Index Funds Bubble? [Michael Burry article]

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Re: Index Funds Bubble? [Michael Burry article]

Post by abuss368 » Fri Sep 06, 2019 8:56 pm

Just watch The Big Short last week so when I saw the thread my initial response was “that Michael Burry”?

Thank you for sharing.
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Re: Index Funds Bubble? [Michael Burry article]

Post by abuss368 » Fri Sep 06, 2019 8:57 pm

Don’t know how a bubble is possible with Index funds. Perhaps Index funds in small niche corners of the market?
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Re: Index Funds Bubble? [Michael Burry article]

Post by Ki_poorrichard » Fri Sep 06, 2019 11:00 pm

bluquark wrote:
Fri Sep 06, 2019 8:48 pm
columbia wrote:
Fri Sep 06, 2019 8:24 pm
I’m using 1999 as the start date, because that’s what’s being discussed. Let’s assume the “smart” money determined that value stocks were the appropriate response to the “bubble.” How has that worked out since then?
https://www.portfoliovisualizer.com/bac ... 0&total3=0

Large cap has narrowly edged out large cap value.
That just shows that, whatever "value" is (I don't tilt to value because I consider it a largely meaningless mystery meat technical metric), it included tech stocks, or stocks highly correlated with tech stocks. More interestingly, if I switch Portfolio 2 to 10-year treasuries, then treasuries outperformed from 1999 to 2016 with much less volatility, and only since then did the hypothetical patient invest-into-a-bubble Bogleheads finally harvest their risk premium.

People who bought in at the very peak, in 2000, are still waiting.
+1

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Re: Index Funds Bubble? [Michael Burry article]

Post by Vision » Sat Sep 07, 2019 4:45 am

So if we assume the liquidity risk there - what to do to actively prepare for this?

Should we just buy more bonds?

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Re: Index Funds Bubble? [Michael Burry article]

Post by columbia » Sat Sep 07, 2019 5:09 am

bluquark wrote:
Fri Sep 06, 2019 8:48 pm
columbia wrote:
Fri Sep 06, 2019 8:24 pm
I’m using 1999 as the start date, because that’s what’s being discussed. Let’s assume the “smart” money determined that value stocks were the appropriate response to the “bubble.” How has that worked out since then?
https://www.portfoliovisualizer.com/bac ... 0&total3=0

Large cap has narrowly edged out large cap value.
That just shows that, whatever "value" is (I don't tilt to value because I consider it a largely meaningless mystery meat technical metric), it included tech stocks, or stocks highly correlated with tech stocks. More interestingly, if I switch Portfolio 2 to 10-year treasuries, then treasuries outperformed from 1999 to 2016 with much less volatility, and only since then did the hypothetical patient invest-into-a-bubble Bogleheads finally harvest their risk premium.

People who bought in at the very peak, in 2000, are still waiting.
Other than agreeing with me that switching to value was not a panacea, I’m not sure what you’re saying.

You’re thinking of cashing out of the market because of valuations?

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Re: Index Funds Bubble? [Michael Burry article]

Post by Eric76 » Sat Sep 07, 2019 5:58 am

I'm surprised he only has $340 million under management even after all the notoriety.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Vision » Sat Sep 07, 2019 6:07 am

So what do we do now?

I don't dollar-cost-average. I have a large lump sum just sitting there. Should I just put it all in stock/bond total index and be done with it?

And what if Barry is true and this is all a bubble and next recession pops it and it goes to pennies? People would say "just keep dollar cost averaging"...yeah...but I'm not a DCA guy, I'm a lump sum guy. So...I will be financially ruined. How to protect against this? Does this only go for stock indices or for bond indices as well?

Also - does his argument apply for bond index funds like BND as well? Or only for stocks?

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30yo lump sum investor - scared of Burry's warnings on index funds, what to do?

Post by Vision » Sat Sep 07, 2019 6:15 am

[Merged here -- moderator oldcomputerguy]

I don't dollar cost average.

And DCAing would dwarf in comparison of lump sum I was fortunate enough to come across.

I must be very smart about investing this lump sum

For decades people have suggested index funds, but Burry claims they are in a bubble as discussed in another thread on boglehead forum.

This worries me. Would this index bubble apply to bond funds as well (like BND)?

What would you suggest to me.

I was originally thinking something like 80% total world stock, 20% US bond (BND) index, but at this point I don't know anymore. If the index overcrowding liquidity issue is universal then it would apply to bond index as well as stock index?

Any suggestions are welcome.

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Re: 30yo lump sum investor - scared of Burry's warnings on index funds, what to do?

Post by GoldenFinch » Sat Sep 07, 2019 6:35 am

Why choose to focus and act on Burry’s opinion over the thousands of other opinions from other people in the press. You are supposed to ignore the noise.

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Re: Index Funds Bubble? [Michael Burry article]

Post by JoMoney » Sat Sep 07, 2019 6:35 am

Vision wrote:
Sat Sep 07, 2019 6:07 am
So what do we do now?

I don't dollar-cost-average. I have a large lump sum just sitting there. Should I just put it all in stock/bond total index and be done with it?

And what if Barry is true and this is all a bubble and next recession pops it and it goes to pennies? People would say "just keep dollar cost averaging"...yeah...but I'm not a DCA guy, I'm a lump sum guy. So...I will be financially ruined. How to protect against this? Does this only go for stock indices or for bond indices as well?

Also - does his argument apply for bond index funds like BND as well? Or only for stocks?
Sounds like you're not comfortable with the level of risk you're taking.
Maybe you could hold more in cash/bonds to the point where you spend half your time worrying about not taking enough risk with that piece of your portfolio.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Index Funds Bubble? [Michael Burry article]

Post by Vision » Sat Sep 07, 2019 6:42 am

JoMoney wrote:
Sat Sep 07, 2019 6:35 am
Vision wrote:
Sat Sep 07, 2019 6:07 am
So what do we do now?

I don't dollar-cost-average. I have a large lump sum just sitting there. Should I just put it all in stock/bond total index and be done with it?

And what if Barry is true and this is all a bubble and next recession pops it and it goes to pennies? People would say "just keep dollar cost averaging"...yeah...but I'm not a DCA guy, I'm a lump sum guy. So...I will be financially ruined. How to protect against this? Does this only go for stock indices or for bond indices as well?

Also - does his argument apply for bond index funds like BND as well? Or only for stocks?
Sounds like you're not comfortable with the level of risk you're taking.
Maybe you could hold more in cash/bonds to the point where you spend half your time worrying about not taking enough risk with that piece of your portfolio.
But how can I own bond indices if Burry's index issues apply to those bond indices as well? So they apply to stuff like BND? Or is it only stock indices that are at risk?

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Re: Index Funds Bubble? [Michael Burry article]

Post by JoMoney » Sat Sep 07, 2019 7:12 am

Vision wrote:
Sat Sep 07, 2019 6:42 am
JoMoney wrote:
Sat Sep 07, 2019 6:35 am
Vision wrote:
Sat Sep 07, 2019 6:07 am
So what do we do now?

I don't dollar-cost-average. I have a large lump sum just sitting there. Should I just put it all in stock/bond total index and be done with it?

And what if Barry is true and this is all a bubble and next recession pops it and it goes to pennies? People would say "just keep dollar cost averaging"...yeah...but I'm not a DCA guy, I'm a lump sum guy. So...I will be financially ruined. How to protect against this? Does this only go for stock indices or for bond indices as well?

Also - does his argument apply for bond index funds like BND as well? Or only for stocks?
Sounds like you're not comfortable with the level of risk you're taking.
Maybe you could hold more in cash/bonds to the point where you spend half your time worrying about not taking enough risk with that piece of your portfolio.
But how can I own bond indices if Burry's index issues apply to those bond indices as well? So they apply to stuff like BND? Or is it only stock indices that are at risk?
BND is a very diversified bond fund, holding high-quality bonds (roughly half in U.S. government bonds), of long a short duration. It's got a little of everything in it. There are pros and cons with everything.
I'm of the opinion that people shouldn't own bonds that they wouldn't be willing to hold to maturity, or bond funds with a relative duration equivalent to a portfolio of bonds they would be willing to hold to maturity.
Personally, I don't own BND and keep my "safe" money in cash/money markets/savings bonds. One of the features of savings bonds is they don't rely on a "market" to redeem them...
There is risk with all saving/investing for the future, at some point you have to find a balance you can accept. You should include some investing in yourself and your skills so you have a way of earning a living regardless what the financial markets are doing, and spend some on the present so not everything is riding on the unknowable future.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Index Funds Bubble? [Michael Burry article]

Post by Vision » Sat Sep 07, 2019 7:18 am

JoMoney wrote:
Sat Sep 07, 2019 7:12 am
Vision wrote:
Sat Sep 07, 2019 6:42 am
JoMoney wrote:
Sat Sep 07, 2019 6:35 am
Vision wrote:
Sat Sep 07, 2019 6:07 am
So what do we do now?

I don't dollar-cost-average. I have a large lump sum just sitting there. Should I just put it all in stock/bond total index and be done with it?

And what if Barry is true and this is all a bubble and next recession pops it and it goes to pennies? People would say "just keep dollar cost averaging"...yeah...but I'm not a DCA guy, I'm a lump sum guy. So...I will be financially ruined. How to protect against this? Does this only go for stock indices or for bond indices as well?

Also - does his argument apply for bond index funds like BND as well? Or only for stocks?
Sounds like you're not comfortable with the level of risk you're taking.
Maybe you could hold more in cash/bonds to the point where you spend half your time worrying about not taking enough risk with that piece of your portfolio.
But how can I own bond indices if Burry's index issues apply to those bond indices as well? So they apply to stuff like BND? Or is it only stock indices that are at risk?
BND is a very diversified bond fund, holding high-quality bonds (roughly half in U.S. government bonds), of long a short duration. It's got a little of everything in it. There are pros and cons with everything.
I'm of the opinion that people shouldn't own bonds that they wouldn't be willing to hold to maturity, or bond funds with a relative duration equivalent to a portfolio of bonds they would be willing to hold to maturity.
Personally, I don't own BND and keep my "safe" money in cash/money markets/savings bonds. One of the features of savings bonds is they don't rely on a "market" to redeem them...
There is risk with all saving/investing for the future, at some point you have to find a balance you can accept. You should include some investing in yourself and your skills so you have a way of earning a living regardless what the financial markets are doing, and spend some on the present so not everything is riding on the unknowable future.
I don't really understand what you mean to be honest. I wanted to know if Burry's arguments are only for stock index funds or for bond index funds as well?

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Re: Index Funds Bubble? [Michael Burry article]

Post by JoMoney » Sat Sep 07, 2019 7:43 am

Vision wrote:
Sat Sep 07, 2019 7:18 am
...
I don't really understand what you mean to be honest. I wanted to know if Burry's arguments are only for stock index funds or for bond index funds as well?
What do you think his point/argument is?
As far as I can tell the argument is something about the liquidity of ETFs relative to the liquidity of the underlying investments, which could impact bonds too if you expect to be able to sell them at any specific point in time... It's not relevant if you expect to buy and hold, bonds will mature regardless of the markets liquidity. It also seems that he's making some point about owning small-value stocks, which is absurd if your arguing about concerns with liquidity.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Index Funds Bubble? [Michael Burry article]

Post by packer16 » Sat Sep 07, 2019 8:13 am

One point that I think is valid in his argument is the increase in the liquidity premium that index funds is imposing on market prices. Now this is somewhat diluted by the market cap weighted indices as the largest purchases typically have higher liquidity to begin with. Where a mismatch may occur is if your have a heavily weighted stock in an index with relatively limited liquidity. The result may be more premium paid to investors willing to hold relatively illiquid stocks that have small/no weights in indices as individual investors do not have the same requirement for liquidity as the index funds do & thus this premium will not be in their prices.

This liquidity premium was there before index funds as it is more a function of the ownership method investors have (funds vs. individual holdings). However, aggregation mechanisms of any sort will create a premium & IMO index funds have added to this aggregation of funds invested in the same stocks in a systematic way.

From this study https://papers.ssrn.com/sol3/papers.cfm ... id=1632969, it looks like the long-term liquidity premium of the S&P 500 varies quite abit form 0.15% to 1.2% annually (although this result is from data from 1963 to 1999 so it includes the first era of aggregation (mutual funds) but not the second (index funds)). The premium is much higher in the 2008 crash (0.3% to 2.1%). As more money flows to Index funds, I would expect this premium to continue to increase. So the impact could be material.

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Re: Index Funds Bubble? [Michael Burry article]

Post by KlangFool » Sat Sep 07, 2019 9:06 am

Eric76 wrote:
Sat Sep 07, 2019 5:58 am
I'm surprised he only has $340 million under management even after all the notoriety.
Eric76,

As per my understanding, he only manages his own money. After "The Big Short", he no longer willing to manage someone's else money.

KlangFool

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Re: 30yo lump sum investor - scared of Burry's warnings on index funds, what to do?

Post by wootwoot » Sat Sep 07, 2019 9:29 am

GoldenFinch wrote:
Sat Sep 07, 2019 6:35 am
Why choose to focus and act on Burry’s opinion over the thousands of other opinions from other people in the press. You are supposed to ignore the noise.
Unique perspective.

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Re: 30yo lump sum investor - scared of Burry's warnings on index funds, what to do?

Post by GoldenFinch » Sat Sep 07, 2019 9:53 am

wootwoot wrote:
Sat Sep 07, 2019 9:29 am
GoldenFinch wrote:
Sat Sep 07, 2019 6:35 am
Why choose to focus and act on Burry’s opinion over the thousands of other opinions from other people in the press. You are supposed to ignore the noise.
Unique perspective.
I’m starting to think so! :happy

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Re: Index Funds Bubble? [Michael Burry article]

Post by lostdog » Sat Sep 07, 2019 11:12 am

I'll listen to Vanguard and Fidelity's army of experts over Michael Burry.

3blindmice
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Index Fund Bubble?

Post by 3blindmice » Sat Sep 07, 2019 11:22 am

[Thread merged into here, see below. --admin LadyGeek]

Hi Bogleheads:
I tried to search for this answer, but I could not find it... so if it has already been addressed, could you link me to the discussion?
What are your thoughts on this "index fund bubble" referenced in the article linked below? I know the central tenet of the Boglehead philosophy is passive index fund investing, buy and hold strategy. Do you believe the popularity and growth of the Boglehead wave has helped create a "bubble"? I am not savvy enough in economic theory to understand if Michael Burry's theory has merit and would love your insight. Thanks for your time.

https://www.bloomberg.com/news/articles ... ket-newtab

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Re: Index Fund Bubble?

Post by Broken Man 1999 » Sat Sep 07, 2019 11:26 am

Try this link:

viewtopic.php?t=289284

Or, use the search box.

Broken man 1999
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Re: Index Fund Bubble?

Post by 3blindmice » Sat Sep 07, 2019 11:34 am

Broken Man 1999 wrote:
Sat Sep 07, 2019 11:26 am
Try this link:

viewtopic.php?t=289284

Or, use the search box.

Broken man 1999
Thanks! I searched "bubble" but only found "bond bubble" links.

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Re: Index Fund Bubble?

Post by Broken Man 1999 » Sat Sep 07, 2019 11:39 am

3blindmice wrote:
Sat Sep 07, 2019 11:34 am
Broken Man 1999 wrote:
Sat Sep 07, 2019 11:26 am
Try this link:

viewtopic.php?t=289284

Or, use the search box.

Broken man 1999
Thanks! I searched "bubble" but only found "bond bubble" links.
You are welcome! I put index fund bubble in the search box, and my link was the most recent.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Index Fund Bubble?

Post by drk » Sat Sep 07, 2019 11:43 am

3blindmice wrote:
Sat Sep 07, 2019 11:22 am
I am not savvy enough in economic theory to understand if Michael Burry's theory has merit and would love your insight.
Even if it did, what would it change for you? Are you savvy enough to invest individual stocks yourself? Are you savvy enough to evaluate active managers?

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Re: Index Funds Bubble? [Michael Burry article]

Post by BenfromToronto » Sat Sep 07, 2019 11:54 am

When I read the Burry's article, I thought it made one relevant point for people of my age who are retired or close to retirement:

“The theater keeps getting more crowded, but the exit door is the same as it always was."

Here is how I interpret this quote: it is about investor psychology, not finance theory.
Index funds and index ETFs have attracted a large number of investors who are buying these products without really thinking about what they are buying.
Unlike many bogleheads, they are not trying to become (very small) permanent owners of all traded companies. They are just trying to grow their savings.

Twenty years ago, they would have bought CDs or treasury bonds. If they had owned stocks, their AA would have been much more conservative (e.g., % of bond holdings = age).
Or they would have trusted active managers who would have decided which stocks should be sold l during a crash and which stocks should be kept.

When the market will go through one of its unavoidable crash, these "investors" will sell (“rush to the exit”), leading to a more severe crash, leading to more sales, leading to an even more severe crash…

I agree with the many posters who have commented that Burry’s article could indicate that passive investing is contributing to a possible stock-mania rather than to a bubble due to the growth of passive investing. In other words, while there is nothing wrong about indexed ETFs, there may be something wrong about the psychology and behaviors of the new investors who are buying them.

I know (from experience) I can tolerate a 2001-style 45% crash or a 2018-style 50% crash; I don’t know whether I could tolerate a 1929-style 90% crash.

So, the Burry’s article is leading me, for the first time in 30 years to reconsider my aggressive AA (about 80% stocks; 40% US -including a small-cap tilt- 35% Europe and Japan, and 5% emerging market). The issue is switching from overpriced stocks to what?

I am not confident that bonds will do well.
I have about 10% of my invested assets in MMFs; increasing this proportion, means accepting losing maybe half of it during the rest of my life (or much more if the higher inflation of my youth returns).
I agree with Warren Buffet’s opinion about gold.
I am not enthusiastic about buying more TIPS (they represent about 5% of my invested assets).
I already own some REITs (about 5% of my invested assets), my house, and a vacation house, giving me enough exposure to real estate.

So, yes, after 30 years of avoiding them, I am considering that maybe it is time to sell some richly priced US stocks and to buy... an actively-managed fund. Specifically, the Vanguard Wellington fund (and yes, pay a low fee of 0.17% for admiral shares).
Does this sound crazy?
Becoming rich slowly is simple --earn, save, invest following a Bogleheads philosophy-- but it is not easy.

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Re: Index Funds Bubble? [Michael Burry article]

Post by LadyGeek » Sat Sep 07, 2019 12:02 pm

I merged 3blindmice's thread into the on-going discussion, which is in the Investing - Theory, News & General forum (general discussion).
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Re: Index Fund Bubble?

Post by 3blindmice » Sat Sep 07, 2019 12:04 pm

drk wrote:
Sat Sep 07, 2019 11:43 am
3blindmice wrote:
Sat Sep 07, 2019 11:22 am
I am not savvy enough in economic theory to understand if Michael Burry's theory has merit and would love your insight.
Even if it did, what would it change for you? Are you savvy enough to invest individual stocks yourself? Are you savvy enough to evaluate active managers?
Nope, not savvy enough for almost anything in economic theory, but interested in learning, thus my question for the Boglehead hive mind. Little by little, I hope to educate myself since dumping my financial adviser back in March.

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Re: Index Funds Bubble? [Michael Burry article]

Post by financeperchance » Sat Sep 07, 2019 12:05 pm

Some here might be interested in what folks at Seeking Alpha, the stock picking website, have to say, actually pretty interesting:
https://seekingalpha.com/article/429002 ... ments=show

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Re: Index Funds Bubble? [Michael Burry article]

Post by 3blindmice » Sat Sep 07, 2019 12:16 pm

BenfromToronto wrote:
Sat Sep 07, 2019 11:54 am
When I read the Burry's article, I thought it made one relevant point for people of my age who are retired or close to retirement:

“The theater keeps getting more crowded, but the exit door is the same as it always was."

Here is how I interpret this quote: it is about investor psychology, not finance theory.
Index funds and index ETFs have attracted a large number of investors who are buying these products without really thinking about what they are buying.
Unlike many bogleheads, they are not trying to become (very small) permanent owners of all traded companies. They are just trying to grow their savings.

Twenty years ago, they would have bought CDs or treasury bonds. If they had owned stocks, their AA would have been much more conservative (e.g., % of bond holdings = age).
Or they would have trusted active managers who would have decided which stocks should be sold l during a crash and which stocks should be kept.

When the market will go through one of its unavoidable crash, these "investors" will sell (“rush to the exit”), leading to a more severe crash, leading to more sales, leading to an even more severe crash…

I agree with the many posters who have commented that Burry’s article could indicate that passive investing is contributing to a possible stock-mania rather than to a bubble due to the growth of passive investing. In other words, while there is nothing wrong about indexed ETFs, there may be something wrong about the psychology and behaviors of the new investors who are buying them.

I know (from experience) I can tolerate a 2001-style 45% crash or a 2018-style 50% crash; I don’t know whether I could tolerate a 1929-style 90% crash.

So, the Burry’s article is leading me, for the first time in 30 years to reconsider my aggressive AA (about 80% stocks; 40% US -including a small-cap tilt- 35% Europe and Japan, and 5% emerging market). The issue is switching from overpriced stocks to what?

I am not confident that bonds will do well.
I have about 10% of my invested assets in MMFs; increasing this proportion, means accepting losing maybe half of it during the rest of my life (or much more if the higher inflation of my youth returns).
I agree with Warren Buffet’s opinion about gold.
I am not enthusiastic about buying more TIPS (they represent about 5% of my invested assets).
I already own some REITs (about 5% of my invested assets), my house, and a vacation house, giving me enough exposure to real estate.

So, yes, after 30 years of avoiding them, I am considering that maybe it is time to sell some richly priced US stocks and to buy... an actively-managed fund. Specifically, the Vanguard Wellington fund (and yes, pay a low fee of 0.17% for admiral shares).
Does this sound crazy?
Thank you for your reply- It helps novice Vanguard investors like myself to read the thoughts of experienced investors like you. I would count myself in the group of investors buying index funds without deep knowledge of what I'm actually buying. I am buying them because I read the Boglehead guide to Investing and it made sense to me. This is specifically why I'm wondering about the "index fund bubble"... if a novice like me (and thousands more like me) are buying them, with no experience or depth of knowledge, it's got to be too good to be true.
Regarding your response, when you say you would sell "richly priced US stocks" are you speaking of selling a portion of your VTSAX to invest in the Vanguard Wellington or do you mean you have individual stocks to sell? Thanks again for your reply.

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Re: Index Funds Bubble? [Michael Burry article]

Post by financeperchance » Sat Sep 07, 2019 12:33 pm

Does anyone here know of an asset class in which the vast majority of investment dollars are unambiguously from indexing? For example, microcap value stocks or some such? It would seem like if you had that answer, it would then be a relatively simple study to look at the individual components and see what percent of them outperform their index. If it's a solid majority of them outperforming, then that would argue for the advantage of stock picking at that point.

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Re: Index Funds Bubble? [Michael Burry article]

Post by 3blindmice » Sat Sep 07, 2019 12:38 pm

financeperchance wrote:
Sat Sep 07, 2019 12:05 pm
Some here might be interested in what folks at Seeking Alpha, the stock picking website, have to say, actually pretty interesting:
https://seekingalpha.com/article/429002 ... ments=show
Thanks for the link- it almost feels like as more people jump on the Boglehead bandwagon, the more risky the index fund becomes as it swells into a bubble-like condition. But for novices like me, blindly investing in "energy" sector options is daunting.

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Re: Index Funds Bubble? [Michael Burry article]

Post by abuss368 » Sat Sep 07, 2019 12:40 pm

Eric76 wrote:
Sat Sep 07, 2019 5:58 am
I'm surprised he only has $340 million under management even after all the notoriety.
That is surprising after the movie and all the stories.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Index Funds Bubble? [Michael Burry article]

Post by nisiprius » Sat Sep 07, 2019 1:05 pm

Seriously, does anyone see any sensible, objective way to use short, qualitative quotes from gurus in the media--or whole paragraphs in an interview, or three-page essays from the guru's own blog--except to notice and pick the ones that feed your confirmation bias?

How do you strike a proper weighted average between

"Bespoke Investment’s Paul Hickey believes a market hot streak is unfolding,"

"Ray Dalio: 'Now is the time' to invest in China'",

"Michael Burry, one of the first investors to call and profit from the subprime mortgage crisis, is seeing a similar bubble in passive investing,"

"It reminds me a lot of the peak in 2000': Legendary investor Rob Arnott compares today's market to the tech bubble?"
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Index Funds Bubble? [Michael Burry article]

Post by BenfromToronto » Sat Sep 07, 2019 1:31 pm

3blindmice wrote:
Sat Sep 07, 2019 12:16 pm
BenfromToronto wrote:
Sat Sep 07, 2019 11:54 am
When I read the Burry's article, I thought it made one relevant point for people of my age who are retired or close to retirement:

“The theater keeps getting more crowded, but the exit door is the same as it always was."

Here is how I interpret this quote: it is about investor psychology, not finance theory.
Index funds and index ETFs have attracted a large number of investors who are buying these products without really thinking about what they are buying.
Unlike many bogleheads, they are not trying to become (very small) permanent owners of all traded companies. They are just trying to grow their savings.

Twenty years ago, they would have bought CDs or treasury bonds. If they had owned stocks, their AA would have been much more conservative (e.g., % of bond holdings = age).
Or they would have trusted active managers who would have decided which stocks should be sold l during a crash and which stocks should be kept.

When the market will go through one of its unavoidable crash, these "investors" will sell (“rush to the exit”), leading to a more severe crash, leading to more sales, leading to an even more severe crash…

I agree with the many posters who have commented that Burry’s article could indicate that passive investing is contributing to a possible stock-mania rather than to a bubble due to the growth of passive investing. In other words, while there is nothing wrong about indexed ETFs, there may be something wrong about the psychology and behaviors of the new investors who are buying them.
[...]

So, yes, after 30 years of avoiding them, I am considering that maybe it is time to sell some richly priced US stocks and to buy... an actively-managed fund. Specifically, the Vanguard Wellington fund (and yes, pay a low fee of 0.17% for admiral shares).
Does this sound crazy?
Thank you for your reply- It helps novice Vanguard investors like myself to read the thoughts of experienced investors like you. I would count myself in the group of investors buying index funds without deep knowledge of what I'm actually buying. I am buying them because I read the Boglehead guide to Investing and it made sense to me. This is specifically why I'm wondering about the "index fund bubble"... if a novice like me (and thousands more like me) are buying them, with no experience or depth of knowledge, it's got to be too good to be true.
Regarding your response, when you say you would sell "richly priced US stocks" are you speaking of selling a portion of your VTSAX to invest in the Vanguard Wellington or do you mean you have individual stocks to sell? Thanks again for your reply.
For me (near retirement), it means selling selling indexed assets like VTSAX (I have some individual stocks in my "play account" but except for BKRB, they are not material).

However, if I were still in my 40's or even 50's, I would keep buying (DCA'ing or DVA'ing) indexed assets like VTSAX and I would not be bothered by the idea of a crash, even a 1929-style crash.
It took 25-year for the market to recover if one had a fixed sum invested in 1929.

However, if one had kept working and DCA'ing or DVA'ing, they would have recovered much faster (5-10 years depending on their capacity investing).

I have experienced this during the 2002 and 2008 crashes: it took only a couple of years to be back where I had been because I kept investing (and bought stocks at a deep discounts).
In the long term, this worked out wonderfully but, in the short term, it was quite painful (and that is why my tagline says it is simple but not easy).
Becoming rich slowly is simple --earn, save, invest following a Bogleheads philosophy-- but it is not easy.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Vision » Mon Sep 09, 2019 12:07 pm

I still don't understand:

1) Does this "index fund bubble" apply to bond indices like BND as well?

2) So now that indexing has become "overcrowded" and mainstream, what alternatives as there? What do we do?

3) Do we reduce risk by increasing bond allocation? If index problem Burry describes applies to both stock and bond indices then that will not be a solution?

I'm kind of lost here.

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Re: Index Funds Bubble? [Michael Burry article]

Post by guyinlaw » Mon Sep 09, 2019 12:25 pm

Vision wrote:
Mon Sep 09, 2019 12:07 pm

1) Does this "index fund bubble" apply to bond indices like BND as well?
The might be a high stock market valuation (bubble). I don't think there is any "index fund bubble." In the past many mutual funds were in reality closet index funds. They used to charge high fees, now Index funds do the same with very low fees.

Many people thought in 2015 that market was too high and reduced their stocks allocation. They missed gains over the last 4 years. You can do that today and be lucky. Timing the market is difficult.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Clever_Username » Mon Sep 09, 2019 12:40 pm

Vision wrote:
Mon Sep 09, 2019 12:07 pm
I still don't understand:

1) Does this "index fund bubble" apply to bond indices like BND as well?

2) So now that indexing has become "overcrowded" and mainstream, what alternatives as there? What do we do?

3) Do we reduce risk by increasing bond allocation? If index problem Burry describes applies to both stock and bond indices then that will not be a solution?

I'm kind of lost here.
I still think this is just yet-another-case of an active manager wanting to drum up business by telling people his competition is rubbish. He called one thing correctly and has given ex-post facto reasons for why he did so; there was also a prominent stock broker who sold everything less than a week before the big 2008 crash, and had plenty of ex-post facto reasons for doing so, only to later admit he sold them because he and his wife were going on vacation and she didn't want him checking stocks while they were supposed to be spending time together.

Anyway, to address your issues.

1. I cannot imagine bonds can be in a bubble. How much excess would anyone, anywhere, ever pay for the promise of receiving some interest payments and some money at the end? Let me know if you ever hear of someone quitting their job to day-trade bonds.

2. I doubt they're overcrowded. I think index funds are still a relatively small, but growing, segment of stock purchases.

3. I maintain that the problem he lays out isn't a problem, so I cannot give advice on this.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

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Re: Index Funds Bubble? [Michael Burry article]

Post by InvestInPasta » Mon Sep 09, 2019 5:49 pm

BenfromToronto wrote:
Sat Sep 07, 2019 11:54 am
I know (from experience) I can tolerate a 2001-style 45% crash or a 2018-style 50% crash; I don’t know whether I could tolerate a 1929-style 90% crash.

So, the Burry’s article is leading me, for the first time in 30 years to reconsider my aggressive AA (about 80% stocks; 40% US -including a small-cap tilt- 35% Europe and Japan, and 5% emerging market).
In 1929 index funds didn't exist, but the DOW crashed 90%, hence it's not because of the ETF that the market crashed that way.

If there were no ETF, I would have an equal weighted portfolio that holds the biggest 50-100 stocks. I can't do stock picking anyway, I'm not Buffett.
When studying English I am lazier than my portfolio. Feel free to correct my english and investing mistakes.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Fallible » Mon Sep 09, 2019 6:23 pm

Vision wrote:
Mon Sep 09, 2019 12:07 pm
I still don't understand:

1) Does this "index fund bubble" apply to bond indices like BND as well?

2) So now that indexing has become "overcrowded" and mainstream, what alternatives as there? What do we do?

3) Do we reduce risk by increasing bond allocation? If index problem Burry describes applies to both stock and bond indices then that will not be a solution?
Please, please read this before you worry anymore about a "bubble" that isn't.
It's headlined "Debunking the Silly “Passive is a Bubble” Myth"

https://awealthofcommonsense.com/2019/0 ... bble-myth/

Also, if you are a new investor, please read this earlier post from investment pro Rick Ferri as it will explain most of what is going on with the Burry "bubble":
The active investment industry is suffering, and that included hedge funds. Fees are drying up as money flees high-cost active management. The owners and managers of firms getting hit will say everything and anything to try and stop people from passing them by.

Rick Ferri
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

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Michael Burry: Passive Investments are the Next Bubble

Post by bck63 » Mon Sep 09, 2019 10:40 pm

[Merged here -- mod oldcomputerguy]

Interesting article about Michael Burry of the Big Short fame who states that index funds and ETFs are inflating stock and bond prices in a similar way that collateralized debt obligations did for subprime mortgages more than 10 years ago.

https://www.cnbc.com/2019/09/04/the-big ... ubble.html

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Re: Michael Burry: Passive Investments are the Next Bubble

Post by firebirdparts » Mon Sep 09, 2019 10:41 pm

I think the mods have already merged 3 threads on this.

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Re: Michael Burry: Passive Investments are the Next Bubble

Post by runner3081 » Mon Sep 09, 2019 10:56 pm

firebirdparts wrote:
Mon Sep 09, 2019 10:41 pm
I think the mods have already merged 3 threads on this.
I think we are closer to 10 threads on this :)

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Re: Index Funds Bubble? [Michael Burry article]

Post by ignition » Tue Sep 10, 2019 9:59 am

Vision wrote:
Mon Sep 09, 2019 12:07 pm
I still don't understand:

1) Does this "index fund bubble" apply to bond indices like BND as well?
There is no index fund bubble.
Vision wrote:
Mon Sep 09, 2019 12:07 pm
2) So now that indexing has become "overcrowded" and mainstream, what alternatives as there? What do we do?
It's not overcrowded. Only 15% of the US stock market is indexed. Stay the course.
Vision wrote:
Mon Sep 09, 2019 12:07 pm
3) Do we reduce risk by increasing bond allocation? If index problem Burry describes applies to both stock and bond indices then that will not be a solution?
Just hold an AA you're comfortable with and don't listen to the talking heads in the media.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Whakamole » Thu Sep 12, 2019 1:13 am

Vision wrote:
Mon Sep 09, 2019 12:07 pm
1) Does this "index fund bubble" apply to bond indices like BND as well?
I don't think there is a good answer to this. BND owns a large subset of bonds, but excludes certain bond categories (munis, high yield/junk, TIPS off the top of my head.) It's also weighted towards government bonds, and bonds of intermediate maturity. If you own BND, you have an inherent "tilt" in the bonds that make up the index being tracked.

That doesn't mean this "tilt" is bad - munis are less liquid and there's a lot of angst about pension obligations, junk bonds tend to behave more like equities, TIPS behave differently than regular bonds, long duration bonds have much more interest rate risk, short term bonds tend to have lower yields, etc. The composition of total bond indices is designed around these problems.

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Re: Index Funds Bubble? [Michael Burry article]

Post by ddeemo » Thu Sep 12, 2019 3:32 am

Index funds only create / perpetuate a bubble if the majority of investments are index funds - not likely anytime soon.

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Re: Index Funds Bubble? [Michael Burry article]

Post by msk » Thu Sep 12, 2019 4:52 am

Are stocks over-priced? I feel in my guts, yes! P/Es over 25 is too much for my taste when I am looking for 5% annual appreciation in real terms. But what's the alternative? A crash caused by ETFs lack of liquidity among smaller holdings does not change the underlying earning ability of those smaller stocks. A company's stock price may not necessarily impact it's earnings capacity. Their P/Es will drop but their earnings may not. So we can smile on the dividends being maintained. Dividend yields shoot up. I have intimate experience in a very tiny stock market in a country dependent on oil revenues. Over the past few years the index dropped a factor 3x because of the drop in oil revenues that fuel the economy. My individual holdings (not indexed) also dropped in market value by large percentages. Being a BH I simply kept holding on while studying all the quarterly reports. Guess what. I get the same dividends in $ today as 3 years ago, but my stocks have all fallen massively in market value. My see-through P/E is now a very palatable 10 and my dividend yield is currently 8%. We may not suffer much if our portfolio withdrawals after an ETF liquidity crash can be satisfied fully by the dividends alone. Some previous crashes impacted generalised earning capacity, some not so much. E.g the housing bubble crash dried up all borrowing because it was a banking crash but the internet bubble? Perhaps much more selective.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Sam1 » Thu Sep 12, 2019 4:55 am

Will someone please explain the liquidity factor for me? What do they mean that it will be harder to exit? Do index funds not actually own underlying stocks?

Also, I read that more people investing in index funds is increasing the values. But isn’t this the same thing as more people investing in stocks increasing stock prices? Is there a difference?

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Re: Index Funds Bubble? [Michael Burry article]

Post by JoMoney » Thu Sep 12, 2019 8:17 am

Sam1 wrote:
Thu Sep 12, 2019 4:55 am
Will someone please explain the liquidity factor for me? What do they mean that it will be harder to exit? Do index funds not actually own underlying stocks?

Also, I read that more people investing in index funds is increasing the values. But isn’t this the same thing as more people investing in stocks increasing stock prices? Is there a difference?
The "liquidity factor" in other contexts is a factor in explaining excess returns for certain stocks, I don't think that's the issue in the context of the issues presented here.
Issues have been raised about some ETF's tracking narrow "indexes" where the trading in the ETF has proportionately more volume traded than a lot of its underlying assets. ETF's are generally expected to track the value of its underlying assets because certain agents are allowed to liquidate or create new shares if there gets to be a large enough spread between the ETFs price and the underlying assets. If the agents feel liquidity in the underlying assets isn't there, they may not participate, or may allow the spread to grow much larger than what the ETFs net asset value might suggest. It could also create a vicious cycle, where the ETF falls in value, retail investors sell off the ETF, then the authorized participants break-up ETF shares selling off the underlying assets, further depressing the Net Asset Value of an ETF that may already be trading below NAV... and if there aren't enough buyers in the market, you don't really have a "market" with enough liquidity to properly value it. That may make for an opportunity for a enterprising 'value investor' but not for passive investors expecting "efficient markets".

As far as indexing increasing the price in some stocks, I'm with you if we're talking about broad-market index funds. Some anti-passive investing stories like to blur the lines and bring up issues with narrow funds tracking esoteric "indexes" that isn't really an issue with a broad market fund. A broad market index raises the value of all the stocks, not just certain areas. A small-cap index representing <10% of the market can easily be distorted if people are disproportionately shifting that way. If we're talking about the other >80% of the market being over-priced... well that's basicly the entire market being over-valued, not just an issue for indexing.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Index Funds Bubble? [Michael Burry article]

Post by Sam1 » Thu Sep 12, 2019 8:45 am

JoMoney wrote:
Thu Sep 12, 2019 8:17 am
Sam1 wrote:
Thu Sep 12, 2019 4:55 am
Will someone please explain the liquidity factor for me? What do they mean that it will be harder to exit? Do index funds not actually own underlying stocks?

Also, I read that more people investing in index funds is increasing the values. But isn’t this the same thing as more people investing in stocks increasing stock prices? Is there a difference?
The "liquidity factor" in other contexts is a factor in explaining excess returns for certain stocks, I don't think that's the issue in the context of the issues presented here.
Issues have been raised about some ETF's tracking narrow "indexes" where the trading in the ETF has proportionately more volume traded than a lot of its underlying assets. ETF's are generally expected to track the value of its underlying assets because certain agents are allowed to liquidate or create new shares if there gets to be a large enough spread between the ETFs price and the underlying assets. If the agents feel liquidity in the underlying assets isn't there, they may not participate, or may allow the spread to grow much larger than what the ETFs net asset value might suggest. It could also create a vicious cycle, where the ETF falls in value, retail investors sell off the ETF, then the authorized participants break-up ETF shares selling off the underlying assets, further depressing the Net Asset Value of an ETF that may already be trading below NAV... and if there aren't enough buyers in the market, you don't really have a "market" with enough liquidity to properly value it. That may make for an opportunity for a enterprising 'value investor' but not for passive investors expecting "efficient markets".

As far as indexing increasing the price in some stocks, I'm with you if we're talking about broad-market index funds. Some anti-passive investing stories like to blur the lines and bring up issues with narrow funds tracking esoteric "indexes" that isn't really an issue with a broad market fund. A broad market index raises the value of all the stocks, not just certain areas. A small-cap index representing <10% of the market can easily be distorted if people are disproportionately shifting that way. If we're talking about the other >80% of the market being over-priced... well that's basicly the entire market being over-valued, not just an issue for indexing.
Thank you.

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Index fund bubble???

Post by tstark » Sat Sep 14, 2019 7:52 pm

[Thread merged into here, see below. --admin LadyGeek]

Hi everyone. Came across this article this week about Michael Burry predicting the increased use of index funds will lead to the next market bubble. I’ve heard similar types of analysis and predictions.

https://www.cnbc.com/2019/09/04/the-big ... ubble.html

Does anyone have any thoughts on this? Why is he wrong? As the use of passive investments grows, is this anything to be concerned about into the future?

Thanks!

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