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Why Index Funds Are Like Subprime CDOs

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Re: Why Index Funds Are Like Subprime CDOs

#201

Post by edmundsauto »

gizmo686 wrote: post #170
edmundsauto wrote: post #165

Earlier quoted context omitted.

I think all available evidence points to active investors NOT being good at guessing the future, when compared to the general consensus. The second half of your argument seems like an interesting opinion, but I'm curious where the evidence is for it.

What do you mean by "general consensus"? If you mean "current market values", then those are being set by the aggragate opinions of active traders. If there are less active traders, there is less brainpower being devoted to finding this consensus, so it would be suprising if the consensus did not get less accurate.

Isn't the price set by everyone, not just the active traders? It's set each time a sale happens, but the price itself is also related to how many people are holding the stock long term.

I don't really consider it possible for pricing to be "accurate". It is what it is, but accurate implies there's a correct valuation, which I don't think there is.

Re: Why Index Funds Are Like Subprime CDOs

#202

Post by toast0 »

candiodari wrote: post #188
ptero wrote: post #158

Earlier quoted context omitted.

It could be more serious than the flash crash (again, just an interpretation). Flash crash gets resolved quickly and is transparent to non-participants because there is a lot of money willing to buy on dips. But fast trading money only buys and sells what they perceive to be highly liquid assets -- there are few things that scare them more than being stuck with an open trade. The scenario Burry describes is akin to C…

The fundamental reason this happens is that Index Funds aren't "real" stocks. You cannot really sell SPY. There is a bucket of shares owned by SPY. Those contain shares of the index' companies. There's an "owned by clients" bucket and there's a "share liquidity reserve" bucket (with shares of companies in the fund). There's also a (small) liquidity "bucket of cash". And of course, that company can, subject only to it…

Mutual funds usually redeem in cash, but they can also redeem in shares -- if some component of the index becomes untradeable, and becomes a significant enough holding, the fund should just give the shares to people who want out of the fund.

Re: Why Index Funds Are Like Subprime CDOs

#203

Post by [deleted] »

markbnj wrote: post #58

Not knowledgeable on these matters, so my money is in index funds. Obviously a lot of other people are in the same category as myself. The article seems to be saying we'd all be better financial citizens if we put our money into actively managed funds, or did our own investing. The latter is out of reach for most people, and with respect to the former it's somewhat puzzling that managed funds can't consistently outpe…

[deleted]

Re: Why Index Funds Are Like Subprime CDOs

#204

Post by swsieber »

basch wrote: post #115
swsieber wrote: post #104

Earlier quoted context omitted.

Huh. I thought standard index fund advice was to split up you investments. I have 25% (of my investments) in a small cap fund. Does that count as ignored, or am I an outlier?

A total market index fund is proportioned by market cap. As the large cap gets larger, it proportionally becomes a higher percent of the pie. If large cap is overvalued, youre owning less small cap than "true price market cap."

Ah got it. So I by sharding my investment into several different different targeted funds (with auto-rebalancing) avoid that issue.... I think.

Re: Why Index Funds Are Like Subprime CDOs

#205

Post by Retric »

OrangeMango wrote: post #174
ptero wrote: post #140

Earlier quoted context omitted.

I will try to interpret, but obviously it is just my interpretation (and personally I mostly agree with many theses Burry gave). First, he does not really talk about being a "good citizen" or not. His points are for "greedy citizens" who, in his view, should be worried (about his pocketbook) if he is heavily invested in passive index funds. This is due to his "bigger and bigger crowds, same exits" analogy: individual…

> What happens if there is a small, but synchronized outflow for any reason? If customers ask for 1% of index funds to be sold, index funds have to sell 1% of their holdings in the exact ratios defined by the index That's pretty interesting. In 2019, the average daily trading volume of Berkshire Hathaway (class A) was 0.04% of the total shares outstanding. If all people that held this stock were forced to sell 1% of…

Index funds can and generally should skip Berkshire Hathaway class A and just buy class B stocks without issue. It’s meaningless in this context.

The SP500 has a long tail 150M on a 20B dollar company, which is the median, is 0.75% per day that’s quite a bit of motion normally but you expect volatility to go up on a major sell off.

Anyway, if 1% of all money is removed from index funds on the same day whatever caused that is also going to cause the market is going to crash and crash hard. It would take something like an outbreak of Ebola in NYC to get that kind of a reaction.

Re: Why Index Funds Are Like Subprime CDOs

#206

Post by hindsightbias »

mtberatwork wrote: post #67
hindsightbias wrote: post #37

Earlier quoted context omitted.

Much of the market gain is around handfuls of stocks like FAANGs. And our leader has issues with 4 of those. So there is a very closely coupled lever to the market. I wonder if there are high speed shorts triggered by twitter already.

> I wonder if there are high speed shorts triggered by twitter already. There are: https://www.marketplace.org/2019/08/29/meet-the-algorithms-c...

Amazing. Would it be insider trading if twitter held his tweets for 5 seconds and sold early rights to the content?

Twitter Flash Trade Platform?

Re: Why Index Funds Are Like Subprime CDOs

#207

Post by sailfast »

markbnj wrote: post #58

Not knowledgeable on these matters, so my money is in index funds. Obviously a lot of other people are in the same category as myself. The article seems to be saying we'd all be better financial citizens if we put our money into actively managed funds, or did our own investing. The latter is out of reach for most people, and with respect to the former it's somewhat puzzling that managed funds can't consistently outpe…

The point of the article for me is that all of this capital in one place is bad for contagion, and there’s no backstop to even small fluctuations downward / sell-offs that will end up zeroing out the wealth of most index investors. In that way it resembles all the capital in CDOs - but this time instead of being held by banks that can get bailed out it’s being held by individuals. Woof.

Bottom line - they look low risk until they’re absolutely not low risk because of these properties.

As an average investor I’d say diversify is still a good strategy. Don’t just do US Market index funds. Global stocks, bonds, and other small-cap stock collections might help hedge risk of large-caps going bust. Most passive-style funds also have these options. Not an active investor. Just a dude playing a dude disguised as another dude. This is not investment advice.

Re: Why Index Funds Are Like Subprime CDOs

#208

Post by swsieber »

edmundsauto wrote: post #163
bgilroy26 wrote: post #126

Earlier quoted context omitted.

I think the big moment, if it comes, is when you can envision the difference between how people value the asset in question and how that asset is actually valued. In the case of the housing market, most people in 2003 pictured suburbification and the generation of baby boomer retirement communities as inevitable economic engines. But in the same era, Arrested Development the TV show was skewering over-production of p…

Is your suggestion that overproduction of housing is what caused the bubble?

I could see overproduction of housing as a sign of the bubble. E.g. why are we suddenly giving out more loans?

Re: Why Index Funds Are Like Subprime CDOs

#209

Post by godzillabrennus »

the_watcher wrote: post #21
godzillabrennus wrote: post #11

Earlier quoted context omitted.

Take a look at opportunity zone funds today. You can pull your money out and pay zero capital gain taxes for seven years. Then get a 15% discount on your capital gains at that time. All returns you realize from the fund are capital gains tax free. The benefits end this year.

I know a bit about Opportunity Zones (roommate bought property that was subsequently designated one, to his delight), but not about the funds. Do you have any particular recs on where I can read up on them?

https://www.activatedcapital.com/resources.html

Good resources on that page.

Re: Why Index Funds Are Like Subprime CDOs

#210

Post by matz1 »

fountainofage wrote: post #200
matz1 wrote: post #193

Earlier quoted context omitted.

I think the only thing one should always do is actively update one knowledge and be ready to adjust strategy accordingly. No strategy/advice last forever There is no such thing as passive investing per se. So instead of recommending fund, it's better to recommend them to learn of the fundamentals of investing instead.

And isn't the fundamental truth of investing: optimize returns based on your tolerance for risk? For the vast majority of the population, the optimal way to get the highest returns with the lowest risk is to put the money into either the S&P 500 or a total market index. Every study has shown that people do not get rewarded appropriately for the risk they take on when they move away from diversification.

The fundamental as in you should know how anything generate value, what is index actually is, how the index work, why the index being recommended, how the stock market work, etc.
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