Index Funds Bubble? [Michael Burry article]

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Index Funds Bubble? [Michael Burry article]

Post by exarkun » Wed Aug 28, 2019 4:25 pm


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Re: Index Funds Bubble?

Post by oldcomputerguy » Wed Aug 28, 2019 4:35 pm

There have been many, many discussions here concerning the allegations of index investing being in a "bubble". Use the search box in the upper right hand corner to search for "index investing bubble".
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

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Re: Index Funds Bubble?

Post by David Jay » Wed Aug 28, 2019 4:35 pm

What will happen if everybody indexed? viewtopic.php?t=238402

If everybody indexed, the only word you could use is chaos, catastrophe viewtopic.php?t=218396

What if everyone invests passively? viewtopic.php?t=251527
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Re: Index Funds Bubble?

Post by Ferdinand2014 » Wed Aug 28, 2019 5:03 pm

I am happy to invest in FXAIX (Fidelity 500 INDEX Fund). I have no worries and sleep well at night.
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Re: Index Funds Bubble?

Post by nisiprius » Wed Aug 28, 2019 5:52 pm

I was impressed by Michael Burry, at least as related in the book (and movie) "The Big Short," but... that just sounds weird to me.

How, exactly, have indexers "orphaned smaller value-type securities?" I think it's just the opposite.

The world's largest mutual fund is the Vanguard Total Stock Market Index Fund, with total assets of $823 billion. It invests in hundreds of small-cap stocks, including, as I scan the list for names that pique my curiosity,

InterGroup Corp, INTG, $68.07 million
Retractable Technologies Inc., RVP, $25.34 million
Polar Power Inc., POLA, $33.47 million
BSQUARE Corp. BSQR, $17.57 million

Thanks to being a passive index investor, I own stock in all of these companies. I have no idea what they do, which probably would seem repulsive to Burry, but I own them.

Perhaps Burry thinks (like too many people) that "indexing" means "investing only in the large-cap stocks of the S&P 500." The Total Stock Market Index Fund, which invests these small companies, is much bigger, about 1.6 times the size, of the venerable 500 Index Fund with $491 billion. I don't know where to find data or a chart quickly, but that ratio has been trending in favor of Total Stock for decades now. Anyway, at the moment, Vanguard index investors have put, ballpark, 63% of their index money into Total Stock and 37% into the S&P 500.

Again, since he wants to make it a "passive versus active" thing,

Total Stock is 5.5% small-caps, 16.92% mid-caps.
Index 500 is 0% small-caps, 9.71% mid-caps.
Weighted by assets in the two funds, investors in Vanguard's two largest funds are 3.4% small-caps, 14.3% mid-caps.


The largest of all active mutual funds are probably Fidelity Contrafund and American Growth Fund of America.

Fidelity Contrafund, 0.64% small, 5.25% mid.
American Growth Fund of America, 0.78% small, 10.83% mid.

If passive investors have "orphaned smaller value-type securities," then so have investors in the largest active mutual funds.

OK, I have to check... Contrafund's holdings... InterGroup Corp? Nope. Retractable Technologies? Nope. Polar Power? Nope. BSQUARE? Nope. And American Growth Fund of America, nope, nope, nope, and nope.

So the stocks of those four companies, "orphaned" by the two biggest active mutual funds, have homes in the Vanguard Total Stock Market Index Fund.

P.S. InterGroup Corporation is a REIT... I think. Retractable Technologies makes syringes that retract and store the needle after use, for safety. Polar Power makes generators; the logo features a polar bear nuzzling the sun, but the reason for the name isn't clear. BSQUARE was founded in 1994 but calls itself an "IoT" company.
Last edited by nisiprius on Wed Aug 28, 2019 6:17 pm, edited 2 times in total.
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Re: Index Funds Bubble?

Post by columbia » Wed Aug 28, 2019 6:01 pm

I’ve orphaned small caps by sticking with S&P 500 exposure, but that’s not what he’s talking about.

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Re: Index Funds Bubble?

Post by nisiprius » Wed Aug 28, 2019 6:11 pm

columbia wrote:
Wed Aug 28, 2019 6:01 pm
I’ve orphaned small caps by sticking with S&P 500 exposure, but that’s not what he’s talking about.
Serious question, what do you think he's talking about? The article subtitle is "Crowding leaves small-cap opportunities, says Michael Burry." I see the article links to a paywalled Bloomberg article, which I was able to read by disabling Javascript:

The Big Short’s Michael Burry Sees a Bubble in Passive Investing. The subtitles are

"Rush into index funds has punished small-cap value stocks" and
"'There is all this opportunity, but so few active managers.'"

The first seems to refers to the same quotation as in the other article:
“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,”
The factual issue here would seem to be whether the rise in passive investing is also creating a shift out of small-caps and into large-caps. I don't see that at all; it seems to me to be exactly the reverse.

The second refers to:
“There is all this opportunity, but so few active managers looking to take advantage,"
Last edited by nisiprius on Wed Aug 28, 2019 6:14 pm, edited 1 time in total.
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Re: Index Funds Bubble?

Post by Dottie57 » Wed Aug 28, 2019 6:12 pm

oldcomputerguy wrote:
Wed Aug 28, 2019 4:35 pm
There have been many, many discussions here concerning the allegations of index investing being in a "bubble". Use the search box in the upper right hand corner to search for "index investing bubble".
And it s tiring to see it often. Just like the “why invest in international?” Threads.

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Re: Index Funds Bubble?

Post by columbia » Wed Aug 28, 2019 6:12 pm

He’s shilling for active management.

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Re: Index Funds Bubble?

Post by nisiprius » Wed Aug 28, 2019 6:14 pm

columbia wrote:
Wed Aug 28, 2019 6:12 pm
He’s shilling for active management.
Oh, I assume he's shilling for his own firm. But it's disappointing that he does it by using an unsupported assertion.
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Re: Index Funds Bubble?

Post by Nate79 » Wed Aug 28, 2019 6:21 pm

exarkun wrote:
Wed Aug 28, 2019 4:25 pm
Haven't seen any discussion on this. Curious what opinions others have.
If already discussed, feel free to move this post.

Three fund managers may soon control nearly half of all corporate voting power, researchers warn

There’s a ‘bubble’ in passive investing, says investor made famous by ‘Big Short’
Are you sure you searched?

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Re: Index Funds Bubble?

Post by Barry Barnitz » Wed Aug 28, 2019 6:31 pm

Hi:

According to S&P:
There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total.
regards,
Additional administrative tasks: Financial Page affiliate blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; Wiki Bogleheads® España.

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Re: Index Funds Bubble?

Post by JBTX » Wed Aug 28, 2019 6:33 pm

nisiprius wrote:
Wed Aug 28, 2019 6:11 pm
columbia wrote:
Wed Aug 28, 2019 6:01 pm
I’ve orphaned small caps by sticking with S&P 500 exposure, but that’s not what he’s talking about.
Serious question, what do you think he's talking about? The article subtitle is "Crowding leaves small-cap opportunities, says Michael Burry." I see the article links to a paywalled Bloomberg article, which I was able to read by disabling Javascript:

The Big Short’s Michael Burry Sees a Bubble in Passive Investing. The subtitles are

"Rush into index funds has punished small-cap value stocks" and
"'There is all this opportunity, but so few active managers.'"

The first seems to refers to the same quotation as in the other article:
“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,”
The factual issue here would seem to be whether the rise in passive investing is also creating a shift out of small-caps and into large-caps. I don't see that at all; it seems to me to be exactly the reverse.

The second refers to:
“There is all this opportunity, but so few active managers looking to take advantage,"
I'm not sure comparing the indexes (indices?) to the top two large cap growth fund is a good comparison.

It would be interesting to know what percent of market cap of large cap is held by index funds, and what percent of small cap stocks are. I'm not at all convinced that small caps are underrepresented when you take into account small cap.index funds.

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Re: Index Funds Bubble?

Post by nisiprius » Wed Aug 28, 2019 6:41 pm

The researchers:
We then extrapolate from past trends to estimate the future growth of the Big Three. We estimate that the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two decades.
Somehow, in the MarketWatch article,

"as much as 40%" turned into "half," and
"within two decades" turned into "soon."

I can't read the full paper without paying $5 which I don't want to do, but I wonder about this, too:
The “Big Three” now hold an average stake of more than 20% of companies in the S&P 500, the authors say.
There's something odd about that, because using data from the 2019 ICI Factbook, index funds hold (by dollar weight) 29% of the stocks in mutual funds, and mutual funds own 30% of all US stocks, so I calculated that index funds hold 29% of 30% = 8.7% of US stocks--that's pretty far from 20%. I think they must be using some non-obvious definition of "average stake."

As for "we then extrapolate from past trends," remember how Mark Twain "proved" that "seven hundred and forty-two years from now the Lower Mississippi will be only a mile and three-quarters long" (extrapolating from the rate at which the river was shortening itself through cutoffs).
Last edited by nisiprius on Wed Aug 28, 2019 6:54 pm, edited 2 times in total.
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Re: Index Funds Bubble?

Post by chw » Wed Aug 28, 2019 6:45 pm

Seems to be click bait to me.

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Re: Index Funds Bubble?

Post by columbia » Thu Aug 29, 2019 5:08 am

In the latest Masters in Business, Jay Bowen is the guest. He runs this shop:
https://www.bowenhanes.com/

When the issue of indexing came up, he twice expressed concerns about algorithms and over indexing potentially causing problems.

1. They are NOT the same thing
2. He provided zero supporting thoughts
3. You’d almost swear that he’s is the stock picking business. ;)

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The Big Short’s Michael Burry Sees a Bubble in Passive Investing

Post by alex123711 » Thu Aug 29, 2019 11:02 am

[Merged here -- mod oldcomputerguy]

“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” Burry, whose Cupertino, California-based firm oversees about $343 million, wrote in an emailed response to questions from Bloomberg News.

https://www.google.com/amp/s/www.bloomb ... -investing

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Re: The Big Short’s Michael Burry Sees a Bubble in Passive Investing

Post by 02nz » Thu Aug 29, 2019 11:04 am

So somebody who has an incentive to advocate against index investing ... advocates against index investing.

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Re: The Big Short’s Michael Burry Sees a Bubble in Passive Investing

Post by whodidntante » Thu Aug 29, 2019 11:11 am

Float weighting ends up being a kind of momentum index, where the winners take up a larger share of investment, and the losers smaller. Since it's also the benchmark, the momentum loading is zero.

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Re: The Big Short’s Michael Burry Sees a Bubble in Passive Investing

Post by Stinky » Thu Aug 29, 2019 11:25 am

alex123711 wrote:
Thu Aug 29, 2019 11:02 am
“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” Burry, whose Cupertino, California-based firm oversees about $343 million, wrote in an emailed response to questions from Bloomberg News.

https://www.google.com/amp/s/www.bloomb ... -investing
If Burry thinks there's a "bubble" in passive investing, I wonder what he thinks will cause it to "pop"?
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Re: The Big Short’s Michael Burry Sees a Bubble in Passive Investing

Post by H-Town » Thu Aug 29, 2019 11:33 am

alex123711 wrote:
Thu Aug 29, 2019 11:02 am
“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” Burry, whose Cupertino, California-based firm oversees about $343 million, wrote in an emailed response to questions from Bloomberg News.

https://www.google.com/amp/s/www.bloomb ... -investing
He was hoping to raise his $343 million AUM... I can't imagine he would advocate for passive index funds.

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Re: Index Funds Bubble?

Post by Fallible » Thu Aug 29, 2019 12:43 pm

Really not much information to go on from this Burry email to Bloomberg. He says the "bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally." But what exactly is the bubble here?

And he goes on to say: "There is all this opportunity, but so few active managers looking to take advantage." So is he blaming active managers, other than himself, for not taking advantage?

Another probably naive question: are these two separate issues - a bubble and an active trend to large size? Would be nice to have a little more context in which his comments were made, and a little less background on his "Big Short" fame implying that if he could correctly predict once...
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Re: Index Funds Bubble?

Post by ltlurker » Thu Aug 29, 2019 1:24 pm

I'm an index investor, like most Bogleheads, and I subscribe to Bloomberg digital so I can read articles such as this and did see this one at lunch (EDT). I'm open to various perspectives especially if there appears to be a rationale behind them. And of course this individual was behind the "big short" so that intrigued me.

If I recall correctly, I believe his position is that Index funds tend to favor the largest companies - naturally - as they're mostly market cap weighted. The S&P 500 as we've noted is widely invested in, but the Total Stock Market also has an average weighting that makes it a Large Cap Fund - by Vanguard's standards. Relatively few people directly invest in the Russell 2000 Index or even have those options in their employers' retirement plans. (I have the opportunity to invest in the Completion Index in my retirement plan so that's partway there).

I think Burry sees this as an opportunity to look at small cap value, which has been out of favor and not had a good run for some time. I think he must be thinking that a reversion is going to start at some point. None of us can know when, of course. And of course others are looking at the ratio of stock valuations to GDP (apparently one of Warren Buffet's key measures) and believe that there's significance to that, as well.

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Re: Index Funds Bubble?

Post by vineviz » Thu Aug 29, 2019 1:34 pm

Rob Arnott, in a recent Morningstar podcast, that if you subtract all of the index investors’ holdings you are left with the aggregate holdings of active investors.

Which looks exactly like the market, obviously. On the other side of any bet made by an active investor there must, then, be another active investor with the opposite bet.
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Re: Index Funds Bubble?

Post by Phineas J. Whoopee » Thu Aug 29, 2019 1:41 pm


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Re: Index Funds Bubble?

Post by Ice-9 » Thu Aug 29, 2019 2:53 pm

I wouldn't mind if he was right that there's an opportunity in smaller caps right now, because I overweight small caps VIA INDEX FUNDS.

My portfolio is 21% Fidelity Zero Large Cap Index and 14% Fidelity Zero Extended Market Index and thus holds more than the market weight of mid and small cap domestically.

On the International side, my portfolio is 14% Fidelity Zero International Index, which is all large cap, and 7% Vanguard All World ex-US Small Cap Index, so again I'm over the market weight of mid and small.

So, Viva MIchael Burry and his misnamed 'bubble in passive investing!' Why not?

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Re: Index Funds Bubble?

Post by bck63 » Thu Aug 29, 2019 3:05 pm

nisiprius wrote:
Wed Aug 28, 2019 5:52 pm
Retractable Technologies makes syringes that retract and store the needle after use, for safety.
As a nurse who gives thousands of injections per year, I am grateful for this product, and also happily own shares of Retractable Technologies (in my total market index funds).

With the total market, I own every awesome company in the entire nation (and the world, too). :sharebeer

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Re: Index Funds Bubble?

Post by Hector » Thu Aug 29, 2019 3:20 pm

I have seen S&P500 index fund being offered a lot more than total stock index fund in company sponsored retirement accounts.
I prefer total stock market fund, but have S&P index fund in company sponsored retirement accounts.

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Re: Index Funds Bubble?

Post by Phineas J. Whoopee » Thu Aug 29, 2019 7:05 pm

Hector wrote:
Thu Aug 29, 2019 3:20 pm
I have seen S&P500 index fund being offered a lot more than total stock index fund in company sponsored retirement accounts.
I prefer total stock market fund, but have S&P index fund in company sponsored retirement accounts.
I'd say that's good enough. S&P 500 market capitalization represents about 80% of Total US Stock. In terms of performance they have tracked each other closely.

If given the choice, as has happened, I'd choose Total Stock, but if the only good option I had was the S&P 500 it wouldn't bother me in the least.

PJW

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Re: Index Funds Bubble?

Post by Wakefield1 » Thu Aug 29, 2019 8:04 pm

bck63 wrote:
Thu Aug 29, 2019 3:05 pm
nisiprius wrote:
Wed Aug 28, 2019 5:52 pm
Retractable Technologies makes syringes that retract and store the needle after use, for safety.
As a nurse who gives thousands of injections per year, I am grateful for this product, and also happily own shares of Retractable Technologies (in my total market index funds).

With the total market, I own every awesome company in the entire nation (and the world, too). :sharebeer
Does Retractable Technologies license this technology to BD which makes an "Integra" syringe that comes with a needle such that after you give an injection from the unit pushing very hard on the plunger causes the needle to "disappear" inside of the syringe?

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Re: Index Funds Bubble?

Post by bck63 » Fri Aug 30, 2019 5:45 am

Wakefield1 wrote:
Thu Aug 29, 2019 8:04 pm
bck63 wrote:
Thu Aug 29, 2019 3:05 pm
nisiprius wrote:
Wed Aug 28, 2019 5:52 pm
Retractable Technologies makes syringes that retract and store the needle after use, for safety.
As a nurse who gives thousands of injections per year, I am grateful for this product, and also happily own shares of Retractable Technologies (in my total market index funds).

With the total market, I own every awesome company in the entire nation (and the world, too). :sharebeer
Does Retractable Technologies license this technology to BD which makes an "Integra" syringe that comes with a needle such that after you give an injection from the unit pushing very hard on the plunger causes the needle to "disappear" inside of the syringe?
I don't know, but I use those "pen" syringes as well. I administer a migraine medication to a patient and a cholesterol-reducing medication to another patient, both with those syringe pens. They're very safe. It's almost impossible to get a "dirty stick" (stuck with a used needle), an occupational hazard in nursing. And you don't have to push that hard. You press the button on top. A click signifies the medication is being administered. A second click indicates it's done and the needle has retracted. Great product.

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Re: Index Funds Bubble?

Post by Wakefield1 » Fri Aug 30, 2019 2:32 pm

bck63 wrote:
Fri Aug 30, 2019 5:45 am
Wakefield1 wrote:
Thu Aug 29, 2019 8:04 pm
bck63 wrote:
Thu Aug 29, 2019 3:05 pm
nisiprius wrote:
Wed Aug 28, 2019 5:52 pm
Retractable Technologies makes syringes that retract and store the needle after use, for safety.
As a nurse who gives thousands of injections per year, I am grateful for this product, and also happily own shares of Retractable Technologies (in my total market index funds).

With the total market, I own every awesome company in the entire nation (and the world, too). :sharebeer
Does Retractable Technologies license this technology to BD which makes an "Integra" syringe that comes with a needle such that after you give an injection from the unit pushing very hard on the plunger causes the needle to "disappear" inside of the syringe?
I don't know, but I use those "pen" syringes as well. I administer a migraine medication to a patient and a cholesterol-reducing medication to another patient, both with those syringe pens. They're very safe. It's almost impossible to get a "dirty stick" (stuck with a used needle), an occupational hazard in nursing. And you don't have to push that hard. You press the button on top. A click signifies the medication is being administered. A second click indicates it's done and the needle has retracted. Great product.
The "Integra" comes preassembled in its sterile packet,3 ml. capacity they give me,there might be others,you fill it from the medicine vial (B12) (two one ml. vials) after giving the injection by pushing the plunger like a regular syringe you push very hard past the end of normal travel on the plunger and the needle "disappears" I believe mandatory that you have withdrawn the needle upon finishing the injection before that hard push to make the needle disappear
My mother needs a B12 injection each month and her Doctor's practice set this up for us

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Re: Index Funds Bubble?

Post by bck63 » Fri Aug 30, 2019 3:49 pm

Wakefield1 wrote:
Fri Aug 30, 2019 2:32 pm
bck63 wrote:
Fri Aug 30, 2019 5:45 am
Wakefield1 wrote:
Thu Aug 29, 2019 8:04 pm
bck63 wrote:
Thu Aug 29, 2019 3:05 pm
nisiprius wrote:
Wed Aug 28, 2019 5:52 pm
Retractable Technologies makes syringes that retract and store the needle after use, for safety.
As a nurse who gives thousands of injections per year, I am grateful for this product, and also happily own shares of Retractable Technologies (in my total market index funds).

With the total market, I own every awesome company in the entire nation (and the world, too). :sharebeer
Does Retractable Technologies license this technology to BD which makes an "Integra" syringe that comes with a needle such that after you give an injection from the unit pushing very hard on the plunger causes the needle to "disappear" inside of the syringe?
I don't know, but I use those "pen" syringes as well. I administer a migraine medication to a patient and a cholesterol-reducing medication to another patient, both with those syringe pens. They're very safe. It's almost impossible to get a "dirty stick" (stuck with a used needle), an occupational hazard in nursing. And you don't have to push that hard. You press the button on top. A click signifies the medication is being administered. A second click indicates it's done and the needle has retracted. Great product.
The "Integra" comes preassembled in its sterile packet,3 ml. capacity they give me,there might be others,you fill it from the medicine vial (B12) (two one ml. vials) after giving the injection by pushing the plunger like a regular syringe you push very hard past the end of normal travel on the plunger and the needle "disappears" I believe mandatory that you have withdrawn the needle upon finishing the injection before that hard push to make the needle disappear
My mother needs a B12 injection each month and her Doctor's practice set this up for us
Oh okay. I know what you're talking about. They're great too. I was thinking of a different product. I'm willing to bet all these products have helped prevent a lot of accidental dirty needle sticks.

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The big shorts Michael Burry sees a bubble in passive investing???

Post by Jgardner » Sun Sep 01, 2019 11:14 pm

[Merged here -- mod oldcomputerguy]

I really appreciate your opinions on this forum. Many brilliant people on here. I was just reading a few articles about Michael Burrys recent comments about passive index investing being a bubble.

I am in the process of moving part of my retirement from actively managed mutual funds to vanguard. Planning to put it in index funds and a bond index fund.

What are your thoughts on Mr Burrys statements?


https://www.bloomberg.com/news/videos/2 ... ging-video
Last edited by Jgardner on Sun Sep 01, 2019 11:16 pm, edited 1 time in total.


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Michael Burry Explains Why Index Funds Are Like Subprime CDOs

Post by BlueHorseshoe » Wed Sep 04, 2019 7:19 am

[Merged into this topic -- mod oldcomputerguy]

Here is an interesting take on ETF's from Michael Bury - his story was part of the basis for the book and movie The Big Short.
https://finance.yahoo.com/news/big-shor ... 46627.html

The vast majority of my investments are in a balanced portfolio of ETF's. Should I be worried?

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Michael Burry: Index Funds are like Subprime CDOs

Post by susze » Wed Sep 04, 2019 8:17 am

[Merged into here -- moderator oldcomputerguy]

Not sure if there is any truth to this, and he seems to be referring to index linked fund vs indexes that actually own the stocks and have shares, actual voting rights etc. ?

But if he is saying this publicly he probably has not found a way to profit from what he believes or is unable to do so.

And yes he is not the first person to come out and say this over the years and all us indexers are still fine.

“The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic.

“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”
https://finance.yahoo.com/news/big-shor ... 46627.html

Luke Duke
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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by Luke Duke » Wed Sep 04, 2019 8:28 am

From the comments of that article:
As I understand it, I think the point he is making is that for many of the smaller stocks in the index, half of the trading is no longer priced by the value of the underlying company but by the fact that the index fund must buy those shares, regardless of the price or value. That is not a problem when the price is meaningful, but as fewer and fewer of the trades are made based on the real value, at some point people will realize that the values of some/many stocks in the index fund are artificially elevated. And with that recognition, the logical thing to do is get out of the index funds. Then add the multiplier effect of the derivatives involved, and you have a recipe for a crash, most likely a big one given the amount of money in the index funds .

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JoMoney
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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by JoMoney » Wed Sep 04, 2019 8:33 am

I don't think anybody should be buying stocks under the impression they can sell them tomorrow.
Warren Buffett suggests you should have the same mindset as if you were buying the whole company, or a farm, or rental property, expecting to garner value from the returns of the business... not because you expect to flip it to some other guy tomorrow.
It's also suggested that you have some amount in cash and bonds to draw on so you're never in a position where you have to sell your stocks to raise cash if liquidity dries up and the markets go bonkers for a bit.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by Bacchus01 » Wed Sep 04, 2019 8:41 am

I read the article this morning as well. It's a very interesting take, and one that I'm not sure is completely wrong. There have been other people talking about how index funds may be harming the market, but none that I read that actually showed how. This is an intriguing position as he's right, I buy index funds with no concept of the actual risk of each of the holdings. That's the value of the fund. On the other hand, when the fund is required to actually buy and hold the securities, they do it regardless of the true value of the asset and instead buy just based on the market price at that time, which for smaller stocks, could be manipulated by the very index fund that is buying them.

I wonder if that makes a case for something like the S&P 500 over TSM as a broad-index stock as the effect of index manipulation should be reduced.

See, now I just made this an actionable discussion.

Thoughts?

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by susze » Wed Sep 04, 2019 8:49 am

Bacchus01 wrote:
Wed Sep 04, 2019 8:41 am
I read the article this morning as well. It's a very interesting take, and one that I'm not sure is completely wrong. There have been other people talking about how index funds may be harming the market, but none that I read that actually showed how. This is an intriguing position as he's right, I buy index funds with no concept of the actual risk of each of the holdings. That's the value of the fund. On the other hand, when the fund is required to actually buy and hold the securities, they do it regardless of the true value of the asset and instead buy just based on the market price at that time, which for smaller stocks, could be manipulated by the very index fund that is buying them.

I wonder if that makes a case for something like the S&P 500 over TSM as a broad-index stock as the effect of index manipulation should be reduced.

See, now I just made this an actionable discussion.

Thoughts?
He talks about the S&P 500 think you are correct. Reduced but still risk provided his thesis is correct. I mean based on this internationals/EM are probably more at risk but maybe the volume isnt there.

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by rascott » Wed Sep 04, 2019 8:50 am

If this was true... you should expect there to be a lot of active managers that could beat the market. However most equity managers basically hug the index, and just make bets on the fringes to attempt to beat it.

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by Rick Ferri » Wed Sep 04, 2019 8:56 am

The active investment industry is suffering, and that included hedge funds. Fees are drying up as money flees high-cost active management. The owners and managers of firms getting hit will say everything and anything to try and stop people from passing them by.

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The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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305pelusa
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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by 305pelusa » Wed Sep 04, 2019 9:02 am

Thanks to people like him (and his observations that appear on the news), finding inneficiencies and exploiting them, the price of the stocks in my index funds remains somewhat fair.

All I see is the efficient market at play.

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by wootwoot » Wed Sep 04, 2019 9:04 am

rascott wrote:
Wed Sep 04, 2019 8:50 am
If this was true... you should expect there to be a lot of active managers that could beat the market. However most equity managers basically hug the index, and just make bets on the fringes to attempt to beat it.
Maybe those active managers are getting ready. Big Short 2?

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by lazyday » Wed Sep 04, 2019 9:05 am

Burry quoted by Bloomberg:
And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.

This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”
In the years leading to the financial crisis, did typical CDOs hold securities that traded on markets, like smallcap stocks do?

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vitaflo
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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by vitaflo » Wed Sep 04, 2019 9:05 am

At the end of The Big Short, it said Burry was only focused on investing in one commodity: Water. Whatever happened to that one?

susze
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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by susze » Wed Sep 04, 2019 9:06 am

Rick Ferri wrote:
Wed Sep 04, 2019 8:56 am
The active investment industry is suffering, and that included hedge funds. Fees are drying up as money flees high-cost active management. The owners and managers of firms getting hit will say everything and anything to try and stop people from passing them by.

Rick Ferri
That is so true, 2/20 is mostly gone and many HFs even just buy indexes now and try and AA and time the market and charge fees

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by susze » Wed Sep 04, 2019 9:08 am

lazyday wrote:
Wed Sep 04, 2019 9:05 am
Burry quoted by Bloomberg:
And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.

This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”
In the years leading to the financial crisis, did typical CDOs hold securities that traded on markets, like smallcap stocks do?
Didnt they hold tranches of actual securities, some that were repackaged multiple times that no one even knew what was there? So maybe no

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Re: Michael Burry: Index Funds are like Subprime CDOs

Post by 12thKnight » Wed Sep 04, 2019 9:09 am

Bacchus01 wrote:
Wed Sep 04, 2019 8:41 am
I read the article this morning as well. It's a very interesting take, and one that I'm not sure is completely wrong. There have been other people talking about how index funds may be harming the market, but none that I read that actually showed how. This is an intriguing position as he's right, I buy index funds with no concept of the actual risk of each of the holdings. That's the value of the fund. On the other hand, when the fund is required to actually buy and hold the securities, they do it regardless of the true value of the asset and instead buy just based on the market price at that time, which for smaller stocks, could be manipulated by the very index fund that is buying them.

I wonder if that makes a case for something like the S&P 500 over TSM as a broad-index stock as the effect of index manipulation should be reduced.

See, now I just made this an actionable discussion.

Thoughts?
The nugget of the issue doesn't feel like an index fund question per se, but rather a statement on how retirement savings behavior has changed the investment landscape. Specifically, could blind, automatic investment in target retirement funds in employer plans be harmful by creating a bubble? Or is this simply part of the business and investment cycle?

Personally, I feel (though I can't prove) that the investment cycle has been stretched out by blind investing. Set it and forget it funds receive employee contributions and deferrals, the market inches up, life goes on. What is lacking is a big enough trigger to cause algorithms and humans to hit the panic button, grab the controls from autopilot and go to cash. What that trigger might be is anyone's guess, but with algorithms commanding 50 to 70 percent of market trading, a critical mass trigger should cause a flash concatenation of automated sell orders. I'd expect quite the fireworks show.

Without knowing where and when all the poison pills are programmed to break open, the only proof of any of this would be post-mortem.

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