Index Funds Bubble? [Michael Burry article]

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DoctorPhysics
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Re: Index fund bubble???

Post by DoctorPhysics » Sat Sep 14, 2019 7:55 pm

viewtopic.php?t=289284

Read the above discussion


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JoMoney
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Re: Index fund bubble???

Post by JoMoney » Sat Sep 14, 2019 8:03 pm

Sometimes the stock market gets "frothy" or "irrationally exuberant". This happened before index funds existed, it will happen again.
Broad-market stock index fund investors will get the same aggregate return as the aggregate of active stock investors... for better or worse... The indexer will just pay less for it.
"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 LadyGeek » Sat Sep 14, 2019 8:37 pm

I merged tstark's thread into the on-going discussion. The combined thread is in the Investing - Theory, News & General forum.
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Re: Index Funds Bubble? [Michael Burry article]

Post by columbia » Sat Sep 14, 2019 8:58 pm


InvestInPasta
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Re: Index Funds Bubble? [Michael Burry article]

Post by InvestInPasta » Sun Sep 15, 2019 12:20 pm

columbia wrote:
Sat Sep 14, 2019 8:58 pm
Mr. Swedroe commented on this:
https://www.evidenceinvestor.com/talk-o ... t-hot-air/
So far it's:
Rick Ferri + Ben Carlson + Larry Swedroe
vs
the man of the Big Short.

:beer + popcorn
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 » Sun Sep 15, 2019 1:08 pm

columbia wrote:
Sat Sep 14, 2019 8:58 pm
Mr. Swedroe commented on this:
https://www.evidenceinvestor.com/talk-o ... t-hot-air/
Larry's good article, titled "Talk of a Passive Bubble is Just Hot Air," shows how passive "bubble" talk is not new, where it comes from and why, and why - even though attacks on passive investing are "absurd and easily exposed as such" - the talk probably will just keep coming. Thankfully, we can continue to expose them by reading the comments on this thread, in particular from Rick Ferri, Ben Carlson, and Larry Swedroe.
"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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exarkun
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Re: Index Funds Bubble? [Michael Burry article]

Post by exarkun » Tue Sep 17, 2019 12:54 pm

Another article by the AP today raises similar talking points about distortion and concentration in just a few companies.

https://www.apnews.com/f0445635ad504028bfbaace8f778f22c

If index funds get control of too much of the stock market, they could distort prices because money will flow into stocks based on how big a proportion they are of indexes, rather than how valuable investors see them as a company. Even the most ardent index-fund proponents acknowledge such a risk, but they say that tipping point is far away. U.S. funds control only about 30% of the total U.S. stock market.

Other criticisms center on index funds being overly concentrated in the hands of just a trio of fund companies — BlackRock, State Street Global Advisors and Vanguard.

pdavi21
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Re: Index Funds Bubble? [Michael Burry article]

Post by pdavi21 » Tue Sep 17, 2019 1:28 pm

I've been thinking about indexing and it's implications on the market. Please correct me if I'm way off base, but I have been considering the indexing "bubble" as more of a potential plateau (lower risk/lower return). It seems as though, the more investors favor passive investing, the more constant inflows/outflows and less frequent sell-offs become. Active investors have to behave more insanely to keep the market risky. If they don't do that, the stock market will become less risky and future returns will be depressed.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Index Funds Bubble? [Michael Burry article]

Post by dspencer » Tue Sep 17, 2019 2:02 pm

pdavi21 wrote:
Tue Sep 17, 2019 1:28 pm
I've been thinking about indexing and it's implications on the market. Please correct me if I'm way off base, but I have been considering the indexing "bubble" as more of a potential plateau (lower risk/lower return). It seems as though, the more investors favor passive investing, the more constant inflows/outflows and less frequent sell-offs become. Active investors have to behave more insanely to keep the market risky. If they don't do that, the stock market will become less risky and future returns will be depressed.
This might be true but it assumes that index fund investors are also buy and hold investors who won't panic sell. That may or may not be true. There's no reason a person can't buy and sell an ETF multiple times a day if they wish. Also, there's no reason that "passive" investors can't give up on buy and hold during a downturn if they get nervous.

I do think it's possible that low fees and simplicity can lead to a higher plateau (plateau mean more like an average of long term valuations rather than a true floor) if unsophisticated investors choose to invest in index funds rather than leaving money in a savings account.

pdavi21
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Re: Index Funds Bubble? [Michael Burry article]

Post by pdavi21 » Tue Sep 17, 2019 2:11 pm

dspencer wrote:
Tue Sep 17, 2019 2:02 pm
pdavi21 wrote:
Tue Sep 17, 2019 1:28 pm
I've been thinking about indexing and it's implications on the market. Please correct me if I'm way off base, but I have been considering the indexing "bubble" as more of a potential plateau (lower risk/lower return). It seems as though, the more investors favor passive investing, the more constant inflows/outflows and less frequent sell-offs become. Active investors have to behave more insanely to keep the market risky. If they don't do that, the stock market will become less risky and future returns will be depressed.
This might be true but it assumes that index fund investors are also buy and hold investors who won't panic sell. That may or may not be true. There's no reason a person can't buy and sell an ETF multiple times a day if they wish. Also, there's no reason that "passive" investors can't give up on buy and hold during a downturn if they get nervous.

I do think it's possible that low fees and simplicity can lead to a higher plateau (plateau mean more like an average of long term valuations rather than a true floor) if unsophisticated investors choose to invest in index funds rather than leaving money in a savings account.
Thanks, I was assuming that. Good points.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

dspencer
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Re: Index Funds Bubble? [Michael Burry article]

Post by dspencer » Tue Sep 17, 2019 2:23 pm

pdavi21 wrote:
Tue Sep 17, 2019 2:11 pm
dspencer wrote:
Tue Sep 17, 2019 2:02 pm
pdavi21 wrote:
Tue Sep 17, 2019 1:28 pm
I've been thinking about indexing and it's implications on the market. Please correct me if I'm way off base, but I have been considering the indexing "bubble" as more of a potential plateau (lower risk/lower return). It seems as though, the more investors favor passive investing, the more constant inflows/outflows and less frequent sell-offs become. Active investors have to behave more insanely to keep the market risky. If they don't do that, the stock market will become less risky and future returns will be depressed.
This might be true but it assumes that index fund investors are also buy and hold investors who won't panic sell. That may or may not be true. There's no reason a person can't buy and sell an ETF multiple times a day if they wish. Also, there's no reason that "passive" investors can't give up on buy and hold during a downturn if they get nervous.

I do think it's possible that low fees and simplicity can lead to a higher plateau (plateau mean more like an average of long term valuations rather than a true floor) if unsophisticated investors choose to invest in index funds rather than leaving money in a savings account.
Thanks, I was assuming that. Good points.
The assumption may very well be true, I just don't have any data to prove it one way or another. There are many financial advisors who would claim that part of their value comes from not selling during/after big downturns and counseling clients through them. I'd love to know if there's any research done on these questions.

cheezit
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Re: Index Funds Bubble? [Michael Burry article]

Post by cheezit » Tue Sep 17, 2019 3:05 pm

dspencer wrote:
Tue Sep 17, 2019 2:23 pm
pdavi21 wrote:
Tue Sep 17, 2019 2:11 pm
dspencer wrote:
Tue Sep 17, 2019 2:02 pm
pdavi21 wrote:
Tue Sep 17, 2019 1:28 pm
I've been thinking about indexing and it's implications on the market. Please correct me if I'm way off base, but I have been considering the indexing "bubble" as more of a potential plateau (lower risk/lower return). It seems as though, the more investors favor passive investing, the more constant inflows/outflows and less frequent sell-offs become. Active investors have to behave more insanely to keep the market risky. If they don't do that, the stock market will become less risky and future returns will be depressed.
This might be true but it assumes that index fund investors are also buy and hold investors who won't panic sell. That may or may not be true. There's no reason a person can't buy and sell an ETF multiple times a day if they wish. Also, there's no reason that "passive" investors can't give up on buy and hold during a downturn if they get nervous.

I do think it's possible that low fees and simplicity can lead to a higher plateau (plateau mean more like an average of long term valuations rather than a true floor) if unsophisticated investors choose to invest in index funds rather than leaving money in a savings account.
Thanks, I was assuming that. Good points.
The assumption may very well be true, I just don't have any data to prove it one way or another. There are many financial advisors who would claim that part of their value comes from not selling during/after big downturns and counseling clients through them. I'd love to know if there's any research done on these questions.
Look at some of the Vanguard papers cited here: https://awealthofcommonsense.com/2014/0 ... investors/

Also, I can't find the article where they talked about it but Fido increased the equity allocation in some of their target funds supposedly because the investors in said funds did better than Fido expected at staying the course.

cb474
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Re: Index Funds Bubble? [Michael Burry article]

Post by cb474 » Wed Sep 18, 2019 6:02 pm

In Swedroe's article he comments, regarding the returns of the S&P 500 in 2019:
The gap between the top and bottom performers was 152 percent, presenting active managers with a great opportunity to add value. Demonstrating how absurd the criticism of passive investing is, if it were driving prices and destroying the price-discovery function, we would not have seen such wide disparity in returns. https://www.evidenceinvestor.com/talk-o ... t-hot-air/
Can someone explain that to me? Why would there be less disparity between the returns of the top and bottom performing stocks in the S&P 500, if passive investing were actually distorting prices and producing and "passive index bubble"?

alex123711
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Re: Index Funds Bubble? [Michael Burry article]

Post by alex123711 » Thu Sep 19, 2019 12:19 am

I would be interested to hear Warren buffets opinion on this, if he has made one?

All Seasons
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Re: Index Funds Bubble? [Michael Burry article]

Post by All Seasons » Thu Sep 19, 2019 12:38 am

When Batman tells you that the world’s index funds are a bubble, we should all listen. :wink:
The market portfolio is always a legitimate portfolio.

DonIce
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Re: Index Funds Bubble? [Michael Burry article]

Post by DonIce » Thu Sep 19, 2019 12:50 am

Ok so as best as I can find on the internet, this is what Burry actually said or was reported to have said:
[P]assive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.

This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis, in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.

According to Burry, passive funds can inflate the prices of the underlying securities they represent, exerting upward pressure without introducing real liquidity (just like CDOs). As Burry wrote, “the theater keeps getting more crowded, but the exit door is the same as it always was.”

Burry also worried that the derivatives used to correlate stocks and indices could be very difficult to unwind should the market go into free-fall. In such an environment, traders seeking to arbitrage price differences between indices and their underlying securities could get their faces ripped off.
A few things to unpack here:

1) Price discovery. Is the price discovery of, say, the bottom half of S&P500 companies by market cap being distorted? Is the price of Macy's (#487 in the S&P500) more affected by the price movements of the top 10 S&P500 companies (Microsoft, Apple, Amazon, etc) than by its own performance? This should be a simple question to answer.

2) Yes, a lot of investing in the market is based on models and strategies and general guidelines, rather than by every investor analyzing every individual security. But, was there ever really a situation in which every investor was analyzing every individual security in a meaningful way? How much useful security analysis did the average active fund manager of 20 years ago really do? Or were they just following the herd?

3) The hypothesis of passive funds inflating underlying securities can be tested. Just need to compare two similar companies, one that happens to be included in a prominent passive index fund, and one that is not. If the value inflation is significant (more than 10%, lets say), then the effect should quickly become extremely obvious from a rigorous comparison of a few dozen of such pairs of companies. Presumably it should be easy to pick such pairs since there should be many companies that are not quite big enough to fall within the S&P500 which many of the most popular funds track, but are not that much smaller (i.e. there should be plenty of companies in places 600-500 that are comparable to companies in places 500-400).

4) Derivatives trading based on indexes like the S&P500 could be a problem. What is the relative volume of derivatives trading compared to the trading of actual underlying shares? Trying to quickly google about these numbers it seems like derivatives volume is maybe 5-10x the volume of underlying actual shares traded. Is this too much? What kind of ratio is sustainable given typical market downturn without causing systemic problems, given the levels of capital that must be maintained by investment banks and funds? What was the ratio of derivative volumes of CDOs/CDSs compared to the underlying volume of home loans leading up to 2008?

Part of the problem leading up to 2008 was the mistaken belief on the part of many participants in the CDO/CDS markets that the underlying assets (home loans) were extremely safe and were extremely unlikely to default in large numbers simultaneously. This turned out to be a false belief. In comparison, it seems more likely that more participants in derivatives trading based on equities have a fuller appreciation of the possible price swings of equities, and therefore should be pricing the risk closer to reality?

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Re: Index Funds Bubble? [Michael Burry article]

Post by InvestInPasta » Wed Oct 02, 2019 2:53 am

exarkun wrote:
Tue Sep 17, 2019 12:54 pm
Other criticisms center on index funds being overly concentrated in the hands of just a trio of fund companies — BlackRock, State Street Global Advisors and Vanguard.[/i]
In Europe the biggest ones are BlackRock (iShares), Société Générale (Lyxor), Deutsche Bank (Xtrackers)
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 Valuethinker » Wed Oct 02, 2019 4:37 am

InvestInPasta wrote:
Wed Oct 02, 2019 2:53 am
exarkun wrote:
Tue Sep 17, 2019 12:54 pm
Other criticisms center on index funds being overly concentrated in the hands of just a trio of fund companies — BlackRock, State Street Global Advisors and Vanguard.[/i]
In Europe the biggest ones are BlackRock (iShares), Société Générale (Lyxor), Deutsche Bank (Xtrackers)
I think the scale though of Blackrock Vanguard State Street is on the order of 10x SG & DB? I have not checked.

What you and I see with the latter is retail presence, ie UCITS VI compliant funds/ ETFs, but retail investors are a far smaller group of people in Europe and with less assets/ person I suspect. (that might be wrong if we include the private clients of Swiss banks).

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Re: Index Funds Bubble? [Michael Burry article]

Post by Valuethinker » Wed Oct 02, 2019 4:44 am

pdavi21 wrote:
Tue Sep 17, 2019 1:28 pm
I've been thinking about indexing and it's implications on the market. Please correct me if I'm way off base, but I have been considering the indexing "bubble" as more of a potential plateau (lower risk/lower return). It seems as though, the more investors favor passive investing, the more constant inflows/outflows and less frequent sell-offs become. Active investors have to behave more insanely to keep the market risky. If they don't do that, the stock market will become less risky and future returns will be depressed.
I doubt indexation serves as a stabilizer.

Higher indexation implies less active managers, and the greater ability for an active investor to drive the share price (since index funds only respond to cash inflows/ outflows to the fund).

In actual practice we seem to have hyperactivity - the rise and rise of flash-traders, High Frequency Traders, to become the majority of all equity trades, and the growing off market nature of those trades (via so-called Dark Pools). Also you have hedge funds, which are far more active traders than the average long-only mutual fund or pension fund.

I suspect the percentage of active traders you need to ensure efficient security pricing is not huge. Perhaps 20% of all funds out there.

What you are seeing is disruption. Future returns are likely to be far lower than past returns - 1-2% for bonds, 4-6% for equities. In that world, costs matter (a lot). And index funds have proven to be far better ways of getting the equity or bond exposure than active management. The industry does not beat its own benchmarks.

So paying 10-20 basis points retail (0.1-0.2%) vs. paying 1-2%? That could be 25% of your returns.

Disruption. Disruption has come to fund management, just as it did to cameras or fixed line telcos or department stores or electricity generation*. And is coming to cars (Autonomous Vehicles, Electric Vehicles).

* the gas fired Combined Cycle turbines that emerged in the early 1990s, plus the impact of cheap new sources of natural gas, has thoroughly disrupted the whole way the utility industry works, globally. That's now happening again with renewables - hence GE's malaise.

anoop
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Re: Index Funds Bubble? [Michael Burry article]

Post by anoop » Thu Oct 03, 2019 12:38 am

She has a book to sell -- Non-consensus investing.
https://finance.yahoo.com/video/ariel-i ... 12084.html

Somewhat off topic (apologies), but this is another interesting story.
https://www.marketwatch.com/story/meet- ... 2019-09-30

firebirdparts
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Re: Index Funds Bubble? [Michael Burry article]

Post by firebirdparts » Thu Oct 03, 2019 12:14 pm

anoop wrote:
Thu Oct 03, 2019 12:38 am
She has a book to sell -- Non-consensus investing.
https://finance.yahoo.com/video/ariel-i ... 12084.html
I know it's hard to really prove anything in a short little TV spot, but it seems like her points were fluffy. She really was just saying "passive bad active good" on the show. I am a fundamentalist, and I understand that adult people need to think about what these stocks are actually worth. If all these people disappear, yes, you have a problem.

When asked about the actual topic of her book, it sounds exactly like what Fred Schwed wrote about the effects of coin flipping in 1940. Yes a few people will say "look at me! I am smarter than the other investors" if they flip heads 4 tries in a row, but that does nothing to improve their coin flipping skills in the future. She wasn't really trying to suggest anything more than that about her book on the show. If she meant to, she'll have to go back on the show and try again.

pvanryn
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Is Your Retirement Fund Ruining Our Economy?

Post by pvanryn » Tue Oct 08, 2019 7:17 am

[Merged here -- mod oldcomputerguy]

I just read this article https://www.npr.org/sections/money/2019 ... paign=news over at NPR.

It makes me nervous - I am fully invested in a three factor portfolio. Can any of the big brains here at Bogleheads point me to the counterargument?

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Re: Is Your Retirement Fund Ruining Our Economy?

Post by Jack FFR1846 » Tue Oct 08, 2019 7:33 am

Not a big brain, but one isn't needed to find the humungous hole in his argument. He states that because index funds don't buy and sell all the time, price discovery isn't going on for stocks. Oh, really? So nobody at all is buying and selling stocks outside of index funds, eh? He says that because of this (false) assumption, stocks are overvalued. Really? And so I would then expect that all of these smart active traders and all of these supercomputer driven robo investors would easily sense this and short those overvalued stocks.
Bogle: Smart Beta is stupid

firebirdparts
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Re: Index Funds Bubble? [Michael Burry article]

Post by firebirdparts » Tue Oct 08, 2019 7:37 am

The first part of the NPR article has been discussed here ad nauseum. It’s simply false. In his final boglehead speech, Bogle himself commented on the second part. It’s simply true. It’s not exactly going to hurt anything, but at some point the US government could decide to change the landscape by force.

retire2022
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Re: Index Funds Bubble? [Michael Burry article]

Post by retire2022 » Tue Oct 08, 2019 7:57 am

All check out this graph if no one posted this

https://www.visualcapitalist.com/chart- ... llar-club/

KlangFool
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Re: Index Funds Bubble? [Michael Burry article]

Post by KlangFool » Tue Oct 08, 2019 8:20 am

retire2022 wrote:
Tue Oct 08, 2019 7:57 am
All check out this graph if no one posted this

https://www.visualcapitalist.com/chart- ... llar-club/
retire2022,

As per the chart, the #1 asset manager is BlackRock. Is that index fund/ETF too? Or something else.

KlangFool

columbia
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Re: Is Your Retirement Fund Ruining Our Economy?

Post by columbia » Tue Oct 08, 2019 9:14 am

pvanryn wrote:
Tue Oct 08, 2019 7:17 am
[Merged here -- mod oldcomputerguy]

I just read this article https://www.npr.org/sections/money/2019 ... paign=news over at NPR.

It makes me nervous - I am fully invested in a three factor portfolio. Can any of the big brains here at Bogleheads point me to the counterargument?
Note to self: do not listen to Planet Money podcast again.

Notlad
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Are Vanguard index funds contributing to a market bubble that will eventually burst?

Post by Notlad » Tue Oct 08, 2019 3:10 pm

[Merged here -- mod oldcomputerguy]

]ust saw this story at NPR. https://www.npr.org/sections/money/2019 ... ur-economy

The gist of it is, Michael Burry (whose story was dramatized in the book and movie, The Big Short) sees a massive bubble in index funds. “Burry believes the fall of active buying and selling has led to overvaluations, and he's predicting a crash in the value of the large companies held in index funds." I'm not sure what to make of it. Any views?

Independent George
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Re: Index Funds Bubble? [Michael Burry article]

Post by Independent George » Tue Oct 08, 2019 4:32 pm

I can easily imagine we're in a market bubble and that we're bound for a crash. What I don't see is how passive indexing is either creating or exacerbating that bubble, especially as compared to the active traders (both today and in crashes past).

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HanSolo
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Re: Index Funds Bubble? [Michael Burry article]

Post by HanSolo » Tue Oct 08, 2019 5:06 pm

alex123711 wrote:
Thu Sep 19, 2019 12:19 am
I would be interested to hear Warren buffets opinion on this, if he has made one?
Warren Buffett suggested that a low-cost index fund is probably the best investment most people could make.

https://www.youtube.com/watch?v=rEX81lGhMwM

metacritic
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Re: Index Funds Bubble? [Michael Burry article]

Post by metacritic » Tue Oct 08, 2019 6:14 pm

Here is a key part of the NPR article that concerns me:

https://www.npr.org/sections/money/2019 ... ur-economy [link fixed by admin LadyGeek]

"In this Giant Three scenario, three investment managers would largely dominate shareholder voting in practically all significant U.S. companies that do not have a controlling shareholder," Bebchuk and Hirst warn. They fear this could have drastic implications for corporate governance and competition.

Another group of scholars, Eric A. Posner, Fiona Scott Morton, and E. Glen Weyl, argue these gigantic institutional investors are already posing a threat to a healthy marketplace. And they urge the federal government to adopt new rules that limit institutional investors from owning large stakes in multiple companies in the same industry."

If this group were successful in their lobbying, and certainly Posner has been many times, it would eviscerate opportunity for individuals to accumulate wealth using the techniques as we advocated here.

firebirdparts
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Re: Index Funds Bubble? [Michael Burry article]

Post by firebirdparts » Tue Oct 08, 2019 6:47 pm

Not really. It might be a little more costly to do what we already do, but it doesn’t seem like you’d have to actually stop.

Since were on the subject, though it seems to me USA corporate governance is badly in need of an overhaul and this reality is more of an opportunity than a problem. Imagine if these guys voting 500 billion shares did to executive cost what they’ve already done to investing cost.

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

Post by germark » Thu Oct 10, 2019 12:05 pm

John Doe 123 wrote:
Wed Sep 04, 2019 9:57 am
germark wrote:
Wed Sep 04, 2019 9:24 am
I read the article and I think that he makes a good point.
I agree, a very good point... I'm just not sure that there's a better way than passive index funds, as I don't have the time to do security level analysis on thousands of equities, and I also don't think there are any actively managed funds that are worth the fees to do this analysis for me... so I guess I'm going down with the ship.
I'm in exactly the same boat. I suspect that the total market index funds are less susceptiple to the kind of explotation / hacking that he is trying to do than other funds. Fingers crossed!

petulant
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Re: Index Funds Bubble? [Michael Burry article]

Post by petulant » Thu Oct 10, 2019 1:01 pm

Maybe Vanguard and BlackRock should split their voting power across multiple independent proxy entities.

firebirdparts
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Re: Index Funds Bubble? [Michael Burry article]

Post by firebirdparts » Thu Oct 10, 2019 1:27 pm

pdavi21 wrote:
Tue Sep 17, 2019 1:28 pm
I've been thinking about indexing and it's implications on the market. Please correct me if I'm way off base, but I have been considering the indexing "bubble" as more of a potential plateau (lower risk/lower return). It seems as though, the more investors favor passive investing, the more constant inflows/outflows and less frequent sell-offs become. Active investors have to behave more insanely to keep the market risky. If they don't do that, the stock market will become less risky and future returns will be depressed.
here is what I think about "selloff"s. Untraded shares have no effect at all on the stated price. Therefore, the assumption of buy and hold investors doesn't help at all. In fact, it hurts. That's what I think.

In all auctions, 2 people (and only 2) determine the price. There can be many bystanders. In a market like the stock market, when people trade, only two people have to agree on this price. When they're done, some bystanders could potentially trade. They're not bidding on one item, they're bidding on millions of items that all have the same value. If no new information is available, at some point you reach an equilibrium, where everybody who wants it has it and everybody who has it wants it. That is my definition of equilibrium.

When the price moves, let's say "new information" becomes available. All the people change their opinion of the stock's value. They can trade based on the new opinions. Trading occurs until it's back in equilibrium, meaning everybody who wants to own it at the price of that moment actually owns it. if you want to call this a selloff, then certainly every share sold has to be bought, and these buyers have to choose to buy this. They have an opinion. This is how stock prices are set.

The effect of indexing is that (as has been repeatedly pointed out by these alarmists) there are fewer people working on the above auction. Index investors may trade, but they care not for the value of the stock. You would think that with fewer people to trade with who have an opinion, at some point you'd notice more volatility during a selloff, not less. You would think that. However, we may have 10,000 times the number of people trading we actually need, for all I know.

As more people index, liquidity problems should be noticeable if you just look at small enough stocks. You would think.

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