!! In short, people will still continue to buy, sell, and/or re-balance. Those saving for retirement, house, car, vacations etc. Those selling, people in retirement for example. And those who are re-balancing, maybe to reduce risk and/or close to retirement.

IlliniDave
Posts: 2194
Joined: Fri May 17, 2013 7:09 am

Re: What happens to stock prices if everyone index invests?

Post by IlliniDave » Tue Jul 30, 2013 7:16 am

techcrium wrote:Theoretically, what would happen to stock prices if the majority of investors picks some index and invests in that and almost nobody handpicks stocks except for the small few??

Let's assume that today 20% of investments are in an index.

What if in the future, 99% of investments are in an index? What are the pitfalls of that?
It's an interesting question (at least to me, apparently not to all). We've reached the point where 70% (maybe more) of the market is held under professional management (mutual funds, pension funds, institutional holdings, etc.). Fortunately as a group those managers like to buy and sell a lot. Assuming aggregate professional management continues to increase the percent of the total market they own (which is a logical goal for them financially), I believe at some point fund managers may begin to try and "hoard" shares within their fund families (to preserve market share of AUM). The relentless trading back-and-forth between managers could very well ebb to a bare minimum and most pools of stock shares would become de facto indexes.

Slowly index funds are growing to be a larger fraction of professionally-managed assets, which is maybe the investor-driven analog of the above.

It wouldn't shock me if 50 years down the road individual traders were almost exclusively buying and selling ETFs or similar instruments (rented shares, essentially) while substantially all of the actual shares are held and locked down by the investment management companies. There would still be some amount of efficiency because humans are traders by nature and there will always be people trying to buy something that they can sell at a profit.

Maybe that's far-fetched, but there's movement in that direction.
Don't do something. Just stand there!

larryswedroe
Posts: 15609
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: What happens to stock prices if everyone index invests?

Post by larryswedroe » Tue Jul 30, 2013 7:47 am

http://www.cbsnews.com/8301-505123_162- ... e-indexed/

Here is a piece I wrote on subject
Larry

Grt2bOutdoors
Posts: 17983
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: What happens to stock prices if everyone index invests?

Post by Grt2bOutdoors » Tue Jul 30, 2013 7:50 am

larryswedroe wrote:http://www.cbsnews.com/8301-505123_162- ... e-indexed/

Here is a piece I wrote on subject
Larry
Just 1 more post to go before you hit 10,000, Larry. :beer
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

SPG8
Posts: 357
Joined: Tue Mar 29, 2011 10:27 am

Re: What happens to stock prices if everyone index invests?

Post by SPG8 » Tue Jul 30, 2013 7:53 am

duplicate
Last edited by SPG8 on Tue Jul 30, 2013 7:53 am, edited 2 times in total.

SPG8
Posts: 357
Joined: Tue Mar 29, 2011 10:27 am

Re: What happens to stock prices if everyone index invests?

Post by SPG8 » Tue Jul 30, 2013 7:53 am

IlliniDave wrote:It's an interesting question
+1

I am interested from an oversight standpoint. I wasn't aware that Vanguard even voted, but it was pointed out that they do. Still, I'm very interested in whether oversight is changing with regard to increased indexing (positively or negatively).

Then you have to consider whether the increase will accelerate. Montgomery County, PA is turning their pension funds over to Vanguard. Apparently they realized they weren't getting a premium for the management fees and would rather save the fees and settle for market returns. It's easy to see how more public money could follow.

FafnerMorell
Posts: 686
Joined: Mon Sep 15, 2008 10:27 am

Re: What happens to stock prices if everyone index invests?

Post by FafnerMorell » Tue Jul 30, 2013 8:31 am

What happens to the Powerball lottery if absolutely no one buys a ticket ever?
Would all the prize money just sit there forever, as they hold drawing after drawing?
This scenario is probably a lot more likely than the index one.

The truly awesome thing about taxing stupidity/greed is there's always someone willing to pay.

techcrium
Posts: 132
Joined: Sun Mar 24, 2013 12:09 am

Re: What happens to stock prices if everyone index invests?

Post by techcrium » Tue Jul 30, 2013 8:46 am

FafnerMorell wrote:What happens to the Powerball lottery if absolutely no one buys a ticket ever?
Would all the prize money just sit there forever, as they hold drawing after drawing?
This scenario is probably a lot more likely than the index one.

The truly awesome thing about taxing stupidity/greed is there's always someone willing to pay.

Well if no one buys a ticket, the jackpot would just remain at the minimum and no one will buy it. I don't know how your analogy applies to my question.



Wow I didn't realize that my thread generated so much hate.

MathWizard
Posts: 2790
Joined: Tue Jul 26, 2011 1:35 pm

Re: What happens to stock prices if everyone index invests?

Post by MathWizard » Tue Jul 30, 2013 9:08 am

Wow I didn't realize that my thread generated so much hate.
I don't see any of that in the responses I see.

One thing you can do is to type relevant parts of your questions into the search box.

When I put "everone indexed" into the search box, this thread pops up and the next two links
were:

http://www.bogleheads.org/forum/viewtop ... st=1245307

and

http://www.bogleheads.org/forum/viewtop ... st=1712645

So you can see that this gets asked frequently.

User avatar
magician
Posts: 1566
Joined: Mon May 02, 2011 1:08 am
Location: Yorba Linda, CA
Contact:

Re: What happens to stock prices if everyone index invests?

Post by magician » Tue Jul 30, 2013 9:14 am

bottlecap wrote:If everyone indexed, then there would be no individual stocks to index with. Companies wouldn't be able to issue new stock, because if it weren't a part of the index there'd be no one to buy it.
Unless someone created the just-issued stock (or, perhaps better, the just-issued security (to cover bonds as well)) index.
Simplify the complicated side; don't complify the simplicated side.

User avatar
magician
Posts: 1566
Joined: Mon May 02, 2011 1:08 am
Location: Yorba Linda, CA
Contact:

Re: What happens to stock prices if everyone index invests?

Post by magician » Tue Jul 30, 2013 9:16 am

techcrium wrote:Wow I didn't realize that my thread generated so much hate.
There is no hate here.

Since when did mild (or even major) criticism become hate?

Ridiculous!
Simplify the complicated side; don't complify the simplicated side.

User avatar
Chan_va
Posts: 746
Joined: Wed Dec 05, 2012 7:15 pm

Re: What happens to stock prices if everyone index invests?

Post by Chan_va » Tue Jul 30, 2013 9:24 am

While it may not be a valid question to ask -"What if everybody indexed?", it is a valid question to ask -"What if the % of indexer's in the market went from 30% to 40%?"

That is interesting. In theory, there are fewer active market participants taking advantage of greater inefficiencies. So, you might expect that market gyrations are amplified as the % of indexer's increase.
Someone will probably find a way to arbitrage this away though.

User avatar
Aptenodytes
Posts: 3751
Joined: Tue Feb 08, 2011 8:39 pm

Re: What happens to stock prices if everyone index invests?

Post by Aptenodytes » Tue Jul 30, 2013 9:49 am

magician wrote:
techcrium wrote:Wow I didn't realize that my thread generated so much hate.
There is no hate here.

Since when did mild (or even major) criticism become hate?

Ridiculous!
I didn't detect any hate, although most people chose to answer a different question than the one the OP posed. I can see how that might be annoying. The OP asked what would happen if hypothetically everyone tried to index. I believe bottlecap got the correct answer -- the stock exchanges would close down. Presumably in this hypothetical world capitalism would be next to come to an end, followed by widespread famine, war, and pestilence. It is a mildly interesting thought experiment, though as many posters pointed out of no practical relevance because it would be impossible to happen. It is kind of like asking what would happen if nobody in the world purchased anything during the month of September. The answer can be estimated, but the answer doesn't matter.

FafnerMorell
Posts: 686
Joined: Mon Sep 15, 2008 10:27 am

Re: What happens to stock prices if everyone index invests?

Post by FafnerMorell » Tue Jul 30, 2013 9:57 am

techcrium wrote:
FafnerMorell wrote:What happens to the Powerball lottery if absolutely no one buys a ticket ever?
Would all the prize money just sit there forever, as they hold drawing after drawing?
This scenario is probably a lot more likely than the index one.

The truly awesome thing about taxing stupidity/greed is there's always someone willing to pay.
Well if no one buys a ticket, the jackpot would just remain at the minimum and no one will buy it. I don't know how your analogy applies to my question.
Wow I didn't realize that my thread generated so much hate.
Oh, don't assume I mean stupidity/greed in a hateful way - heck, I'm grateful for those folks paying expenses that I can free-ride on. Yay, stupid/greedy people, yay!
(If it makes them feel better, they can fairly call us indexers "lazy" - after all, a lot of us purposely pick "Lazy Portfolios". Although Nisiprius and others devote a lot of energy and effort to helping others see the advantage of indexing, so maybe a slight better definition is needed. I guess I'll lead that to the energy-effortful-lazy people to come up with <grin>).
Last edited by FafnerMorell on Tue Jul 30, 2013 10:18 am, edited 1 time in total.

User avatar
G-Money
Posts: 2864
Joined: Sun Dec 09, 2007 7:12 am

Re: What happens to stock prices if everyone index invests?

Post by G-Money » Tue Jul 30, 2013 10:14 am

Aptenodytes wrote:The OP asked what would happen if hypothetically everyone tried to index. I believe bottlecap got the correct answer -- the stock exchanges would close down. Presumably in this hypothetical world capitalism would be next to come to an end, followed by widespread famine, war, and pestilence. It is a mildly interesting thought experiment, though as many posters pointed out of no practical relevance because it would be impossible to happen. It is kind of like asking what would happen if nobody in the world purchased anything during the month of September. The answer can be estimated, but the answer doesn't matter.
The thread title asks a different question than what was posed in the OP's post. The thread title asked:
What happens to stock prices if everyone index invests?
. . . to which your answer is a plausible one.

The OP asked in the first post:
Theoretically, what would happen to stock prices if the majority of investors picks some index and invests in that and almost nobody handpicks stocks except for the small few??
. . .
What if in the future, 99% of investments are in an index? What are the pitfalls of that?
This is a different question, to which I think most of the responses were aimed (and accurately answered).
Don't assume I know what I'm talking about.

minesweep
Posts: 1175
Joined: Fri Mar 02, 2007 9:17 pm
Location: PA

Re: What happens to stock prices if everyone index invests?

Post by minesweep » Tue Jul 30, 2013 10:24 am

MathWizard wrote:
Wow I didn't realize that my thread generated so much hate.
I don't see any of that in the responses I see.

One thing you can do is to type relevant parts of your questions into the search box.

When I put "everone indexed" into the search box, this thread pops up and the next two links
were:

http://www.bogleheads.org/forum/viewtop ... st=1245307

and

http://www.bogleheads.org/forum/viewtop ... st=1712645

So you can see that this gets asked frequently.
and:

Can Index Investing Get Too Crowded?

and:

Will Indexing Kill the Market?

Mike

Quickfoot
Posts: 956
Joined: Fri Jan 11, 2013 1:03 pm

Re: What happens to stock prices if everyone index invests?

Post by Quickfoot » Tue Jul 30, 2013 10:49 am

Even if everyone index invested not everyone would be investing in the same indexes, I do not hold any total stock market or total bond market for example but I do hold multiple domestic & foreign equity, bond and REIT index funds. When everyone is doing something it's time to do something different, whether that's being in different indexes, individual stocks, or something else that "everyone" who is in indexes will think is crazy at the time :).

User avatar
Aptenodytes
Posts: 3751
Joined: Tue Feb 08, 2011 8:39 pm

Re: What happens to stock prices if everyone index invests?

Post by Aptenodytes » Tue Jul 30, 2013 11:03 am

G-Money wrote: The OP asked in the first post:
Theoretically, what would happen to stock prices if the majority of investors picks some index and invests in that and almost nobody handpicks stocks except for the small few??
. . .
What if in the future, 99% of investments are in an index? What are the pitfalls of that?
This is a different question, to which I think most of the responses were aimed (and accurately answered).
Right -- another case of the title of the post asking a different question than the body of the post. I was going by the title, and stand corrected. All investors, 99% of investors, and a majority of investors, all lead to radically different conclusions.

User avatar
SimpleGift
Posts: 2882
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: What happens to stock prices if everyone index invests?

Post by SimpleGift » Tue Jul 30, 2013 11:10 am

Rick Ferri had some insightful comments on this topic in another recent thread:
Rick Ferri wrote:It doesn't take much activity to figure out prices. On any given day, only a small fraction of any market trades. This turover is more than adequate to price securities.

You don't need 20% turnover per day in the housing market to figure out how much your house is worth. 5% turnover in your geographic location per YEAR is good enough. Stocks are the same. Indexing can be 95% of the market and individual stock prices will still flucuate independently.
Cordially, Todd

IlliniDave
Posts: 2194
Joined: Fri May 17, 2013 7:09 am

Re: What happens to stock prices if everyone index invests?

Post by IlliniDave » Tue Jul 30, 2013 11:42 am

Aptenodytes wrote: The OP asked what would happen if hypothetically everyone tried to index. I believe bottlecap got the correct answer -- the stock exchanges would close down.
I think the exchanges would still be in operation. ETFs and the like would take the place of traditional stock shares that are traded. Even in the 100% index scenario the "Spiders" and many sub-index ETFs (and all the other crazy ETFs out there) would persist on the exchanges. I don't think 100% indexing will happen although I could see a time when the actual stocks rarely changed hands (similar end result in a sense), rather, people will be buying/selling fund and single-company ETFs.
Last edited by IlliniDave on Tue Jul 30, 2013 11:44 am, edited 1 time in total.
Don't do something. Just stand there!

User avatar
ogd
Posts: 4841
Joined: Thu Jun 14, 2012 11:43 pm

Re: What happens to stock prices if everyone index invests?

Post by ogd » Tue Jul 30, 2013 11:54 am

I'll echo what other posters have said: if we get close enough to 100% indexing, a negative feedback loop would appear that would stabilize that ratio to a lower value. Like so: more indexing -> less stock research -> prices become out of whack -> stock picking is more rewading -> less indexing. Negative feedback is at work in every ecosystem, google "foxes and rabbits" for a simplified example.

And if you're bothered ethically by taking advantage of stock research that others pay for -- think of it as capitalism's antibody reaction to the vast amounts of money wasted on redundant stock research (e.g. JPM and GS constantly trying to outsmart each other).

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What happens to stock prices if everyone index invests?

Post by avalpert » Tue Jul 30, 2013 12:44 pm

IlliniDave wrote:
Aptenodytes wrote: The OP asked what would happen if hypothetically everyone tried to index. I believe bottlecap got the correct answer -- the stock exchanges would close down.
I think the exchanges would still be in operation. ETFs and the like would take the place of traditional stock shares that are traded. Even in the 100% index scenario the "Spiders" and many sub-index ETFs (and all the other crazy ETFs out there) would persist on the exchanges. I don't think 100% indexing will happen although I could see a time when the actual stocks rarely changed hands (similar end result in a sense), rather, people will be buying/selling fund and single-company ETFs.
What on earth is a single-company ETF and why would want one? Why would you need to pay someone anything to manage a fund (that you buy on exchanges anyway) when you could buy the share directly?
I think a lot of the stories manufactured in response to this hypothetical question (which itself would require the overturning of our basic understanding of finance and economics) is rooted in superficial understanding of the stock market.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What happens to stock prices if everyone index invests?

Post by avalpert » Tue Jul 30, 2013 12:47 pm

techcrium wrote:Theoretically, what would happen to stock prices if the majority of investors picks some index and invests in that and almost nobody handpicks stocks except for the small few??
The small few would provide most price discovery and either there will be enough activity to keep it efficient or prices will become more volatile.
What if in the future, 99% of investments are in an index? What are the pitfalls of that?
Pitfalls for whom? It probably wouldn't matter at all, may make prices more volatile but to the extent that is true any realistic model would acknowledge that some of those 99% would step in to take advantage of that and an equilibrium will be found that enough price discovery is going on such that there is no expected benefit to exploit.

umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What happens to stock prices if everyone index invests?

Post by umfundi » Tue Jul 30, 2013 2:15 pm

I think nisiprius got it right in the third post of this thread.

The question is a backdoor argument for active management. If lots of people index, the market will get less efficient, so there will be more hundred-dollar bills on the sidewalk for active investors to pick up.

Keith
Déjà Vu is not a prediction

User avatar
tadamsmar
Posts: 7595
Joined: Mon May 07, 2007 12:33 pm

Re: What happens to stock prices if everyone index invests?

Post by tadamsmar » Tue Jul 30, 2013 2:37 pm

nisiprius wrote:This question does not come out of a vacuum. I doubt you thought it up for yourself; I'll bet you heard or read it somewhere. It's just a standard random talking point against index funds, and a weak one at that. The idea is to suggest not merely that indexing is dangerous, but that it is wicked and selfish. It's the Kant "categorical imperative" (nope, never read Kant, just saw a bullet-point summary once :)).
It is wicked and selfish to always use index funds no matter what. I am a highly moral person that would do my duty to correct any miss-pricing that I may verify. I have beavered away as a wage-slave and invested my meager savings in index funds only because God in his grace has not so far chosen to endow me with the power to verify such miss-pricing.

lws6772
Posts: 437
Joined: Mon Oct 06, 2008 5:14 pm
Location: Texas

Re: What happens to stock prices if everyone index invests?

Post by lws6772 » Tue Jul 30, 2013 3:15 pm

I don't think we will ever see everyone index investing. The vast majority of mutual fund companies would go broke or at least until they could convince everyone it now suddenly cost much more to manage an index fund than previously thought. :happy
Rule 1. Never lose money. Rule 2. Never forget Rule 1.

learning_head
Posts: 832
Joined: Sat Apr 10, 2010 6:02 pm

Re: What happens to stock prices if everyone index invests?

Post by learning_head » Tue Jul 30, 2013 3:42 pm

larryswedroe wrote:http://www.cbsnews.com/8301-505123_162- ... e-indexed/

Here is a piece I wrote on subject
Larry
I think Larry's article makes some very interesting points! Thanks Larry!

(Also thanks to Rick (in another thread) and Nisi for their responses - I found them nicely put too)

techcrium
Posts: 132
Joined: Sun Mar 24, 2013 12:09 am

Re: What happens to stock prices if everyone index invests?

Post by techcrium » Tue Jul 30, 2013 3:57 pm

nisiprius wrote:This question does not come out of a vacuum. I doubt you thought it up for yourself; I'll bet you heard or read it somewhere. It's just a standard random talking point against index funds, and a weak one at that. The idea is to suggest not merely that indexing is dangerous, but that it is wicked and selfish. It's the Kant "categorical imperative" (nope, never read Kant, just saw a bullet-point summary once :)).
I don't know what you are talking about but why couldn't I have thought it up myself? I did not read any article and then spin someone else's idea as my own.

Index investing is picking up everywhere. I have a fair percentage of my portfolio in indexes, but I am obviously trying to look at it from all angles.

User avatar
JoMoney
Posts: 4791
Joined: Tue Jul 23, 2013 5:31 am

Re: What happens to stock prices if everyone index invests?

Post by JoMoney » Tue Jul 30, 2013 4:10 pm

techcrium wrote: I don't know what you are talking about but why couldn't I have thought it up myself? I did not read any article and then spin someone else's idea as my own.

Index investing is picking up everywhere. I have a fair percentage of my portfolio in indexes, but I am obviously trying to look at it from all angles.
In the modern world, it doesn't seem to matter if you thought of it on your own. It seems the folks who get published first and have the highest educational pedigree get the credit... or the person who gets the patent on it first (no matter how simple and obvious the idea may be)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

IlliniDave
Posts: 2194
Joined: Fri May 17, 2013 7:09 am

Re: What happens to stock prices if everyone index invests?

Post by IlliniDave » Tue Jul 30, 2013 4:14 pm

avalpert wrote:
What on earth is a single-company ETF and why would want one? Why would you need to pay someone anything to manage a fund (that you buy on exchanges anyway) when you could buy the share directly?
I think a lot of the stories manufactured in response to this hypothetical question (which itself would require the overturning of our basic understanding of finance and economics) is rooted in superficial understanding of the stock market.
It's just an artifact of my dystopian view of the future extrapolated from the OPs question/train of thought. It's not something desirable for an individual investor, but the Institutions are gradually bringing the entire stock market under their control (from about a third in the early 1980s to over two-thirds as of a couple years ago, if I recall correctly). Extrapolate that trend another few decades and they'll basically have the whole pie. As long as they're willing to operate at high turnover, things go on. But what happens when one of them decides the only way to maintain profits is to ensure the shares they control today stay in their control, and if possible they obtain more shares on an ongoing basis. ETFs seem to be a means to that end.

Feel free to crow about the superficiality of my understanding of things. For today that's my guess as to the end result of largely static control of the stock markets, and for today I'm sticking to it. :D
Don't do something. Just stand there!

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What happens to stock prices if everyone index invests?

Post by avalpert » Tue Jul 30, 2013 4:30 pm

IlliniDave wrote: But what happens when one of them decides the only way to maintain profits is to ensure the shares they control today stay in their control, and if possible they obtain more shares on an ongoing basis. ETFs seem to be a means to that end.
See, that doesn't make any sense. The shares aren't worth anything if they aren't being traded - unless you are suggesting they will try to force all markets to be illiquid because they think they can take a higher premium for it but the market would obviously adjust to that (no different than any other hoarding scenario, either price drops or the market finds alternative means of distributing shares in their company). And ETFs as a means to that end would require dramatic change in the regulatory definition of an ETF such that it would no longer be anything like what an ETF is today (for starters, ETFs must hold a minimum of 13 stocks and the top 5 holding of an etf cannot exceed 65% of total holdings).

So again, this little hypothetical is silly and removed from reality.

IlliniDave
Posts: 2194
Joined: Fri May 17, 2013 7:09 am

Re: What happens to stock prices if everyone index invests?

Post by IlliniDave » Tue Jul 30, 2013 7:05 pm

avalpert wrote: So again, this little hypothetical is silly and removed from reality.
Of course it's removed from reality, its conjecture about the future. We'll see how things proceed when 70% becomes 80% then becomes 90% and so on. Maybe it will only approach 100% asymptotically. I don't think it will be hoarding in the sense of trying to manipulate the market, but in the sense of trying to preserve their AUM. Mega collections of stocks that investors own shares of, but when they want to sell, they sell to another investor through the market rather than redeem through the fund manager, so the fund managers' respective holdings stay intact.

As the percent owned by the institutions grows larger I believe it will force some sort of substantial paradigm shift.

Disparage away. I'll go find a more cordial discussion to join, thanks.
Don't do something. Just stand there!

User avatar
nisiprius
Advisory Board
Posts: 35444
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: What happens to stock prices if everyone index invests?

Post by nisiprius » Tue Jul 30, 2013 8:15 pm

techcrium wrote:
nisiprius wrote:This question does not come out of a vacuum. I doubt you thought it up for yourself; I'll bet you heard or read it somewhere. It's just a standard random talking point against index funds, and a weak one at that. The idea is to suggest not merely that indexing is dangerous, but that it is wicked and selfish. It's the Kant "categorical imperative" (nope, never read Kant, just saw a bullet-point summary once :)).
I don't know what you are talking about but why couldn't I have thought it up myself? I did not read any article and then spin someone else's idea as my own.

Index investing is picking up everywhere. I have a fair percentage of my portfolio in indexes, but I am obviously trying to look at it from all angles.
My apologies. It's such a common way of attacking indexing that I jumped to a conclusion.

The philosopher Kant's "categorical imperative" is something like "in deciding whether something is good to do, think about what would happen if everyone did it." A lot of people who argue against indexing by saying "what if everyone did it" try to suggest that indexers are somehow free-riding and spoiling it for everyone else.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What happens to stock prices if everyone index invests?

Post by avalpert » Tue Jul 30, 2013 9:17 pm

IlliniDave wrote:
avalpert wrote: So again, this little hypothetical is silly and removed from reality.
Of course it's removed from reality, its conjecture about the future. We'll see how things proceed when 70% becomes 80% then becomes 90% and so on. Maybe it will only approach 100% asymptotically. I don't think it will be hoarding in the sense of trying to manipulate the market, but in the sense of trying to preserve their AUM. Mega collections of stocks that investors own shares of, but when they want to sell, they sell to another investor through the market rather than redeem through the fund manager, so the fund managers' respective holdings stay intact.

As the percent owned by the institutions grows larger I believe it will force some sort of substantial paradigm shift.

Disparage away. I'll go find a more cordial discussion to join, thanks.
Conjecture in the future can be grounded in reality, heck any useful conjecture is. This isn't conjecture about the future, this is pure fiction that ignores any realistic account of the institutions it is conjecturing about.

But sure, if you can explain how and why institutions would pressure the SEC to define ETFs in such a way as to allow it to hold a single stock and somehow how these institution can convince investors to pay them to buy that single stock rather than doing it themselves go right ahead - as it is, your conjecture is just unrealistic fiction divorced from an understanding of the institutions it is conjecturing about.

User avatar
nedsaid
Posts: 9392
Joined: Fri Nov 23, 2012 12:33 pm

Re: What happens to stock prices if everyone index invests?

Post by nedsaid » Tue Jul 30, 2013 9:39 pm

Indexing is boring and the boredom would get to the Jim Cramers of the world. Somebody would start trading again. There are always the arbitragers and traders that would seek to exploit any inefficiency in the market. The animal spirits at some point would set in.
A fool and his money are good for business.

dewey
Posts: 338
Joined: Fri Feb 24, 2012 11:42 am

Re: What happens to stock prices if everyone index invests?

Post by dewey » Tue Jul 30, 2013 11:20 pm

IlliniDave wrote:
avalpert wrote: So again, this little hypothetical is silly and removed from reality.
Of course it's removed from reality, its conjecture about the future. We'll see how things proceed when 70% becomes 80% then becomes 90% and so on. Maybe it will only approach 100% asymptotically. I don't think it will be hoarding in the sense of trying to manipulate the market, but in the sense of trying to preserve their AUM. Mega collections of stocks that investors own shares of, but when they want to sell, they sell to another investor through the market rather than redeem through the fund manager, so the fund managers' respective holdings stay intact.

As the percent owned by the institutions grows larger I believe it will force some sort of substantial paradigm shift.

Disparage away. I'll go find a more cordial discussion to join, thanks.
IlliniDave...your tagline quote doesn't square with this post.
“The only freedom that is of enduring importance is freedom of intelligence…”

IlliniDave
Posts: 2194
Joined: Fri May 17, 2013 7:09 am

Re: What happens to stock prices if everyone index invests?

Post by IlliniDave » Wed Jul 31, 2013 7:10 am

dewey wrote: IlliniDave...your tagline quote doesn't square with this post.
How so Dewey? About the "paradigm shift"? Didn't mean it in the sense that "good" investing strategy for individuals is going to change much, at least not in my lifetime. But the clear trend is that the institutions are gaining management control over an ever-increasing fraction of the total of the stock market. They don't own it, but they control it (and of course it's the trough they feed at, so they're motivated to offer their "services" to the largest fraction of the market possible, and have no reason to voluntarily reduce or limit their total AUM). At some time down the road (several decades hence) it will probably get to be substantially 100% unless rules are imposed or redefined to preclude that. It's hard to see any other outcome sans substantial intervention. Then what?

Looking then at the trends in how stocks are being managed by professionals, I believe index funds are easily the fastest growing segment, and ETFs have already blown by traditional index funds to represent the majority of indexed investment dollars and I see no reason for that trend to change.

Extrapolate those two things together and for a guy like me not much changes even if at some point I wind up owning ETFs instead of TIFs. So I just stand there. I think it's the "investment industry" that will undergo some paradigm shift (not all bad either). In part through the increasing demand from investors for efficient long-term investment options, in part due the the constraints its own growth will impose on itself. The market (in the large sense) will be fine. The typical day's transactions today look different than they did 40 years ago, and they'll probably look equally different 40 years in the future. It's possible things will stay just like they are today, but I tend to think that's the least likely outcome of all.
Don't do something. Just stand there!

IlliniDave
Posts: 2194
Joined: Fri May 17, 2013 7:09 am

Re: What happens to stock prices if everyone index invests?

Post by IlliniDave » Wed Jul 31, 2013 7:38 am

nedsaid wrote:Indexing is boring and the boredom would get to the Jim Cramers of the world. Somebody would start trading again. There are always the arbitragers and traders that would seek to exploit any inefficiency in the market. The animal spirits at some point would set in.
That seems like a plausible future as well--that there will always be at least some small corner of the market that remains "personal" and resists the ebbing corporatization. Certainly there will always be people that want to do it, I believe, but don't know how they'll pull it off. Maybe diversified investing for retirement/long term is just not something that will ever be popular enough in the country to propel institutional AUM to the limit.

But I like the thought the way you expressed it: "animal spirit".
Don't do something. Just stand there!

Post Reply