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Can We Survive the Next Financial Crisis?

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Re: Can We Survive the Next Financial Crisis?

#161

Post by darawk »

camjohnson26 wrote: post #109
darawk wrote: post #36

Earlier quoted context omitted.

This is a real misunderstanding of how markets work. An index fund invests in everything, market-cap weighted (usually). This means that your investment merely reinforces the prices already determined by the other participants in the market . There are still huge numbers of active managers, not to mention quants and others. They, collectively, determine the prices of assets. When you invest in an index fund, you're j…

You're saying that an increase in demand won't increase the price. Obviously there are other factors that affect the price too but being in an index fund is absolutely one of them.

No, I am saying that that same demand impacts everyone in the index equally. That's the point of an index fund.

Re: Can We Survive the Next Financial Crisis?

#162

Post by busterarm »

oihoaihsfoiahsf wrote: post #120
kolbe wrote: post #107

Earlier quoted context omitted.

The P in GDP does not stand for Profit. An economy consists of a lot more than private sector profits.

Right. But I'd wager that index fund investors are more interested in profits than GDP, at least as it relates to their investments and the proposition at the top of this thread that index funds will be "ripped" (presumably disproportionately) in the next downturn.

Right. If you have a wide market downturn, all of the "active investors" are going to take their money out as cash and wait to buy and the "passive investors "are going to take a bath.

The mistake that index fund adherents make is that there is no such thing as passive investing.

Certain market participants have been screaming about this fact to anyone who will listen for 2+ years now.

Re: Can We Survive the Next Financial Crisis?

#163

Post by longerthoughts »

zimablue wrote: post #122
kgwgk wrote: post #94

Earlier quoted context omitted.

How does the math work out if the wealthy have much more capital than "the rest of us"? Why have you chosen to keep your capital in assets with below-average return if you know which are the better assets?

Better individual assets or better management of your assets are both gated. Privately held companies, hedge funds, financial managers. The guy who argues the parent point is Piketty in the book Capital.

On top of the access issue is the financial knowledge gap between people of different socioeconomic backgrounds. Not only are people limited in what they can invest in, but they might not even be investing at all.

Re: Can We Survive the Next Financial Crisis?

#164

Post by darawk »

toss1 wrote: post #135
darawk wrote: post #36

Earlier quoted context omitted.

This is a real misunderstanding of how markets work. An index fund invests in everything, market-cap weighted (usually). This means that your investment merely reinforces the prices already determined by the other participants in the market . There are still huge numbers of active managers, not to mention quants and others. They, collectively, determine the prices of assets. When you invest in an index fund, you're j…

> basically. It doesn't cause amazon to rise in price. Actually, it does. Whenever a company is added to one of the major indexes, it almost always increases in price, and conversely, when one is removed, it generally declines. This is specifically because of all of the index funds that suddenly must put money into/remove it from the stock when it is added/removed from the index. Supply, Demand, price curves, you kno…

Yes, but it impacts everyone in the index equally. Index funds are not responsible for amazon in particular's performance.

Re: Can We Survive the Next Financial Crisis?

#165

Post by toss1 »

darawk wrote: post #164
toss1 wrote: post #135

Earlier quoted context omitted.

> basically. It doesn't cause amazon to rise in price. Actually, it does. Whenever a company is added to one of the major indexes, it almost always increases in price, and conversely, when one is removed, it generally declines. This is specifically because of all of the index funds that suddenly must put money into/remove it from the stock when it is added/removed from the index. Supply, Demand, price curves, you kno…

Yes, but it impacts everyone in the index equally. Index funds are not responsible for amazon in particular's performance.

around the time they add/remove Amazon (or company X) to the index, they do enhance or detract from it's performance.

Of course, when't it's there for years, it merely adds a relatively steady-state chunk to their price, affecting the level of their price curve, but not so much the slope.

Re: Can We Survive the Next Financial Crisis?

#166

Post by [deleted] »

travisoneill1 wrote: post #82
darawk wrote: post #57

> The leveraged loans are now being packaged into collateralized loan obligations and sold to investors. Sound familiar? And the CLO market has grown to match the size of the CDO market at its pre-crisis peak. Yet one major difference makes the CLOs of today less scary: The loans that comprise them are backed by collateral, and if one of the companies in the mix defaults, an investor can find recourse through the sal…

Yeah, that doesn't make any sense. The reason CDO's were underwater is because the price of housing dropped and left the collateral worth less than the principal of the loan. Loans to companies follow the same principal. If the value of companies suddenly drops same thing. It's a weird statement and is directly contradicted by the next paragraph in the article.

[deleted]

Re: Can We Survive the Next Financial Crisis?

#167

Post by noobermin »

Brybry wrote: post #155
noobermin wrote: post #106

Earlier quoted context omitted.

The distance between the average and the median is staggering. This should be why you always should be suspicious when someone uses an average as a good statistic for wealth or income in the US.

I assume you intend "mean" instead of "average". Mean, median, and mode are all averages and a lot of statistics actually refer to median when they say "average".

I suppose. That's why I referred to the median and average as a "statistic" and distinct, although that may be just the way I've been used to talking about it.

Re: Can We Survive the Next Financial Crisis?

#168

Post by blevin »

ram_rar wrote: post #19
jorblumesea wrote: post #7

Earlier quoted context omitted.

If you bought an actively managed fund 30 years ago, it was literally an index fund with more fees attached. Active managers actually just index, but try hard to obfuscate this fact to justify their high fees. If you dive into their books, they are basically buying the market. I think it begs the question, how active was/is active? The math is clear, you are statistically unlikely to beat the market.

But, what if everybody only buys index funds and there arent any active players anymore ? I am not an expert in this field, but I do feel that the passive nature of index funds has been benefiting greatly from the actions of active investors.

Philosophical Economics has a thoughtful essay on this: https://www.philosophicaleconomics.com/2016/05/passive/

I’m going to argue that the trend towards passive management is not only sustainable, but that it actually increases the accuracy of market prices. It does so by preferentially removing lower-skilled investors from the market fray, thus increasing the average skill level of those investors that remain. It also makes economies more efficient, because it reduces the labor and capital input used in the process of price discovery, without appreciably impairing the price signal.

Re: Can We Survive the Next Financial Crisis?

#169

Post by radlad »

chimeracoder wrote: post #153
y-c-o-m-b wrote: post #105

Earlier quoted context omitted.

I disagree. Net worth is an unstable data point and I always view it as a status symbol more than a realistic means of acquiring cash. For example in a market where nobody is willing (or able) to buy your home, your net worth can be ... well, worthless. In a financial crisis it's even worse. Your "on-demand" cash is what's in your checking or savings account. There's no guarantee you'll be able to tap into your home,…

> For example in a market where nobody is willing (or able) to buy your home, your net worth can be ... well, worthless No, because if it's true that nobody is willing to buy your home, your home isn't worth the $300,000 you're claiming it is. There's no single metric that works for all situations, but net worth is the best way to compare financial health between people and across a population in a meaningful way.

It may be worth $300,000 today, but after the next mortgage crisis, it may be worth a fraction of that.

Similarly, for your investments, if the stock market takes a huge hit, your net worth will instantly become a fraction of what it currently is.

Cash will still be cash. (But also maybe worth less!)

Re: Can We Survive the Next Financial Crisis?

#170

Post by chimeracoder »

radlad wrote: post #169
chimeracoder wrote: post #153

Earlier quoted context omitted.

> For example in a market where nobody is willing (or able) to buy your home, your net worth can be ... well, worthless No, because if it's true that nobody is willing to buy your home, your home isn't worth the $300,000 you're claiming it is. There's no single metric that works for all situations, but net worth is the best way to compare financial health between people and across a population in a meaningful way.

It may be worth $300,000 today, but after the next mortgage crisis, it may be worth a fraction of that. Similarly, for your investments, if the stock market takes a huge hit, your net worth will instantly become a fraction of what it currently is. Cash will still be cash. (But also maybe worth less!)

> It may be worth $300,000 today, but after the next mortgage crisis, it may be worth a fraction of that. Similarly, for your investments, if the stock market takes a huge hit, your net worth will instantly become a fraction of what it currently is. Cash will still be cash. (But also maybe worth less!)

There is no asset (including cash) that is guaranteed to preserve its value across arbitrary amounts of time under all circumstances. Even TIPS could theoretically be worthless if the government collapses.

That doesn't mean that net worth isn't still an excellent normalized comparison between arbitrary people or parts of a population today, which is exactly what we're talking about.

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