Bogle worried Vanguard is getting too big

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RAchip
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Re: Bogle worried Vanguard is getting too big

Post by RAchip » Sun Jan 08, 2017 2:07 pm

"Do index funds contribute enough buying pressure on certain stocks to bid up stocks to artificially high prices?"

I have no idea, but if it is happening or does happen, it would work the other way too. If index people get scared and pull their money out of the market that would drive prices down for some companies that don't deserve to fall.

To me, the Boglehead argument or theory of "just buy index funds" is clearly flawed. If everyone did that, there wouldn't be a properly functioning market for individual stocks. Index fund investing only works if everyone doesn't do it.

neomutiny06
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Re: Bogle worried Vanguard is getting too big

Post by neomutiny06 » Sun Jan 08, 2017 2:10 pm

RAchip wrote:"Do index funds contribute enough buying pressure on certain stocks to bid up stocks to artificially high prices?"

I have no idea, but if it is happening or does happen, it would work the other way too. If index people get scared and pull their money out of the market that would drive prices down for some companies that don't deserve to fall.

To me, the Boglehead argument or theory of "just buy index funds" is clearly flawed. If everyone did that, there wouldn't be a properly functioning market for individual stocks. Index fund investing only works if everyone doesn't do it.


While this may be true, we will never have a world where everyone indexes. So yes, I will benefit from the academics while everyone else tries to beat the market. Humans aren't wired to Index. They are wired to attempt to outsmart and do better than those before them. The world will never 100% index. Or even 50% index.

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Munir
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Re: Bogle worried Vanguard is getting too big

Post by Munir » Sun Jan 08, 2017 2:43 pm

It's clear that different groups of investors have varying needs and expectations from Vanguard. I have had Vanguard for decades and have been very happy with their service and competence on all levels (I'm a Flagship client). However, my needs are minimal and I only get in touch with them 2-3x/year. Everything else I do is via internet. I don't want nor need any changes, and prefer the lowest cost service. In fact, that's why I chose Vanguard.

gkaplan
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Re: Bogle worried Vanguard is getting too big

Post by gkaplan » Sun Jan 08, 2017 3:40 pm

columbia wrote:My only real beef with Vanguard is that they do not have "Rebalance Now" and/or annual automatic rebalancing features.

If they really are getting so big, surely there is room in the budget to implement such software features. Heck, I'll donate my time to write the code. :)


I've never found the need for this feature. I created an Excel spreadsheet that helps me to do this, as I imagine others have done.
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wesgreen
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Re: Bogle worried Vanguard is getting too big

Post by wesgreen » Sun Jan 08, 2017 8:52 pm

Munir wrote: I don't want nor need any changes, and prefer the lowest cost service. In fact, that's why I chose Vanguard.

Well said, likewise here.

leonard
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Re: Bogle worried Vanguard is getting too big

Post by leonard » Mon Jan 09, 2017 1:32 pm

chinto wrote:Generally.... I presume.....


hmmmm,....
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inbox788
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Re: Bogle worried Vanguard is getting too big

Post by inbox788 » Mon Jan 09, 2017 5:23 pm

neomutiny06 wrote:
RAchip wrote:"Do index funds contribute enough buying pressure on certain stocks to bid up stocks to artificially high prices?"

I have no idea, but if it is happening or does happen, it would work the other way too. If index people get scared and pull their money out of the market that would drive prices down for some companies that don't deserve to fall.

To me, the Boglehead argument or theory of "just buy index funds" is clearly flawed. If everyone did that, there wouldn't be a properly functioning market for individual stocks. Index fund investing only works if everyone doesn't do it.


While this may be true, we will never have a world where everyone indexes. So yes, I will benefit from the academics while everyone else tries to beat the market. Humans aren't wired to Index. They are wired to attempt to outsmart and do better than those before them. The world will never 100% index. Or even 50% index.

Consider this. Even in a world where everyone is indexing and a BH, what would be the effect? People would buy when they invest cash, and sell when they retire and use funds. There would be a supply and demand like the birth/death rate. And if there were enough imbalance somewhere, I'm sure a compensation mechanism will present itself. If the market is low, some retirees may choose to use more cash savings or rebalance, while if the market is bubbling, same retirees may want to cash out a bit more (1 year cash to 2 year cash or 2 year cash to 4 year cash). If I was retired, and the market went up 20-30% in 1 year (more than 5x the SWR), I'd consider going beyond rebalancing and cashing out a couple of extra years to cash. Still not sure if the market tanks same amount

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mickeyd
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Re: Bogle worried Vanguard is getting too big

Post by mickeyd » Wed Jan 11, 2017 4:42 pm

Index fund investing only works if everyone doesn't do it.


I do not care what everyone does. I only care about me and mine.
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leonard
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Re: Bogle worried Vanguard is getting too big

Post by leonard » Wed Jan 11, 2017 9:57 pm

RAchip wrote:To me, the Boglehead argument or theory of "just buy index funds" is clearly flawed. If everyone did that, there wouldn't be a properly functioning market for individual stocks. Index fund investing only works if everyone doesn't do it.


It doesn't require a very large percent of the market to be involved in arbitrage to keep prices in line. Nothing flawed there.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

henrikk
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Re: Bogle worried Vanguard is getting too big

Post by henrikk » Thu Jan 12, 2017 1:09 am

leonard wrote:
RAchip wrote:To me, the Boglehead argument or theory of "just buy index funds" is clearly flawed. If everyone did that, there wouldn't be a properly functioning market for individual stocks. Index fund investing only works if everyone doesn't do it.

It doesn't require a very large percent of the market to be involved in arbitrage to keep prices in line. Nothing flawed there.

Can you (or anyone) back this statement up with research? I am *not* challenging the statement. I've heard similar statements a lot, but I have not seen any hard data or research to back it up. Also, to be blunt, I am not asking for forum discussion answers by people reinforcing their beliefs, but something more concrete. Is there a body of peer-reviewed research on this? Or something similar?

I have seen nothing that assuages my concerns that as indexing becomes more popular, flaws and cracks in arbitrage will appear much sooner than expected.

dex
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Re: Bogle worried Vanguard is getting too big

Post by dex » Thu Jan 12, 2017 4:50 am

henrikk wrote:
I have seen nothing that assuages my concerns that as indexing becomes more popular, flaws and cracks in arbitrage will appear much sooner than expected.


If flaws and cracks in arbitrage do appear, it means that active management can be profitable. If that happens, I hope the Boglehead advice will change to invest in active funds. After all, the underlying Boglehead principle is do what will give the highest likely return. In our current world with small or no market inefficiency, passive funds give the highest average return. In a world with exploitable market inefficiency, active funds will generally do better than passive one. So we will have greater than market average returns, a better situation than now where our best strategy (passive funds) provides only market average returns. So we should wish for the day that index funds become too popular.

However, it is extremely unlikely to happen. There is only weak evidence that active funds work in the current market and there is still a large active fund sector. It doesn't seem likely that when there is strong evidence that active funds work, there will be an active sector so small that the inefficiency persists. Maybe a lot of people will just follow the passive fund mantra unthinkingly but surely there will be a lot of other people who do a proper analysis. If not, all the better for you because you can invest in active funds and (generally) do better than the index.

Sorry, I don't have any references to cite, I'm just theorizing.

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TheTimeLord
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Re: Bogle worried Vanguard is getting too big

Post by TheTimeLord » Thu Jan 12, 2017 11:01 am

Mr. Bogle said this morning on CNBC Vanguard had added $300 Billion in assets this past year. I believe he stated that exceeded all the outflows from, as he put it, their peers/competitors.
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RAchip
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Re: Bogle worried Vanguard is getting too big

Post by RAchip » Thu Jan 12, 2017 3:50 pm

"I have seen nothing that assuages my concerns that as indexing becomes more popular, flaws and cracks in arbitrage will appear much sooner than expected."

Its just simple math. If a large enough portion of investors do nothing but buy and sell S&P 500 index funds, then there will be large buying and selling of individual stocks buy the funds that has no relationship to the particular circumstances of those 500 individual stocks. This would lead to significant differentials between the market price of some stocks and what that market price "should" be. I think the argument that "index fund investing only works if everyone doesn't do it" is undisputable.

itstoomuch
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Re: Bogle worried Vanguard is getting too big

Post by itstoomuch » Thu Jan 12, 2017 4:43 pm

RAchip wrote:More money in index funds means the market value of individual stocks will not accurately reflect circumstances of individual companies, creating opportunities for those who do not just buy index funds.


Agree.
IMO, at one time the Indexes and big funds are now such a big part of the Market where a relative small trade can change the market value of a company. The problem of small floats and big ownership of a company by just 4-6 fund companies. Volatility could increase.
YMMV
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leonard
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Re: Bogle worried Vanguard is getting too big

Post by leonard » Thu Jan 12, 2017 4:45 pm

henrikk wrote:
leonard wrote:
RAchip wrote:To me, the Boglehead argument or theory of "just buy index funds" is clearly flawed. If everyone did that, there wouldn't be a properly functioning market for individual stocks. Index fund investing only works if everyone doesn't do it.

It doesn't require a very large percent of the market to be involved in arbitrage to keep prices in line. Nothing flawed there.

Can you (or anyone) back this statement up with research? I am *not* challenging the statement. I've heard similar statements a lot, but I have not seen any hard data or research to back it up. Also, to be blunt, I am not asking for forum discussion answers by people reinforcing their beliefs, but something more concrete. Is there a body of peer-reviewed research on this? Or something similar?

I have seen nothing that assuages my concerns that as indexing becomes more popular, flaws and cracks in arbitrage will appear much sooner than expected.


If only there was a way....I'll race you to the peer reviewed research:

http://www.google.com
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

dex
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Re: Bogle worried Vanguard is getting too big

Post by dex » Sun Jan 15, 2017 4:04 am

Here's a non technical paper about how the growth of passive funds affects active investing. Lots of references to peer review articles. Written by Micheal Mauboussin (and others)

https://doc.research-and-analytics.csfb ... 6qBQ%3D%3D

I don't think the authors come out with a prediction on what will happen to market efficiency in the future. However, they says that there is already evidence that indexing is making the market less efficient and cites this article

https://www.researchgate.net/profile/Er ... 000000.pdf

Summary: The researcher runs regression of P/E ratio and P/B ratio against monthly net flows into S&P 500 mutual funds and ETFs along with other control variables. They compared the coefficient for net S&P monthly flow for S&P 500 companies versus largish companies not in the S&P 500. Regression estimates implies that a one standard deviation increase in S&P 500 inflows will increase P/E for S&P companies by 2.9% and decrease P/E for non-S&P companies by 3.0%. P/B will increase for S&P companies by 4.9% and decrease for non-S&P companies by 0.3%. If the market was efficient, there should have been equivalent change for S&P and non-S&P companies since active investor should have sold the overpriced S&P company stock and brought the underpriced non-S&P company stock.

neomutiny06
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Re: Bogle worried Vanguard is getting too big

Post by neomutiny06 » Sun Jan 15, 2017 8:03 am

It seems this thread has turned into a discussion about if "indexing" gets to big. But I don't believe that is what Bogle is concerned about when he says Vanguard is getting too big.

Johnnie
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Re: Bogle worried Vanguard is getting too big

Post by Johnnie » Wed Jan 18, 2017 9:23 pm

I don't know if it has been mentioned, but VG's small cap value fund has been criticized for including companies whose average size isn't all that small and value weighting not that heavy. Elsewhere it has been noted that if small cap value investing was universally adopted in the proportions recommended by its best known adherents, there wouldn't be enough SCV shares to go around.

Which suggest to me that a bigger is not necessarily better in an SCV mutual fund.

I also suspect that's not what Bogle had in mind either, though.
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itstoomuch
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Re: Bogle worried Vanguard is getting too big

Post by itstoomuch » Thu Jan 19, 2017 12:01 am

I hold a small cap stock (<$5B market) with Institutional and Mutual funds holding 105% of float. Vanguard has 16%. :happy :? :mrgreen: 6% are in shorts.
Doesn't take much to swing this stock. :moneybag
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