A critique of the claim that passive investing is a bubble
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A critique of the claim that passive investing is a bubble
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Re: A critique of the claim that passive investing is a bubble
#2I 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.
Re: A critique of the claim that passive investing is a bubble
#3I 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.
Agreed. Burry seems to be getting a lot of responses but almost none of them seem to have actually listened to what he said (or even read the article). There is real risk from the index-matching synthetic techniques that these funds are using.
Re: A critique of the claim that passive investing is a bubble
#4I 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.
What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions?
Re: A critique of the claim that passive investing is a bubble
#5I believe index funds are a good investment strategy, but at the same time we shouldn’t get defensive when people criticize them, and call a thoughtful critique “silly”. In fact I would like to hear more intelligent criticism of index funds, and thoughts around preparing for a hypothetical world in which index funds were overrated, not less.
How might we notice that index funds were becoming overrated? Perhaps the rise of hedge funds which consistently outperformed index funds? Is that happening?
What should we do if index funds became overrated? Move our money into a medium-size number of stocks, like 30 of them, to essentially do our own index selection? Or moving out of stocks entirely?
Thinking about questions like this without attacking criticism as “silly” is IMO a better way to minimize risk.
Re: A critique of the claim that passive investing is a bubble
#6I 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.
I think that was certainly a more interesting point compared to "who will do price discovery", which seems to be something that would likely find an equilibrium.
This article does mention it, but pretty briefly.
It'd be interesting to hear from people more familiar with the details of how all this works... perhaps there are some in the initial thread, but I haven't had time to skim it all: https://news.ycombinator.com/item?id=20877700
Re: A critique of the claim that passive investing is a bubble
#7As I read it, the word bubble in the Burry interview was really just used for clickbait purposes - his argument wasn't so much that index funds are overvalued, it was that there's opportunity in small caps because they're underrepresented in index funds, and everyone else is investing in index funds.
Re: A critique of the claim that passive investing is a bubble
#8I 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.
What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions?
The index fund is holding the underlying stock, largely. The challenge is that if say 5% of their fund holders sell their shares in the fund, the fund has to sell the underlying stock to generate the cash to pay out. Most funds have a rule in their documents that if you are a large fundholder (holding 1% or more of the fund) and you sell, they can hand you stocks directly rather than selling them and giving you cash, but that doesn't work it it's tens of thousands of small fund holders selling.
Re: A critique of the claim that passive investing is a bubble
#9I 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.
Not the author, but I think the article indirectly talks about the liquidity in the markets being far higher than it has been in the past.
Further, if there is a stampede for the exits, there still have to be buyers on the other side of the sellers. Those buyers will undoubtably include active managers along with those indexers with different time horizons and/or braver constitutions. Both will likely be rewarded for their patience.
Re: A critique of the claim that passive investing is a bubble
#10I 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.
> ...will drive the market down
So what? Let the weak long positions panic and sell at the bottom. Everyone else gets a few years of discount prices to buy. The hardest hit will be those who are leveraged and arguably deserve to get hosed for taking that much risk.
If you don’t have to meet a margin call, you can ride out a crisis; if you’ve got cash in reserve, you can profit from it.