How does one respond to this ethical/emotional critique of indexing?

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Lauretta
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How does one respond to this ethical/emotional critique of indexing?

Post by Lauretta »

I have come across an article by a money manager who has a blog in which he praises active management and he tends to criticise indexing, including on an ethical basis it would seem.

For example, in this article, which takes the form of a dialogue:
https://moiglobal.com/bogles-truth-buffetts-dud-201808/
the index fund manager says:
If there are enough active investors busy driving prices to where they should be, my passive fund reaps the benefits, my investors pay less and everyone is happy.
to which the lay investor replies:
You should be ashamed of yourself, you know
His argument is, I think, that indexers are free riders, reaping the benefits of the market but without doing any work themselves.
More of that author's ideas can be found here:
https://www.massimofuggetta.com

Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
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RocketShipTech
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by RocketShipTech »

If you thought free riding is bad, just wait until you read this:

“Passive investing is worse for society than Marxism”
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Northern Flicker »

The large funds hold portfolios that weight large stocks similarly to market cap weight because those are investments with enough market cap and liquidity for these market participants to actually hold them. To take an extreme example, imagine if all of the investors of a large US total market index fund tried to liquidate their shares and reinvest all of the proceeds in the smallest stock in the index. There would not be enough of it to go around. The idea that investors are ethically obliged to bet against the market seems pretty absurd.
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zarci
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by zarci »

Interesting post.

First, a market in which the majority of investors are indexers cannot exist in reality. There are too many institutional investors, bankers and other players for that reality to manisfest. The world bank releases figures that show the distribution of investors, might try to find that...

Secondly, there is an incredible overgrowth of different types of ETFs ranging from factors, to small cap, to tech stocks. The list goes on. Even amongst people that invest in a very broadly diversified slice of the market, there is still an incredible amount of bias that provides movement in asset prices.

Just looking at the Bogleheads board topics during the plunge earlier this year would suggest that even the members that subscribe to this board could drive some interesting price action. :happy

The fact that the author is an active investment fund manager, and uses a term that is super sensitive in Italian would imply, at least to me, that i would not let this person babysit my children.

Perhaps a little bit of a tangent. But Vanguard has been criticized for taking large stakes in companies. In some instances even being the largest shareholder. The criticism here is that they do not fulfill their role during annual shareholders meetings. AKA not keeping the company accountable in a way that for example Warren Buffet would. I honestly do not really have a rebuke against that criticism though.
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zarci
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by zarci »

RocketShipTech wrote: Wed Aug 19, 2020 2:05 am If you thought free riding is bad, just wait until you read this:

“Passive investing is worse for society than Marxism”
Amazing :sharebeer

In an interview (can't find the link...) Bogle discussed future returns and the impact of lower economic growth.

He stated that stocks yield about 2% dividends today and you get about 2% capital gains on top of that. 2 and 2 make 4% economic growth that is way lower than the historical 7% that people are banking on.

He then went on to say that you essentially invest in an index fund to capture that economic growth.

What was interesting to me is that he equated "The rerurn of the market as a whole" to "Economic growth of the US".

I never really managed to relate those two, but his explanation of the sum of average dividend and capital gains being equal to the growth number makes sense.

Now, does that not strike you as a very socialist thing to do?
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by runner3081 »

I view and quickly discard what I just read.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by steve321 »

I looked at the blog you refer to; he is managing or co-managing a fund apparently, called Atomo Made in Italy. I looked it up, the ISIN is LU1391064661. Current fees are 4,53% and they are underperforming. So they he is probably feeling ashamed too. :wink:
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by noyopacific »

If index investors are freeloaders what would one call active managers who charge for a service that is almost always detriment to their clients interests and returns ? Very few active managers are able to deliver returns that can beat or even match the returns of index funds over ten years or more. Most active managers are little more than parasites, chisellers, grifters, frauds . . . take your pick. They can call me a freeloader if they want to. I'll consider the source and the motive behind the insult.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by telemark »

Successful active managers, by the fact of their success, reduce the opportunities for other active managers to outperform the index. In effect, they are stealing from other active managers. Should they feel ashamed? Or is this perhaps a ridiculous argument?
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by sean.mcgrath »

Lauretta wrote: Wed Aug 19, 2020 1:59 am I have come across an article by a money manager who has a blog in which he praises active management and he tends to criticise indexing, including on an ethical basis it would seem.

For example, in this article, which takes the form of a dialogue:
https://moiglobal.com/bogles-truth-buffetts-dud-201808/
the index fund manager says:
If there are enough active investors busy driving prices to where they should be, my passive fund reaps the benefits, my investors pay less and everyone is happy.
to which the lay investor replies:
You should be ashamed of yourself, you know
His argument is, I think, that indexers are free riders, reaping the benefits of the market but without doing any work themselves.
More of that author's ideas can be found here:
https://www.massimofuggetta.com

Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
Yes, it is an interesting perspective. Of course he has a vested interest in guilting folk into paying his fees, but that needn't stop us from replying to the critique. In a complex society, we often benefit from the efforts of others and those of others before us. I don't see that as free riding, as we all contribute in our own ways to building this incredibly successful society.

If you look at the number of companies taken private in the last decades, you will see that there are always people ready to make a handsome profit on under-priced assets -- I wish them the best of luck. I see my approach as humility: I accept that this is not my area of competence, and am content to passively benefit from the fruits of our economic system.

The successful active investor will be happy to have me: after all, I am the one paying the "wrong" price that they are profiting from. :happy
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Lauretta »

sean.mcgrath wrote: Wed Aug 19, 2020 3:28 am
Lauretta wrote: Wed Aug 19, 2020 1:59 am I have come across an article by a money manager who has a blog in which he praises active management and he tends to criticise indexing, including on an ethical basis it would seem.

For example, in this article, which takes the form of a dialogue:
https://moiglobal.com/bogles-truth-buffetts-dud-201808/
the index fund manager says:
If there are enough active investors busy driving prices to where they should be, my passive fund reaps the benefits, my investors pay less and everyone is happy.
to which the lay investor replies:
You should be ashamed of yourself, you know
His argument is, I think, that indexers are free riders, reaping the benefits of the market but without doing any work themselves.
More of that author's ideas can be found here:
https://www.massimofuggetta.com

Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
Yes, it is an interesting perspective. Of course he has a vested interest in guilting folk into paying his fees, but that needn't stop us from replying to the critique. In a complex society, we often benefit from the efforts of others and those of others before us. I don't see that as free riding, as we all contribute in our own ways to building this incredibly successful society.

If you look at the number of companies taken private in the last decades, you will see that there are always people ready to make a handsome profit on under-priced assets -- I wish them the best of luck. I see my approach as humility: I accept that this is not my area of competence, and am content to passively benefit from the fruits of our economic system.

The successful active investor will be happy to have me: after all, I am the one paying the "wrong" price that they are profiting from. :happy
These are all very good points, thank you. I like this in particular.
In a complex society, we often benefit from the efforts of others and those of others before us. I don't see that as free riding, as we all contribute in our own ways to building this incredibly successful society.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Lauretta »

noyopacific wrote: Wed Aug 19, 2020 3:13 am If index investors are freeloaders what would one call active managers who charge for a service that is almost always detriment to their clients interests and returns ? Very few active managers are able to deliver returns that can beat or even match the returns of index funds over ten years or more. Most active managers are little more than parasites, chisellers, grifters, frauds . . . take your pick. They can call me a freeloader if they want to. I'll consider the source and the motive behind the insult.
:D
I hope that this was the reply you were looking for.
I don't think I was looking in advance for any particular reply, at least consciously. I have read another post of yours, on compensation of directors at Vanguard. Perhaps that questions is linked to the one in my OP, insofar as indexing involves free riding.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by vested1 »

telemark wrote: Wed Aug 19, 2020 3:25 am Successful active managers, by the fact of their success, reduce the opportunities for other active managers to outperform the index. In effect, they are stealing from other active managers. Should they feel ashamed? Or is this perhaps a ridiculous argument?
The latter, for both your question and the illogical impulse to feel guilt for riding the coattails of the industry without needing to do the homework.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by ignition »

Freeriding doesn't hurt active managers so I don't see why we should be ashamed. It does prevent active managers from taking advantage of investors with less skill who choose to invest in index funds (not being able to charge high fees or benefiting from bad trades made by less skilful investors).
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by ignition »

zarci wrote: Wed Aug 19, 2020 2:15 am Perhaps a little bit of a tangent. But Vanguard has been criticized for taking large stakes in companies. In some instances even being the largest shareholder. The criticism here is that they do not fulfill their role during annual shareholders meetings. AKA not keeping the company accountable in a way that for example Warren Buffet would. I honestly do not really have a rebuke against that criticism though.
The criticism is simply not true:

https://www.evidenceinvestor.com/is-ris ... overnance/
https://www.evidenceinvestor.com/passiv ... dies-show/
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by zarci »

ignition wrote: Wed Aug 19, 2020 5:30 am
zarci wrote: Wed Aug 19, 2020 2:15 am Perhaps a little bit of a tangent. But Vanguard has been criticized for taking large stakes in companies. In some instances even being the largest shareholder. The criticism here is that they do not fulfill their role during annual shareholders meetings. AKA not keeping the company accountable in a way that for example Warren Buffet would. I honestly do not really have a rebuke against that criticism though.
The criticism is simply not true:

https://www.evidenceinvestor.com/is-ris ... overnance/
https://www.evidenceinvestor.com/passiv ... dies-show/
Interesting, thanks for the link!
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by whereskyle »

Lauretta wrote: Wed Aug 19, 2020 1:59 am I have come across an article by a money manager who has a blog in which he praises active management and he tends to criticise indexing, including on an ethical basis it would seem.

For example, in this article, which takes the form of a dialogue:
https://moiglobal.com/bogles-truth-buffetts-dud-201808/
the index fund manager says:
If there are enough active investors busy driving prices to where they should be, my passive fund reaps the benefits, my investors pay less and everyone is happy.
to which the lay investor replies:
You should be ashamed of yourself, you know
His argument is, I think, that indexers are free riders, reaping the benefits of the market but without doing any work themselves.
More of that author's ideas can be found here:
https://www.massimofuggetta.com

Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
I would retort and send the shame right back at him (I also have Italian ancestry): Anyone who charges money for advice about individual stock picking should be ashamed of themselves. Virtually all academics subscribe to the idea that the most reliable strategy in picking stocks is to buy the entire market because most market moves are determined by nothing more than a 50/50 coin flip (See Malkiel, A Random Walk Down Wall Street.) The slightest suggestion that one should pay someone to buy their stocks for them according to "a system" that creates market-beating value for the actual investor is highly spurious, almost certainly wrong, and harmful to most investors who might hear it.

As for whether I invest passively because I buy indexed mutual funds and ETFs, I say, "Absolutely not." My active investing approach simply emphasizes inactivity rather than activity. I have studied the markets, their histories, and the theories behind how value is created in the market. This active research led me to conclude that buying all the stocks in the index according to market cap and never rebalancing among them is a way that I can entirely eliminate the risk of total portfolio failure, reduce stress, reduce behavioral risks that will lower my returns, and guarantee that I'll be right in the middle of the market's performance every year. I would buy all the stocks in the index according to their market cap myself as frequently as I do and then just hold them myself, but I don't have the money to do that. I pay Vanguard a nominal fee in order for them to make that possible for me.

Finally, my well-researched approach to investing helps the market function. I'm buying more of my funds everyday, creating liquidity and potentially increasing the price of whatever stocks this guys tells people to hold. If he is unwilling to hold stocks long enough to see them go up, well then I think this guy is not an investor, but a day trader, and I have no qualms about telling him that he is a gambler and not an investor. The main difference between me and him, I expect, is that I can justify my approach with research, empirical evidence, and behavioral science that shows that my approach can help other investors as well. I doubt this guy can do any of that to justify whatever investing advice he may give to people.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by barneycat »

Having this discussion in moral terms is inappropriate and simply shows how emotional he is about the issue. People respond emotionally when threatened. This isn't a moral issue, it's about a business model that does or does not provide value. If it truly provides value then investors will ultimately recognize it and pay for that value. If it doesn't provide value then they won't. I could see this argument if he and others provide research and insights out of the goodness of their hearts, but they're not!

I see truth in the case that the flurry of activity (research, reports, noise) in active management does push out information into the marketplace that a passive approach wouldn't. But still, that's not a moral discussion. If the market gets to the point where everyone is passive and nobody is doing research then there truly will be the opportunity to add value by capitalizing on inefficiencies. I've seen numbers of 85-90% passive for this to become an issue.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by acegolfer »

OP,

Suppose New York Times makes an article written by a reporter available to the public. If you read it without paying, you are a free rider. Is that unethical/shameful?

I don't see any ethical issues when index investors benefit from analysts. We are not stealing any private information.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by nisiprius »

1) Active Investing Is Worse Than Objectivism
(that's a riff off the title of the polemic mentioned by RocketShipTech, above, by one Inigo Fraser-Jenkins)

Whoa! In every other aspect of my financial life, these folks tell me the highest, most ethical, and most moral conduct is to act purely in my own financial self-interest. But when it comes to choosing a mutual fund, they tell me that I should quit being a slacker and free-riding off the virtuous risk-taking of others. Instead of choosing the mutual fund that will--in my judgement, knowing my own abilities--make me the most money, they want to shame me into altruism. They tell me to recognize a moral duty, for the good of the investing community, to give up a little in the interest financing the worthy endeavor of price discovery. Possibly by paying people like Fugetta to do it for me.

No thank you, I will do what's best for me, and as for "what would happen if everybody indexes" I will cross that bridge when I come to it, because in my opinion it ain't gonna happen.

2) Price Tags are Acceptable

In the 1870s, John Wanamaker, for the first time in recorded human history put price tags on the items in his department stores. Shoppers, rather than being price makers engaged in active price discovery, became passive price takers. In almost every field of consumer purchase but car buying, passive price taking based on price tags and advertised prices was the norm in the US for well over a century, and I can't remember anyone trying to shame me into doing my duty and haggle prices with the grocery checkout cashier.

3) I Cannot Pick Stocks and I Cannot Pick Stockpickers

I refuse to be flattered into thinking that I do. I do not have any valuable insights into price discovery of stocks. I've touched and felt the wonderful quality of L'Eggs hosiery, but that does not give me an edge over the armies of soulless people with green eyeshades reading balance sheets by gaslight. I would just add noise to the market and make it less efficient.

No, thank you, I have no ability to pick stocks, nor to pick stock-pickers, nor do I have any moral or ethical duty to try.

P.S. if, after reading... OK, skimming... over that long screed by Massimo Fuggetta, I found that I was becoming convinced, I'd just buy BRK.B stock. I doubt that would satisfy Fuggetta.

P.P.S. Larry Swedroe took on The Super Investors of Graham and Doddsville, looking at the two of them that manage mutual funds, and found that "Perhaps, like Buffett, these super investors have been burdened by the huge amount of assets under management. Or perhaps the markets have become more efficient over time. However you want to look at it, the super investors of Graham and Doddsville have been anything but super for at least the past 15 years." And that was before the Sequoia Fund's -30% loss in 8/2015-6/2016.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by balbrec2 »

Lauretta wrote: Wed Aug 19, 2020 1:59 am I have come across an article by a money manager who has a blog in which he praises active management and he tends to criticise indexing, including on an ethical basis it would seem.

For example, in this article, which takes the form of a dialogue:
https://moiglobal.com/bogles-truth-buffetts-dud-201808/
the index fund manager says:
If there are enough active investors busy driving prices to where they should be, my passive fund reaps the benefits, my investors pay less and everyone is happy.
to which the lay investor replies:
You should be ashamed of yourself, you know
His argument is, I think, that indexers are free riders, reaping the benefits of the market but without doing any work themselves.
More of that author's ideas can be found here:
https://www.massimofuggetta.com

Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
One need not respond at all. Do what works best for you.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by aristotelian »

If active investors are right about their bets, they will make more in the market than the passive investor. They are not trying to benefit society, they are trying to beat the market and will be rewarded for doing so if their choice is correct. The passive investor is accepting lower returns for reduced risk. Active investors believe they can determine market inefficiencies while passive investors do not. I see nothing unethical, just different risk tolerance and assumptions about the market.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by arcticpineapplecorp. »

you're free to choose.

if you think you or your "guy/gal" can beat the market, have at it.

if you don't, own an index fund that get's you the return of the market.

morals are not law. indexing is not illegal, so why should I feel bad about doing something lawful?
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Kenkat »

I think it is a passionate attempt to appeal to emotion in order to separate you from your money
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by PicassoSparks »

Lauretta wrote: Wed Aug 19, 2020 1:59 am
You should be ashamed of yourself, you know
His argument is, I think, that indexers are free riders, reaping the benefits of the market but without doing any work themselves.
More of that author's ideas can be found here:
https://www.massimofuggetta.com

Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
Allow me to respond to this ethical/emotional critique with an ethical/emotional critique of my own.

I shouldn't have to be investing at all. If we had a decent social safety net and better taxation regimes that prevented the rampant expansion of wealth inequality, ordinary people wouldn't have to get involved in the stock market to begin with. Instead, since the 1980s we've seen the dismantlement of many social protections and the end of defined benefit pension plans.

In essence, ordinary people have been thrown to the wolves. With defined contribution plans we have the "freedom" to travel through incredibly uneven terrain on our own. Our long term financial wellbeing depends on us successfully navigating an environment full of scam artists, snake oil salesmen, high fees, bad knowledge, and terrible risks. Our advisors are not even required to perform to a fiduciary standard, universally, and so we find ourselves at the mercy of sales people pretending to have our best interests at heart. It's ugly. Unsophisticated investors get taken for a ride in small and large ways all the time.

Even worse, the best practices for dealing with the stock market are profoundly counterintuitive. These forums and the literature are full of advice on dealing with the behavioral issues of investing that cause people to panic sell, capitulate, and chase returns. We're told to manage our risk tolerance, while knowing that people are really bad at predicting their own risk tolerance. We know this because there's annual studies showing that on average active investors underperform passive investors and that individual investors routinely dramatically underperform the market even if they are investing in index funds because they buy and sell at the wrong times.

Then along comes Jack Bogle and many others to say "you know what? you don't even need to play the game. the winning move is to make a series of really simple decisions and then stop paying close attention, so that you can devote your time and care to the things you care about and the actual profession that you trained for" And then some investor who wants to play the game, who thinks they can make money off of suckers like me is going to try to shame me for that and force me into playing?

Forget them. And forget this entire situation. I don't owe capitalism or the stock market anything. I never signed up for this, and if I'm going to have to deal with it, it's going to be in the simplest best way that works for me. Someone else can deal with propping up this messed up system. I have a life to live.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by dziuniek »

Silliness.

If more folks are passive indexing, the competition in the active space would be smaller. If you can't get ahead with less competition - maybe you need to look for a different career.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by MathIsMyWayr »

If you take a big spoonful of salty water from a bowl, does the salt concentration of water remaining in the bowl change?
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Jack FFR1846 »

While the author is furiously trading his clients' investments, churning and burning, he yearns for the cup. No value is created with his effort and much fees are generated, reducing the returns for his clients.

To those who think us freeloader indexers are immoral, I'd suggest one search the Simpson's character....Nelson and the meme labeled "Ha Ha".

One could make similar "moral" judgments that those who collect social security are taking welfare from those of us still working. If you take social security, do you feel bad now? I'd submit that you shouldn't.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by CardioMD »

I feel no need to respond.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Broken Man 1999 »

Well, I'm convinced! I am a freeriding sinner!

I ordered a hair shirt from Amazon to wear everytime our portfolio reaches another ATH.

Wearing the hair shirt will act as a reminder of my investing sins of buying index mutual funds.

I promise I will repent, just as soon as our portfolio crosses into double-digit millions. I think it might happen in 2078.

Broken Man 1999
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by RadAudit »

steve321 wrote: Wed Aug 19, 2020 2:51 am I looked at the blog you refer to; he is managing or co-managing a fund apparently, called Atomo Made in Italy. I looked it up, the ISIN is LU1391064661. Current fees are 4,53% and they are underperforming. So they he is probably feeling ashamed too. :wink:
+1

OP, if he is co-managing a fund that is charging 4.53% in fees and underperforming the market, he is the one who should be ashamed not the passive investor who is making close to market returns.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.
euphonious
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by euphonious »

There are many for whom perceptions of self worth are linked to their professional work. For such people, it can be extremely difficult to accept the notion that their work does not provide any meaningful benefit to society. It is not surprising, then, when these people begin fabricating spurious moral tenets to justify their work.
hnd
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by hnd »

this sounds like a last gasp for relevancy. We know that the largest funds/etfs are index funds and that number is growing rapidly. We also know that index fund assets are growing rapidly and basically account for 50% of all assets when it was nowhere near that 10 years ago.

active funds 2010 2.4T -> 2020 3.5T
Passive funds 2010 .9T -> 2020 3.4T

We don't owe anyone anything. Fund managers and fund companies have been scraping the top of our portfolios for very little for a hundred years. The curtain is being pulled back and its hard to hide your warts.

we see this almost everywhere now. appealing to emotion. we had someone tell us that homeschooling our children was robbing society an the school system of children from good homes and that we should be ashamed.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by wickywack »

RocketShipTech wrote: Wed Aug 19, 2020 2:05 am If you thought free riding is bad, just wait until you read this:

“Passive investing is worse for society than Marxism”
This line of argument always amuses me.

Passive investing is the essence of capitalism working as intended: clever entrepreneurs (e.g., Bogle) identify inefficiencies in the market (e.g., too many active managers), devise clever schemes to ruthlessly bypass them (e.g., index funds), and deliver significant value to investors (e.g., lower fees, higher returns).
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by bertilak »

nisiprius wrote: Wed Aug 19, 2020 6:47 am I would just add noise to the market and make it less efficient.
That's always been my repose to the "free rider" scold. "So you want me to throw sand in the market gears by making poor choices? Besides, do the experts really need my (inept) help? If so, we are stretching the meaning of "expert."
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Minty »

Passive investors ride the winners as they go up, but we're also lashed to the losers as they go down. No one would say that the owner of an office or apartment building, or an undeveloped lot, is a free rider even returns are affected by investment decisions of others (Trader Joe's built nearby good, new toxic waste dump bad). Active investors get paid if successful; their work is not charity, nobody makes them do it.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by willthrill81 »

If passive investors are just 'reinforcing' the prices set by active traders, then shouldn't that provide even more opportunities for active traders to beat the market?
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by GAAP »

So, the vast majority of people who have typical 401(k) plans are acting shamefully because they have no other option?

Hmm... I guess the "correct" thing to do would be not to invest at all...

Self-beneficial "advice" like this is shameful by definition -- and therefore easily ignored.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by sls239 »

I try not to overthink things.

When someone is trying to shame me for rejecting them, I just assume they feel a sense of entitlement that is not justified.

It is extraordinarily common.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by arcticpineapplecorp. »

wickywack wrote: Wed Aug 19, 2020 9:58 am
RocketShipTech wrote: Wed Aug 19, 2020 2:05 am If you thought free riding is bad, just wait until you read this:

“Passive investing is worse for society than Marxism”
This line of argument always amuses me.

Passive investing is the essence of capitalism working as intended: clever entrepreneurs (e.g., Bogle) identify inefficiencies in the market (e.g., too many active managers), devise clever schemes to ruthlessly bypass them (e.g., index funds), and deliver significant value to investors (e.g., lower fees, higher returns).
+1
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by finite_difference »

I think there is an ethical argument against indexing, which is not entirely convincing but has some merits, but “free-riding” is not it.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by RocketShipTech »

ignition wrote: Wed Aug 19, 2020 5:30 am
zarci wrote: Wed Aug 19, 2020 2:15 am Perhaps a little bit of a tangent. But Vanguard has been criticized for taking large stakes in companies. In some instances even being the largest shareholder. The criticism here is that they do not fulfill their role during annual shareholders meetings. AKA not keeping the company accountable in a way that for example Warren Buffet would. I honestly do not really have a rebuke against that criticism though.
The criticism is simply not true:

https://www.evidenceinvestor.com/is-ris ... overnance/
https://www.evidenceinvestor.com/passiv ... dies-show/
Call and raise:

https://www.bloomberg.com/amp/opinion/a ... -the-index
We test if an increase in common ownership changes future expected profits with an event study method. We collect instances of a stock entering the S&P 500 index and identify its product market competitors. We measure the change in institutional and common ownership (with product market rivals) and find that entering stocks experience a significant increase in both. We measure the stock returns of the entrant's product market rivals upon the entry news. We find that increases in common ownership (driven by the whole vector of ownership similarity) cause increases in stock returns, consistent with a hypothesis that common ownership raises profits.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by RocketShipTech »

GAAP wrote: Wed Aug 19, 2020 11:07 am So, the vast majority of people who have typical 401(k) plans are acting shamefully because they have no other option?

Hmm... I guess the "correct" thing to do would be not to invest at all...

Self-beneficial "advice" like this is shameful by definition -- and therefore easily ignored.
Literally the definition of tragedy of the commons
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by bryanm »

Minty wrote: Wed Aug 19, 2020 10:59 am Passive investors ride the winners as they go up, but we're also lashed to the losers as they go down. No one would say that the owner of an office or apartment building, or an undeveloped lot, is a free rider even returns are affected by investment decisions of others (Trader Joe's built nearby good, new toxic waste dump bad). Active investors get paid if successful; their work is not charity, nobody makes them do it.
willthrill81 wrote: Wed Aug 19, 2020 11:01 am If passive investors are just 'reinforcing' the prices set by active traders, then shouldn't that provide even more opportunities for active traders to beat the market?
These are my views. All those active investors are hogging all the inefficiencies in the market—making money on them and leaving no profits for me. Shame on them! I'm simply being neighborly: I take none of the money-making inefficiencies for myself. I leave them all there for active investors to harvest.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by Fallible »

Kenkat wrote: Wed Aug 19, 2020 7:59 am I think it is a passionate attempt to appeal to emotion in order to separate you from your money
Yes. The emotions of one losing money appealing to emotions of those making money elsewhere. The emotion appealed to is usually fear of missing out by being "average."
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by bertilak »

bryanm wrote: Wed Aug 19, 2020 11:28 amAll those active investors are hogging all the inefficiencies in the market—making money on them and leaving no profits for me. Shame on them! I'm simply being neighborly: I take none of the money-making inefficiencies for myself. I leave them all there for active investors to harvest.
Altruism at its best! Gold star for you: ✨
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by NotWhoYouThink »

The same way I respond to anyone trying to manipulate my emotions for their own gain. I reject the criticism and the critic.

Everybody knows the rules, we all get to decide which part of the game we want to participate in. My willingness to buy equities pushes the price infinitesimally higher, which benefits other players, and the companies issuing the equities. If someone else wants to pick winners and losers and time their bets, my indexing doesn't slow them down.

Someone making this argument for investing is someone to avoid not only with investments but with your attention on any matter.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by jimgour »

My response would be:
"That's interesting. Normally I value your opinion."
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by tadamsmar »

Lauretta wrote: Wed Aug 19, 2020 1:59 am I have come across an article by a money manager who has a blog in which he praises active management and he tends to criticise indexing, including on an ethical basis it would seem.

For example, in this article, which takes the form of a dialogue:
https://moiglobal.com/bogles-truth-buffetts-dud-201808/
the index fund manager says:
If there are enough active investors busy driving prices to where they should be, my passive fund reaps the benefits, my investors pay less and everyone is happy.
to which the lay investor replies:
You should be ashamed of yourself, you know
His argument is, I think, that indexers are free riders, reaping the benefits of the market but without doing any work themselves.
More of that author's ideas can be found here:
https://www.massimofuggetta.com

Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
If there are enough active investors then adding more will not drive prices to where they should be. It is shameful to volunteer for an effort that does not need any more volunteers. So the first thing you have to do is figure out if the active ranks already have too many volunteers that should be ashamed of themselves. It would be very shameful to become an active investor without first confirming that any more are needed.

Even if you could confirm that volunteers are needed, the work requires skill. Volunteering for the army and getting training might be a good thing, but going around randomly shooting a military rifle just because we need more soldiers would be shameful. Becoming an inept day trader would also be shameful even though you would be an active trader. Just becoming a active trader does not mean that you are driving prices where they should be.

In every active trade, if one trader is driving prices toward where they should be then the other active trader is keeping prices away from where they should be. Therefore one of these active traders is more shameful than a passive trader, assuming you don't give points for wasted effort.

It actually takes a lot of work to convince yourself that indexing is the best for you and your family which you are supporting. It would be shameful to not do the best for your family.

Many Bogleheads (including me) used to trade actively. We did not do well, therefore were driving prices away from where they should have been. We are ashamed that we did this. We quit doing this bad thing.

It took work, effort, study to determine that we where driving prices away from where they should be. By becoming passive traders we are contributing to the effort to drive price to where they should be. We should be proud of that, it is fitting that we are benefiting more from being a good passive investor instead of a bad active investor. It would be shameful for us to return to being bad active investors who are screwing up prices.

If active traders are needed then they are getting more benefit from the market than passive traders. Therefore passive traders are not getting the same benefit, therefore we are not freeloading and getting the same benefits as the active traders. Therefore we have nothing to be ashamed about.
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Re: How does one respond to this ethical/emotional critique of indexing?

Post by joylesshusband »

Lauretta wrote: Wed Aug 19, 2020 1:59 am //snip
Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it's something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)
Shame was a very powerful negative emotion in my (former) culture as well, having spent my first 38 years of life in Europe. Shame is used as a very potent tool in the US as well, where I have lived since 1997.
However, I managed to entirely discard shame as a personal trait as soon as my first kid was born (I was 28), at which point I fully realized that I'd really do anything to protect my family in case it needed my protection. Emphasis on "anything".


An adult should never feel ashamed. Accountable - yes, but not ashamed.

As to indexers being "freeriders" - we are just better at the game of utilizing opportunities to our own advantage, which is the same game an active manager is playing. Only we are better, and proud of it.
Lower costs, better returns - what's there to be ashamed of?
Retired July 2018 @ age 59. Posting here purely for amusement.
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