Bogle Sounds a Warning on Index Funds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Posts: 610
Joined: Sun Aug 12, 2018 11:14 am

Re: Bogle Sounds a Warning on Index Funds

Post by JackoC » Tue Dec 04, 2018 11:22 pm

typical.investor wrote:
Tue Dec 04, 2018 7:34 pm

1. The use of dual-shares has been growing recently: One-fifth of companies that listed on U.S. stock exchanges last year had dual-class shares.

Academic research remains divided on the merits of dual-class shares.

I simply don't believe index investing is causing the problems that founder-managers are trying to avoid by dual structure classes. It's not like we have a utopian system now which ensures higher long-term shareholder returns.

In any case, I expect shareholders to exert their rights to maximize their benefits. I do not see indexing in any way to be a threat to that.

2. Companies are becoming more profitable with less competition. Isn't that what a shareholder would want?
1. The point about dual class shares is another tangent. The issue isn't the best way of corporate governance in one company at a time. It's that ownership in all companies in a given industry is being concentrated in fewer hands, those of index funds. Nor is it that the managers of index funds act against the interests of index fund shareholders. The interests of index fund managers and shareholders align in not caring much about one company in an industry outcompeting others and especially overturning the whole competitive balance of the industry: because they own all the other incumbents who'd be hurt by that. There are all kinds of other potential issues of corporate governance, but the issue with index funds is them growing to the point where they have effective controlling interests in each major player in an industry.

Again it's really simple if we just think of the same thing happening if KKR bought and took private every company in an industry. Even without merging the companies. Would everyone think that was no problem? Obviously not. This is basically the same, and diffusing the voting to index fund shareholders would only remedy that if those shareholders could be counted on to act economically irrationally. If they acted rationally, like KKR would, they'd want to limit competition among the similar companies they own, within the law.

2. In the long run, no. It's a prisoner's dilemma type effect. Concentrated ownership naturally leads the concentrated owners to squelch competition in their short term interest. But by stunting innovation and economic growth in the long run it's not in even their own long term interest. And it's definitely not in society's overall interest.

Benjamin Buffett
Posts: 70
Joined: Sun Nov 25, 2018 2:20 pm
Location: Indiana

Re: Bogle Sounds a Warning on Index Funds

Post by Benjamin Buffett » Wed Dec 05, 2018 8:45 pm

Firstly no passive investor should change their course , and the government should leave index funds alone for the most part, they are part of the economy, a valuable part. Index funds are nowhere close to controlling the entire market, hedge funds, and other players will all compete for shares of companies.....also its self limiting to a point, the more scarce a share is the more expensive it becomes to acquire it.

If you want you could make a three fund portfolio that diversifies with an actively managed fund product, or buy individual shares. This would make the portfolio more interesting while reducing the effect of this "problem". Of course the actively managed funds will add to the overhead and complexity of the total portfolio.
* 60% in US total stock market
* 20% in an actively managed fund or individual stocks(treated as one fund)
* 20% in a bond fund or cash

I think that at a point if index funds control too much of the shares and really start taking over they will run into limitations imposed by the scarcity they create in the shares themselves, which could make the problem self solving......

Furthermore any hedge fund, mutual fund, business, or wealthy family could do this, even the government could start buying shares en masse of the biggest companies......index funds are not special in that ability.

The government could always give a tax exemption to any index fund that waves its voting rights to its shares that it buys, this would make index funds better at what they do, preserve the rights of the investor and the fund, and prevent them from controlling everything.

Posts: 1488
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky

Re: Bogle Sounds a Warning on Index Funds

Post by AlphaLess » Wed Dec 05, 2018 9:11 pm

David Jay wrote:
Thu Nov 29, 2018 11:43 am
Bogle, in his usual manner, has clearly stated the corporate governance issue. This issue is affected by ownership as he points out.

It is important to separate the issue of corporate governance from the issue of pricing. Pricing is set by transactions, not by ownership. Day traders, HFT programs and active managers will continue to efficiently set prices, as they do today, at even a tiny fraction of today's trading volume.
Excellent comment!

Pricing is not an issue. There will be plenty of price discovery agents, because returns to price discovery are very lucrative.
"You can get more with a kind word and a gun than with just a kind word." George Washington

Posts: 119
Joined: Tue Aug 14, 2018 9:18 am

Re: Bogle Sounds a Warning on Index Funds

Post by DeadPoets » Fri Dec 07, 2018 4:54 pm

flyingaway wrote:
Thu Nov 29, 2018 8:36 pm
There are so many different index funds that the indexes are becoming active with smart people behind their constructions.
My first thought is that this is the direction “active” trading will go.