> Nobel-approved models of risk that proved to be untrue
Makes you wonder how much more of this ends up remaining unquestioned until it’s too late.
Why Index Funds Are Like Subprime CDOs
121–130 of 324 posts
Re: Why Index Funds Are Like Subprime CDOs
#122The discussion of this on the Bogleheads forums, a community dedicated to low-cost investing primarily via indexing, provides an interesting counter-point to Burry's opinions: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=289284
This is a good point: Post by ltlurker » Thu Aug 29, 2019 1:24 pm I'm an index investor, like most Bogleheads, and I subscribe to Bloomberg digital so I can read articles such as this and did see this one at lunch (EDT). I'm open to various perspectives especially if there appears to be a rationale behind them. And of course this individual was behind the "big short" so that intrigued me. If I recall correctly, I bel…
There are fewer publicly listed companies than ever before:
https://www.nytimes.com/2018/08/04/business/shrinking-stock-...
>In 2015, for example, the top 200 companies by earnings accounted for all of the profits in the stock market, according to calculations by Kathleen Kahle, a professor of finance at the University of Arizona, and Professor Stulz. In aggregate, the remaining 3,281 publicly listed companies lost money.
I'd love to see 2016 to 2019 stats on that, but I think there are structural advantages (proliferation of databases, price transparency) that large corps are enjoying right now with which small companies just can't compete. Technology is obviating many people (and therefore businesses), and allowing the big to get bigger with no marginal cost.
Would you bet against the top ten holdings in VTI, which take 1/5th of all investments?
https://investor.vanguard.com/etf/profile/portfolio/vti
And also, we know the government will bail out all large entities, especially if many voters are invested in them (which they are due to 401k/pension funds being invested in the very same companies).
Who is going to outcompete the few big airlines, telecom providers, FAANG, hotel brands, car rental brands, banks, pharma companies, etc that have national and worldwide reach? I'm sure a few companies here and there might, but by and large, I bet the big players are here to stay (until the whole system breaks down, but then you have bigger problems).
Re: Why Index Funds Are Like Subprime CDOs
#123Not 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 more interesting question is, if there is an index fund crash, will the actively managed funds benefit from it, or crash right alongside the index funds? How much are actively managed funds contaminated by stocks that are in index funds? (That probably depends on the type; a small-cap or emerging markets managed fund will probably be mostly clean of the indexed stocks, but a managed large-cap is probably full of…
There’s a clear narrative in favor of actively managed funds: they analyze the underlying stock and avoid stocks that are overvalued according to their fundamentals, and buy those that are undervalued.
The consequence would be near total avoidance of the S&P 500 as a good strategy for the long run. There would be exceptions for those stocks that are quite undervalued, or so overvalued that they are worth shorting (despite the tailwind of index funds).
Don’t worry, strategies like these have predicted 12 out of the last 5 asset bubbles.
Re: Why Index Funds Are Like Subprime CDOs
#124Isn't a big part of the issue with actively managed funds the fees, which usually wipe out any gains above index funds. Wouldn't the market correction be to close the delta in fees between active and passively managed funds to encourage more people to go the active route? A lot of the grousing about passively managed funds come from people who are running actively managed funds that charge huge fees to under perform…
You can't run most active management strategies on anything approaching the average passive fee structure. Additionally, you run into problems with scale. An S&P 500 tracking fund scales extremely well and could add several billion of AUM without having to incur additional expenses. A long only equity fund would probably not be able to do the same without hiring more people, building more infrastructure, etc.
I get that the fees can't be comparable, but without passive management, active management fees are unchecked, and they rose a lot over time.
I'm willing to agree that it should cost an order of magnitude more for an actively managed fee, but most are beyond that.
A lot of this seems like plain greed to me, combined with grift and graft. A lot of workplace plans try to funnel people into actively managed funds that often charge really high fees.
Re: Why Index Funds Are Like Subprime CDOs
#125Earlier quoted context omitted.
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?
Here's an example fund, https://fundrise.com/offerings/opportunity-fund/view , but it has steep fees: Annual investment management fee 0.75% Annual tax and accounting fee 0.45% Annual carried interest / promote 15% over 8% return Maybe it's not as high when you consider that they purchase the property directly, but it still seems a bit too risky to lock myself into those high fees for 10 years. I think the main benef…
Main benefit has to be the zero capital gains you pay (on the new gain) if you are patient and hold for the full 10 years. Second benefit would be the cap gains deferral (negative interest loan).
Re: Why Index Funds Are Like Subprime CDOs
#126So there are two concerns here. One concern is a problem with a certain asset being inflated, in this case S&P 500 stocks, and the money you might lose if you hold those assets and their value goes down to normal. A second concern is the collateral effects of a bubble bursting: the inflated assets are tied into many other assets/instruments, and untangling the mess caused by a rapid bubble burst may cause a financial…
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 prefab houses and they were closer to the truth.
If you could make an analogous case today that the majority of the companies that make up the S&P 500 are over-valued then you could presage the popping of the ETF bubble. In this case, however, the population size of the S&P 500 is much easier to monitor than the population of houses in the US Housing Market, which in 2003 were being built far from Wall Street in pockets of Arizona, Nevada, and Florida. In addition, companies can be subbed in and out of the index with ease in a way that houses cannot pop in and out of the market.
That is why I think the housing bubble pop in 06/07 is not analogous to the current era with ETFs
Re: Why Index Funds Are Like Subprime CDOs
#127Not 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…
Imagine there was a cookie market made up of two types of cookies, tasty and meh. An active investor in cookies would spend time determining which cookies are likely tasty and which are meh. They would pay more for the tastier cookies so they can savor the flavor and less for the meh ones they can binge eat in the shower when no one is home.... A passive investor comes along and says, I don't want to do all this research, I'll just assume the market was able to price these accordingly and buy any cookie at the market price. At the beginning, it is great. They just sit back and buy baskets of cookies, some tasty, some meh... but they always pay the higher price for tasty and lower price for meh, so it is fair. Over time, more people start buying baskets of cookies rather than spending time/money figuring out what to pay for them. At some point, no one is left to figure out which cookies are tasty vs meh, so the price of all cookies converge to a single price. Cookie manufactures notice this and figure might as well just make meh cookies as no one can tell the difference until after they buy them... and then we are stuck in a world with meh cookies. With some critical mass of active cookie investors, prices could be set fairly for all cookies. Too many active investors, and there is a drain on the system as there is likely a lot of duplicated work among the investors ( each one has to have a research team, back office cookie trading systems, etc, etc ). Too little and prices become less accurate.
Re: Why Index Funds Are Like Subprime CDOs
#128So there are two concerns here. One concern is a problem with a certain asset being inflated, in this case S&P 500 stocks, and the money you might lose if you hold those assets and their value goes down to normal. A second concern is the collateral effects of a bubble bursting: the inflated assets are tied into many other assets/instruments, and untangling the mess caused by a rapid bubble burst may cause a financial…
A hedge from this theory would be to buy stocks just outside the SP 500? Something like TSLA. That would be a crazy situation, where the SP 500 is crashing and the rest of the market it taking off
I don't know about that. If a general financial crisis is the concern, stocks outside the S&P 500 would not be spared.
What I got from this interview was just a reminder that it makes sense not to get caught up in enthusiasm for a certain asset. And investors (including me) are certainly enthusiastic about the S&P 500 index fund.
Re: Why Index Funds Are Like Subprime CDOs
#129So there are two concerns here. One concern is a problem with a certain asset being inflated, in this case S&P 500 stocks, and the money you might lose if you hold those assets and their value goes down to normal. A second concern is the collateral effects of a bubble bursting: the inflated assets are tied into many other assets/instruments, and untangling the mess caused by a rapid bubble burst may cause a financial…
A hedge from this theory would be to buy stocks just outside the SP 500? Something like TSLA. That would be a crazy situation, where the SP 500 is crashing and the rest of the market it taking off
A simpler option is to buy options on the index. You can butterfly the index with calls and puts around your minimum return / maximum loss tolerance.
Re: Why Index Funds Are Like Subprime CDOs
#130Timely article, I was just thinking about this last night...while browsing Vanguard's site looking for index funds to invest in. Everyone blindly putting their money into similar instruments and getting double digit gains nearly every year just seems like it can end catastrophically. I want to do more research on how these passive funds affect the overall market and vice versa.
Stupid question but what are you looking for when browsing Vanguard? I thought all the index funds were the same, just following the index.