Market index funds are unsustainable?

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blorman
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Market index funds are unsustainable?

Post by blorman » Wed Jun 14, 2017 11:19 pm

Hi all long time lurker here, but I came across this which is interesting: Care where your money goes: Why Market Index Funds and Passive Investing are Unsustainable. Wondering what Bogleheads think about this issue and if any of you have sustainable portfolios.

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blorman

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triceratop
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Re: Market index funds are unsustainable?

Post by triceratop » Wed Jun 14, 2017 11:41 pm

The post claims that investing in companies which are incompatible with sustainability rewards that behavior. I don't see how selling one's shares so another market participant keeps the growth due to those companies is a disincentive at all. It only would be if Stocks ceased being an effective way for early investors to cash out during an IPO.

It's amusing how they attempt to redefine "value investing" away from Warren Buffett.

I wouldn't take this article too seriously.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

jbranx
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Re: Market index funds are unsustainable?

Post by jbranx » Thu Jun 15, 2017 12:13 am

Here's a list of 37 ETF's that one way or another are socially, ethically, or sustainability dedicated:

http://etfdb.com/type/investment-style/ ... sponsible/

I've followed--never purchased--a lot of these tilts to "good behavior" of one type or another since Amy Domini (KLD) came out with the first one. Once upon a time they were heavily in tech and avoided nuclear power, defense, tobacco, and alcohol. The list changes with the times. Some folks today think retailers and other low payers and hamburger joints and certain tech monopolies don't belong on the lists. GE has almost always been on the lists to avoid, but today it's favored by some who hope its gas turbines replace coal. In other words, some of us who have followed the trends have decided we can take what the market gives us to invest in and share any mis-begotten gains with charity.

afan
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Re: Market index funds are unsustainable?

Post by afan » Thu Jun 15, 2017 6:13 am

Well, yes. By definition market weight investing means that you do not choose which stocks to include and that you exclude none. "Don't Care what you are invested in" is a good way to describe it. You invest in the stock market, not in individual stocks.

If you feel a moral aversion to certain industries then you may not want to own those stocks, even if your behavior has no effect at all on the industries. In that case you should not own broad index funds.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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bottlecap
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Re: Market index funds are unsustainable?

Post by bottlecap » Thu Jun 15, 2017 6:26 am

I don't worry about it.

Not investing in a company doesn't encourage "sustainability" or change a company's behavior. It's a feel-good concept that demonstrates ignorance of how the market works.

The appeal is that is requires little effort. The drawback is that it is ineffective and costly. You could be giving all that extra money you earn in "unsustainable" funds to your various pet causes. It would do far more "good" that way.

Here's an interesting thought experiment: If sustainable investing truly punishes the "bad" companies, then the prelevance of these funds should corelate with reduced returns in "unsustainable" market funds. I'm not aware of any studies addressing that (for you economics or business school students looking for a thesis), but I can almost guarantee there has been no effect.

JT

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Re: Market index funds are unsustainable?

Post by iamlucky13 » Thu Jun 15, 2017 4:22 pm

bottlecap wrote:Here's an interesting thought experiment: If sustainable investing truly punishes the "bad" companies, then the prelevance of these funds should corelate with reduced returns in "unsustainable" market funds. I'm not aware of any studies addressing that (for you economics or business school students looking for a thesis), but I can almost guarantee there has been no effect.

JT
Wouldn't it be the other way? Lower demand for their stock reduces the price, which in turn improves the earnings relative to cost?

Then again, lower demand and price also makes it more difficult to raise additional capital through stocks. It's a trade off.

I think the more direct intention, though, is to hurt the value of current shareholders through lower share prices, hypothetically inspiring them to demand a change in business practices to remedy the reduced stock demand.

However, since the reason they haven't already changed their business practices is presumably the cost of doing so, this also is a trade off between a better share price or better earnings.


Theoretical
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Re: Market index funds are unsustainable?

Post by Theoretical » Thu Jun 15, 2017 9:12 pm

Regardless of the merits or demerits of sustainable investing, I immediately distrust anyone who redefines well-established words in that tortured of a way. It's qualitatively different even than the dubious art of saying an extreme growth stock is a value bargain because it's got even more potential than the market sees. That's bad, and it stretches the limits of credulity, but "value" in the financial/bargain/good deal sense is still there.

To call it sustainable value investing, deliberately leaving off the s, makes it sound like it's "a bargain" when its really not that at all.

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Re: Market index funds are unsustainable?

Post by bottlecap » Thu Jun 15, 2017 9:43 pm

iamlucky13 wrote:
bottlecap wrote:Here's an interesting thought experiment: If sustainable investing truly punishes the "bad" companies, then the prelevance of these funds should corelate with reduced returns in "unsustainable" market funds. I'm not aware of any studies addressing that (for you economics or business school students looking for a thesis), but I can almost guarantee there has been no effect.

JT
Wouldn't it be the other way? Lower demand for their stock reduces the price, which in turn improves the earnings relative to cost?

Then again, lower demand and price also makes it more difficult to raise additional capital through stocks. It's a trade off.
You may be mixing your terms (price vs. cost, for example), so I'm not sure exactly what you're saying. But if I catch your drift correctly, my answer would be no.

If a certain percentage of investors refuse to buy a stock, that just means the rest of us buy more and pick up the gains. We aren't going to let good earnings lay around for cheap.

For similar reasons, it will not make it more difficult to raise additional capital through stock issuance.

I don't know where the gains would go, though - to "unsustainable" index funds or "unsustainable" active funds. Perhaps the latter, at least initially.

JT

iamlucky13
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Re: Market index funds are unsustainable?

Post by iamlucky13 » Thu Jun 15, 2017 11:33 pm

bottlecap wrote:
iamlucky13 wrote:
bottlecap wrote:Here's an interesting thought experiment: If sustainable investing truly punishes the "bad" companies, then the prelevance of these funds should corelate with reduced returns in "unsustainable" market funds. I'm not aware of any studies addressing that (for you economics or business school students looking for a thesis), but I can almost guarantee there has been no effect.

JT
Wouldn't it be the other way? Lower demand for their stock reduces the price, which in turn improves the earnings relative to cost?

Then again, lower demand and price also makes it more difficult to raise additional capital through stocks. It's a trade off.
You may be mixing your terms (price vs. cost, for example), so I'm not sure exactly what you're saying. But if I catch your drift correctly, my answer would be no.

If a certain percentage of investors refuse to buy a stock, that just means the rest of us buy more and pick up the gains. We aren't going to let good earnings lay around for cheap.

For similar reasons, it will not make it more difficult to raise additional capital through stock issuance.

I don't know where the gains would go, though - to "unsustainable" index funds or "unsustainable" active funds. Perhaps the latter, at least initially.

JT
I don't follow. For any given stock, there is a limited number of people willing to pay a certain price for a limited number of shares each. If some of that limited set of people decide not to buy for non-price related reasons, the number of people willing to pay that price has now decreased. In order for them to find buyers for the same number of shares, the price has to go down.

Your individual decision for how many shares you will buy is not based on how many shares are available. It's based on how much you want to invest in a given company, which itself is probably also based somewhat on price. You aren't going to buy more than you planned at the same price just because you learned somebody else doesn't want the stock at all.

PFInterest
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Re: Market index funds are unsustainable?

Post by PFInterest » Fri Jun 16, 2017 9:25 am

i would argue this is not interesting.

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Re: Market index funds are unsustainable?

Post by LadyGeek » Fri Jun 16, 2017 9:18 pm

Thread locked for moderator review.
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Re: Market index funds are unsustainable?

Post by prudent » Sat Jun 17, 2017 10:28 am

After review, the thread is unlocked with the understanding that replies remain focused on investing and not social/ethical issues. A couple of posts were removed which did not meet that threshold.

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