Has the growing trend of blindly buying index funds caused market inefficiency?

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VartAndelay
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Has the growing trend of blindly buying index funds caused market inefficiency?

Post by VartAndelay »

In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
Ivygirl
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by Ivygirl »

And as a follow-up question, what would happen if for some reason these "blindly buying" investors change their minds en masse?

Two minutes on their employer's retirement savings site could reset their paycheck contributions to 0.

Interesting to think about.
AlwaysLearningMore
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by AlwaysLearningMore »

This has been discussed many time on this board, going back many years. https://tinyurl.com/y28xt9f9
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by JBTX »

As long as there are ample active investors setting prices, there shouldn't be inefficiencies. You could, in theory, get to such a high percentage of indexers that perhaps it would be an issue, but it is doubtful that will ever happen. Wall Street firm employees can't collect 7 figure bonuses investing in index funds.

It is possible that a high percentage of indexers change the characteristics of the market. Does it change the behavior of Coke and Pepsi when most investors own coke and Pepsi vs one or the other? That trend would seemingly align with recent trend to oligopoly. But markets are affected by lots of technology and trends. That's just part of the deal.
BHawks87
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by BHawks87 »

Seems that if the majority of people are indexing then more active traders would start getting superior returns and then more people would jump ship on indexing and go back to active trading and mutual funds with active traders which would then swing the pendulum back to indexing.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by alex_686 »

VartAndelay wrote: Fri Oct 16, 2020 12:22 pm If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
I am going to give you a 3 part answer.

P/E ratios are high. This could be because money is irrationally pouring into the equity market. We don't need to bring indexing into this. This has happened before. Nifty 50 comes to mind. But I don't think this is the answer. This could be the logical conclusion of rock bottom interest rates and low perceived risk / risk premiums. I think a better answer is due to the savings glut. Demand for capital is falling while supply of investable dollars is increasing. I blame increased wealth inequity.

Next, prices are set at margin so you only need a relative few players to get good pricing.

If you are concerned about market inefficiency, I would look elsewhere. I think that indexing leads to complacent lazy oligopolies. If the largest shareholder of Facebook and Alphabet is Vanguard fund, I don't think they are going to advocate that they engage in a price war to increase market share and destroy the profit margins for both.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
TheoLeo
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by TheoLeo »

I wonder if markets aren't MORE efficient if people who don't know how to value stocks just buy index funds instead of buying individual stocks.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by UpperNwGuy »

VartAndelay wrote: Fri Oct 16, 2020 12:22 pm In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
What would you suggest these investors do? Should they do a monthly analysis of price and value before making their monthly investment into the fund? Your question confuses me.
Last edited by UpperNwGuy on Fri Oct 16, 2020 2:04 pm, edited 1 time in total.
Explorer
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by Explorer »

I remember reading in the recent times a couple of articles that suggest "indexing will surpass active by 2024," another article stating "half of assets invested in index funds." I do not know if there is a definitive publication anywhere.

If the 50% mark is true, I would not worry much at this time since there is an equilibrium between those who want to burn calories trying to outsmart the market and those that easily (lazily) enjoy what market gives.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by nisiprius »

It's a very common talking point used to attack indexing, and it's nonsense.

It could possibly be true that since the introduction of the 401(k) plan in 1980, millions of workers have been blindly buying stocks and that this could have driven up the prices of stocks in general. It could also be nonsense, but let's grant that it's possible. But that's a stock market issue, not an index fund issue, and it doesn't argue against index funds.

People who buy broad market index funds (which is what John C. Bogle meant by "index funds") cannot have any effect on market efficiency at all, and cannot distort valuations, because they accept market valuations and create equal proportionate demands for every stock. They cannot create scarcities of particular stocks or drive up the prices of individual stocks or categories of stocks.

Imagine chicken soup with dumplings. If an active manager manipulates their ladle to favor dumplings, it will create a scarcity of dumplings in the soup that remains and drive up the price of dumplings. If the active manager sells their dumpling-rich bowls of soup to investors who buy it blindly, it could lead to market distortion and overpriced dumplings. However, if a passive index fund stirs the pot well and ladles out a fair sample of the whole pot, the ladleful will have the same composition as what was in the pot... which also means, mathematically, that it does not change the composition of whats in the pot. If the pot had 50% chicken and 50% dumplings before the indexers serve themselves, it still has 50% chicken and 50% dumplings afterwards. It doesn't interfere with the market pot, and it doesn't hurt the people who serve themselves soup afterwards.

As a matter of fact, broad market indexing is the only investing strategy that mathematically cannot create a crowded trade or distort valuations.

The other obvious point is that if too many people are indexing, that ought to be a self-correcting problem. If indexers are paying too much for stocks, that ought to create an opportunity for active investors to make money by selling stock to indexers at inflated prices, which ought to pull more active investors into the market.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by bugleheadd »

all i know is im going ot keep maxing out my 401k whether price is high or low or in between. low is even better as ii'll be accumulating at low share prices.

this past march/april was barely a blip on my 401k. was also fortunate to have lump sum company contribution and bonus contribution at end of feb/early march. u can see that vertical line in the chart is when that big contribution hit. 2 years of employee contributions of $39k is now almost $80k. this is all in sp500 fund

Image
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by arcticpineapplecorp. »

VartAndelay wrote: Fri Oct 16, 2020 12:22 pm In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
so how do you do it?

presumably you're saying the market's too high to buy...so what are you buying? (hint: bonds are highly priced too). Don't tell me you're just hoarding cash? Are you investing in your 401k? If so, in what? Money market mutual fund?

Bogle himself said it wouldn't be a problem until indexing represented closer to 80 or 90 percent of all investing.

As it stands now I thought indexing mae up about 35% of all investing (I read that somewhere months ago in response to a similar question). This link says as of 2019 it only made up 14% (https://www.google.com/search?client=fi ... indexed%3F)

there's a lot of gambling still going on, and presumably will be for the foreseeable future. People think they're smarter or above average, even though they're not.

have you not seen the rise in popularity of robinhood and the like?
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by flaccidsteele »

It’s inconsequential that people blindly buy the index

The US index is like any asset. When people love it, the price goes up. When people hate it, the price goes down

Fear eventually shakes people out so others can be greedy when others are fearful

Rinse and repeat
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by 1789 »

bugleheadd wrote: Fri Oct 16, 2020 2:14 pm all i know is im going ot keep maxing out my 401k whether price is high or low or in between. low is even better as ii'll be accumulating at low share prices.

this past march/april was barely a blip on my 401k. was also fortunate to have lump sum company contribution and bonus contribution at end of feb/early march. u can see that vertical line in the chart is when that big contribution hit. 2 years of employee contributions of $39k is now almost $80k. this is all in sp500 fund

Image
Your strategy, contributions and fund selection looks excellent to me. Congrats.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by framus »

nisiprius wrote: Fri Oct 16, 2020 2:08 pm It's a very common talking point used to attack indexing, and it's nonsense.

It could possibly be true that since the introduction of the 401(k) plan in 1980, millions of workers have been blindly buying stocks and that this could have driven up the prices of stocks in general. It could also be nonsense, but let's grant that it's possible. But that's a stock market issue, not an index fund issue, and it doesn't argue against index funds.

People who buy broad market index funds (which is what John C. Bogle meant by "index funds") cannot have any effect on market efficiency at all, and cannot distort valuations, because they accept market valuations and create equal proportionate demands for every stock. They cannot create scarcities of particular stocks or drive up the prices of individual stocks or categories of stocks.

Imagine chicken soup with dumplings. If an active manager manipulates their ladle to favor dumplings, it will create a scarcity of dumplings in the soup that remains and drive up the price of dumplings. If the active manager sells their dumpling-rich bowls of soup to investors who buy it blindly, it could lead to market distortion and overpriced dumplings. However, if a passive index fund stirs the pot well and ladles out a fair sample of the whole pot, the ladleful will have the same composition as what was in the pot... which also means, mathematically, that it does not change the composition of whats in the pot. If the pot had 50% chicken and 50% dumplings before the indexers serve themselves, it still has 50% chicken and 50% dumplings afterwards. It doesn't interfere with the market pot, and it doesn't hurt the people who serve themselves soup afterwards.

As a matter of fact, broad market indexing is the only investing strategy that mathematically cannot create a crowded trade or distort valuations.

The other obvious point is that if too many people are indexing, that ought to be a self-correcting problem. If indexers are paying too much for stocks, that ought to create an opportunity for active investors to make money by selling stock to indexers at inflated prices, which ought to pull more active investors into the market.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by anoop »

VartAndelay wrote: Fri Oct 16, 2020 12:22 pm In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
The problem is not with indexing but fed interference. That is what is keeping zombie companies with debt-supported earnings alive and causing stratospheric P/Es. If it weren't for the fed, the zombie companies would fail and they would be replaced by healthy companies, and conservative investors would stick to bonds and CDs instead of piling on the stock market.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by 000 »

One thing to remember is that many work plans only have a S&P 500 index, which is missing ~20% of the US market cap (unlike Total Market, which is really only missing stocks with insufficient float) and so those investors blindly throwing it into the S&P 500 index are making an "active" choice relative to the total market. Add to this that many people consider S&P 500 to be the market and that options and other derivatives (such as in life insurance products) track S&P 500 and not total market.

What does this mean? Are S&P 500 stocks in a bubble versus the extended market?

I'm not sure that markets are efficient. How many potential arbitrageurs are really watching the ~3,000 stocks not in the S&P 500? Or are potential arbitrageurs eschewing small caps because mega cap momentum has ruled the day for so long and a feedback loop exists?

I do not posit that the above questions should be answered true, but it's not clear the answer is no either.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by edgeagg »

000 wrote: Fri Oct 16, 2020 5:36 pm I do not posit that the above questions should be answered true, but it's not clear the answer is no either.
I think I agree with the point above, and have a reductio ad absurdum question: Suppose that the entire market was indexing. In that case, how are prices determined for any equity since by definition, no one is paying any attention to the price of any single equity?

So how large does indexing have to get before there aren't enough buyers and sellers in the market? I'd love to see any pointers to research on this topic.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by 000 »

edgeagg wrote: Fri Oct 16, 2020 7:45 pm I think I agree with the point above, and have a reductio ad absurdum question: Suppose that the entire market was indexing. In that case, how are prices determined for any equity since by definition, no one is paying any attention to the price of any single equity?

So how large does indexing have to get before there aren't enough buyers and sellers in the market? I'd love to see any pointers to research on this topic.
If everyone indexed, the only trading would be between asset classes, not stocks, so individual stock prices would all move together.

Actually, this raises an interesting point. In March I observed that most individual stocks -- even those of businesses seemingly unaffected or helped by the pandemic -- moved downward together. To me this suggests that there was a surge in supply of stocks in general, not particular stocks; in other words, more people than usual were panic selling broad baskets or indices of stocks, not individual stocks.

In addition to stocks moving together, it seems that other asset classes (precious metals, even bonds sometimes) are moving together too. The "market" seems to have "risk on" and "risk off" phases, suggesting particular asset classes or individual securities are not being priced based on fundamental long term value. Of course, part of this could be due to liquidity issues.

Anyway, I'm not sure that index funds in particular are a culprit here, but valuation-indifferent investing might be. Lots of people are chasing earnings because there's little yield left to chase.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by pennsylvania211 »

I think I agree with the point above, and have a reductio ad absurdum question: Suppose that the entire market was indexing. In that case, how are prices determined for any equity since by definition, no one is paying any attention to the price of any single equity?
So how large does indexing have to get before there aren't enough buyers and sellers in the market? I'd love to see any pointers to research on this topic.
This is really interesting.

Suppose the entire market was indexing, then there would be money to be made by active trading, and trading would increase until a new equilibrium on returns would be reached sooner or later.

Also it would be nearly impossible for indexing to reach 100% of market. Given that stock compensation and RSUs are in the game. Also given that people such as you are in the game.

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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by Goldwater85 »

Prices are set at the margin, but the best argument here is that heavy use of indexing may cause corporate governance issues.

Arguably much of the story behind the bull run of the past 40 years was attributable to the increasing concentration of public shares in the hands of professional investors who used their 1.0-2.0% management fee to employ analysts to monitor the businesses they invested in. Alienate them by costly empire building, looting or general laziness, and boards and managements risk having a slate run against them or attracting a hostile suitor.

Index funds which can’t track individual holdings and just vote ISS recommendations (which increasingly follow ESG milestones that aren’t related to corporate profitability), look much like the scattered, very small investors that predominated in the 1950s from a corporate policing standpoint.

No doubt, investors are individually better of purchasing an index fund for .05% and piggy backing. But, collectively, in a prisoner’s dilemma sort of way, we may all have been better off paying active funds 1.0% to hold managements’ collective feet to the fire and keeping firms focused on profitability, which maximizes overall market returns and also encourages higher multiples.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by Reamus294 »

I do think there is a possibility but I think it wouldn’t only be due to individual investors. It would have to become a trend from pension funds too. Pension funds have much greater economies of scale and have far greater diversification needs so even though a lot of them invest in indexes I don’t think it will be their primary source of investment returns. I am hoping the human nature of someone thinking they are smarter than the next person will keep from everyone investing in indexes. Also, the new apps out there and huge run ups like tesla will make it very appealing to invest individual stocks.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by typical.investor »

anoop wrote: Fri Oct 16, 2020 4:44 pm
VartAndelay wrote: Fri Oct 16, 2020 12:22 pm In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
The problem is not with indexing but fed interference. That is what is keeping zombie companies with debt-supported earnings alive and causing stratospheric P/Es. If it weren't for the fed, the zombie companies would fail and they would be replaced by healthy companies, and conservative investors would stick to bonds and CDs instead of piling on the stock market.
But is it really the case that those companies with stratospheric P/Es are really zombies? Are Facebook , Amazon, Apple , Netflix , Alphabet Google) and Tesla zombies?

Some argue rather that:
nosebleed valuation levels are an example of a “stock market failure” at the hands of these inexperienced millennials who have gotten lured in to taking oversized risks in equities for the first time in their lives.

They are buying bullish call options that expire inside two weeks. There was ($500 billion) of bullish call options bought in a four-week stretch by small retail traders, and that in ’99 it was $100 billion, in ’07, it was $100 billion.
And of course while indexing doesn't correct that, it's definitely not indexing that is pushing the spread between the most and least expensive stocks.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by anoop »

typical.investor wrote: Fri Oct 16, 2020 10:12 pm
anoop wrote: Fri Oct 16, 2020 4:44 pm
VartAndelay wrote: Fri Oct 16, 2020 12:22 pm In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
The problem is not with indexing but fed interference. That is what is keeping zombie companies with debt-supported earnings alive and causing stratospheric P/Es. If it weren't for the fed, the zombie companies would fail and they would be replaced by healthy companies, and conservative investors would stick to bonds and CDs instead of piling on the stock market.
But is it really the case that those companies with stratospheric P/Es are really zombies? Are Facebook , Amazon, Apple , Netflix , Alphabet Google) and Tesla zombies?
The ones with stratospheric P/Es are good companies, but the stock is really not worth it and wouldn't be where it is without fed support.
The zombies have very little earnings or losses and they wouldn't be around if they weren't able to borrow for survival, again fed supported.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by cinghiale »

I’m curious about the use of the word “blindly” in the thread title.

Is there a growing trend of blindly buying index funds out there? If there is, this is first time I’ve heard of it.

If employees in a corporation/business/institution have opted for payroll deposits into index funds each paycheck, that strikes me as intelligently “dollar cost averaging” into the market, whether the market is surging or sinking.

If other investors develop a well-thought out investment strategy and execute it with index funds, and the rebalance from time to time, that sounds to me like a sound and time-honored strategy.

Is it time for the White Coat Investor to change names? “White Cane Investor,” perhaps?
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by typical.investor »

Reamus294 wrote: Fri Oct 16, 2020 10:06 pm I do think there is a possibility but I think it wouldn’t only be due to individual investors. It would have to become a trend from pension funds too. Pension funds have much greater economies of scale and have far greater diversification needs so even though a lot of them invest in indexes I don’t think it will be their primary source of investment returns. I am hoping the human nature of someone thinking they are smarter than the next person will keep from everyone investing in indexes. Also, the new apps out there and huge run ups like tesla will make it very appealing to invest individual stocks.
The WSJ has a similar view.
In fact, of the 25 stocks with market values above $10 billion that have the hottest returns so far this year, only two— Moderna Inc. and Peloton Interactive Inc. —are among the 25 most-popular stocks on Robinhood.
They focus in on the interesting case of Zoom from the end of 2019 through September when the stock boomed sevenfold. Institutional ownership went to 55%. Yet, index funds (which are included in institutional ownership) only accounted for 19% of institutional buying.

https://www.wsj.com/articles/look-whos- ... 1602860804
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by geerhardusvos »

nisiprius wrote: Fri Oct 16, 2020 2:08 pm Imagine chicken soup with dumplings. ❤️

As a matter of fact, broad market indexing is the only investing strategy that mathematically cannot create a crowded trade or distort valuations. 👌🏻
Now imagine chicken soup with dumplings while reading nisiprius posts 8-)
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by typical.investor »

nisiprius wrote: Fri Oct 16, 2020 2:08 pm
As a matter of fact, broad market indexing is the only investing strategy that mathematically cannot create a crowded trade or distort valuations.
OK, so you assert that if all investors globally invested in the Vanguard Total Stock Market Index Fund that mathematically there couldn't be a crowded trade or value distortions. I see.

Emerging Markets would sure be awfully cheap.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by rnitz »

Saw a great interview with Eugene Fama today who had an interesting (and different) take on this issue that I'd not seen before. He said (paraphrasing):

Who is indexing removing from the active market? If it's the intelligent, disciplined, researched investor then it adds to inefficiency. But if it's removing the casual, flighty, emotional investor then it may add to market efficiency.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by Northern Flicker »

Most retirement plans have actively managed funds with automatic investment just the same. Probably more assets are flowing into those, but the active managers never raise that issue as a problem.
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by rich126 »

AlwaysLearningMore wrote: Fri Oct 16, 2020 12:54 pm This has been discussed many time on this board, going back many years. https://tinyurl.com/y28xt9f9
Tinyurls shouldn't be used. They provide zero information as to the web site, not that a complete url is reliable itself but at least it gives some context.
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tadamsmar
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by tadamsmar »

VartAndelay wrote: Fri Oct 16, 2020 12:22 pm In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
The exact stats indicate that the anecdotal "a lot of people" do not amount to all that much.

2017 numbers:
17.5% of global cap was in index funds
25.6% was in active funds
56.9% was institutional funds overseen by an asset manager and do not track an index.

https://www.reuters.com/article/us-fund ... SKCN1C82TE
dru808
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by dru808 »

bugleheadd wrote: Fri Oct 16, 2020 2:14 pm all i know is im going ot keep maxing out my 401k whether price is high or low or in between. low is even better as ii'll be accumulating at low share prices.

this past march/april was barely a blip on my 401k. was also fortunate to have lump sum company contribution and bonus contribution at end of feb/early march. u can see that vertical line in the chart is when that big contribution hit. 2 years of employee contributions of $39k is now almost $80k. this is all in sp500 fund

Image
:sharebeer Great chart
60% SCHK | 25% VIGI | 15% ILTB
Tamalak
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by Tamalak »

Blindly buying index funds has no effect on the relative prices of the stocks. It causes no more inefficiency than if I had kept my cash.

The only argument that my buying index funds causes "inefficiency" is that I have given up the potential to price discover. That is, by buying index funds I'm withholding possible market insights that would make the market MORE efficient.

That argument is bogus because I have no insights to offer, I assure you. Price discovery is a profession. It's not my profession.
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tadamsmar
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by tadamsmar »

VartAndelay wrote: Fri Oct 16, 2020 12:22 pm In the recent years there has been a growing trend of workers allocating some of their money each paycheck into an automatic investment into a stock index fund. I don't know the exact stats but from my anecdotal experience it seems like a lot of people are doing this. This means they are not giving any consideration whatsoever to the price or the value at the time. They are literally buying blindly. So let's say they have it set automatically so that 10% of each paycheck buys into a stock index fund. Well then it does not matter whether the price of that fund is $1, $100, or $1000 on payday. They are going to buy 10% either way.

If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies? Could this have anything to do with why some people are saying that price to earnings ratios seem sky high lately?
Have you noticed how people who think the are not blind are, in fact, blindly doing stuff? For instance active traders.

When an active trade occurs, is the buyer or the seller blind? If one of them is correcting seeing a mispriced stock then the other one must be blind to that fact, it's just simple logic.
BogleFan510
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by BogleFan510 »

These people are not 'buying blind,' they are just not wasting energy on something they dont need to worry about.

They need a retirement investment. They buy the best retirement investment available at the market price from a trusted vendor.

If this same person needed eggs and went to the store and bought them, would you criticize them for not doing discovery on the eggs? They know roughly what eggs cost and trust the supply chain and regulatory frameworks of farming, so they check that the expire date and that the price is within reason and then buy. They dont need to visit the chicken coop to trust that experts certified the cage free label is accurate or that the 3.99 per dozen price is reasonable for the brand they prefer.

You could literally apply this false logic to any human transaction where a price is set, buying a home, car, food, clothes, gas, etc.
acegolfer
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by acegolfer »

VartAndelay wrote: Fri Oct 16, 2020 12:22 pm
If enough people and enough money are doing this though, couldn't this possibly lead to market inefficiencies?
My prediction, If you blindly invest in index, then we will have one less irrational investor actively investing. So it will make the market more efficient.
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firebirdparts
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by firebirdparts »

rnitz wrote: Sat Oct 17, 2020 7:41 pm Saw a great interview with Eugene Fama today who had an interesting (and different) take on this issue that I'd not seen before. He said (paraphrasing):

Who is indexing removing from the active market? If it's the intelligent, disciplined, researched investor then it adds to inefficiency. But if it's removing the casual, flighty, emotional investor then it may add to market efficiency.
I think those guys are all buying Tesla.

It’s easy to get thought experiments tangled up on this subject. If a lot of shares refuse to respond to price, then you’d see higher volatility. So watch for that over the next 30 years. The effect on governance is more of a real issue.
A fool and your money are soon partners
TallBoy29er
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Re: Has the growing trend of blindly buying index funds caused market inefficiency?

Post by TallBoy29er »

Just chiming in to say I like your screen name, Mr Andelay. Serenity NOW!
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