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A critique of the claim that passive investing is a bubble

awealthofcommonsense.com

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Re: A critique of the claim that passive investing is a bubble

#71

Post by FabHK »

OJFord wrote: post #63
FabHK wrote: post #45

Earlier quoted context omitted.

> Burry made the unanswered point that in a sell-off large index funds will have to dump their smaller holdings at large discounts. First, I think he didn't made that point very clearly. Second, why would they be sold at a larger discount than larger holdings? It is all in proportion - they own less and sell less of the smaller holdings. (There are issues conceivable where you have a liquidity mismatch (bonds, real e…

> why would they be sold at a larger discount than larger holdings? It is all in proportion - they own less and sell less of the smaller holdings His argument there AIUI was that the daily volume is not in proportion.

Fair enough, so going back to a liquidity mismatch.

Will be interesting to watch the next market crash.

Re: A critique of the claim that passive investing is a bubble

#72

Post by gnicholas »

IshKebab wrote: post #68
gnicholas wrote: post #61

> Yes, index investors are free riders, but this is the way most markets work. We don’t go to the grocery store to bid on prices of oranges against one another to set an equilibrium. The market does that for us. Actually, our behavior does shape the price of oranges. If we go to the store and they're less expensive, then we are more likely to buy them. The analogy breaks down because he's comparing indexes and orange…

People more or less do do that. I've often searched for something on Amazon and bought the most popular result.

Sure, but do you buy a bundle of goods this way? That’s the analog of index investing.

Re: A critique of the claim that passive investing is a bubble

#73

Post by mcguire »

talolard wrote: post #2

I think this article really misses the point that Burry was making, which is that if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down. This article seems to focus on all of the upsides of indexing, which are all true. However, those upsides don't negate the risk that is being pointed to.

Are you arguing that index investors should not be part of the market at all?

A large number of investors leaving the market will see a sell off no matter what vehicle they're in.

Re: A critique of the claim that passive investing is a bubble

#74

Post by maerF0x0 »

gnicholas wrote: post #61

> Yes, index investors are free riders, but this is the way most markets work. We don’t go to the grocery store to bid on prices of oranges against one another to set an equilibrium. The market does that for us. Actually, our behavior does shape the price of oranges. If we go to the store and they're less expensive, then we are more likely to buy them. The analogy breaks down because he's comparing indexes and orange…

We bid on a basket of groceries by choosing a store to shop at though. The price of oranges is mostly immaterial when compared to the greater pricing of the collection of goods purchased in a single trip. This is why loss leaders make sense. They entice you in w/ a distorted price and then recoup the loss across your basket.

Re: A critique of the claim that passive investing is a bubble

#75

Post by newshorts »

> When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is literally no market impact.

Correct me if I’m wrong but isn’t there a well known price premium for stocks included in major index funds? As I understand it, the most popular indexes target a few companies, thus index funds that track them funnel a disproportionate volume of demand to those companies causing a price premium.

It’s stands to reason that if a sudden outflow of money from index funds occurred, that price premium would swing the equal and opposite direction.

Re: A critique of the claim that passive investing is a bubble

#76

Post by maerF0x0 »

IMO the real issue is amount of cash available for investment and the lack of investable assets[1].

If i were king for a day I'd legislate a low bar that required the equities to be listed so that both the insiders cannot be barred from liquidity and so that the investing public can access those parts of the economy.

[1]: https://personal.vanguard.com/pdf/ISGPCA.pdf

Re: A critique of the claim that passive investing is a bubble

#78

Post by mcguire »

omgwtfbyobbq wrote: post #48
perspective1 wrote: post #24

Earlier quoted context omitted.

Exactly. The article, starting with the title, is pompous and overconfident. Burry made the unanswered point that in a sell-off large index funds will have to dump their smaller holdings at large discounts. We have never had a market crash with passive holdings this large (and consolidated in a small handful of funds)-- we're in unprecedented times. Burry's point is entirely plausible. And although that it wouldn't i…

The idea that we've never had a market correction with passive holdings at current levels is accurate. It also was an accurate statement in 2008, and it also applies to foreigners and mutual funds now, both of which have increased their holdings of equities over time and both of which have substantially greater holdings than index funds. https://awealthofcommonsense.com/wp-content/uploads/2019/09/...

I think the point you want to make is that we've never had a market correction with the number of investors at current levels is accurate.

Re: A critique of the claim that passive investing is a bubble

#79

Post by panarky »

sambe wrote: post #22
talolard wrote: post #2

I think this article really misses the point that Burry was making, which is that if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down. This article seems to focus on all of the upsides of indexing, which are all true. However, those upsides don't negate the risk that is being pointed to.

These sections seem to address the point to me: * "The tail is not wagging the dog" - index funds are a relatively small percentage of total share ownership. * "Benchmark huggers have always been around" - owning ~the index was not started with index funds. * "Active funds literally own the market" - the sum of portfolios of non-index funds ends up having the same profile. * "Price discovery is a cop-out" - relativel…

Speculators may do no harm as bubbles on a steady stream of enterprise.

But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

(John Maynard Keynes, General Theory, Chapter 12, page 142 in the Google Book edition)

Re: A critique of the claim that passive investing is a bubble

#80

Post by tobylane »

newshorts wrote: post #75

> When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is literally no market impact. Correct me if I’m wrong but isn’t there a well known price premium for stocks included in major index funds? As I understand it, the most popular indexes target a few companies, thus index funds that track them funnel a disproportionate volume of…

>isn’t there a well known price premium for stocks included in major index funds?

Maybe the premium is for being in the index, which the index fund dutifully reacts to. There are only 100 places in the FTSE100 so it is seen as significant. The current news about a major UK high street retailer is that it dropped out of this index, implying it's the beginning of its end. https://www.google.com/search?q=marks+and+spencers&tbm=nws

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