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Bogle Sounds a Warning on Index Funds

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Re: Bogle Sounds a Warning on Index Funds

#141

Post by whatok »

xenadu02 wrote: post #109
jonknee wrote: post #99

Earlier quoted context omitted.

The pressure to increase profits exists regardless of ownership, if anything having large institutional funds own the majority lessens the pressure (vs an activist fund or something similar). If they're leaving money on the table someone is going to take it.

Not really; you can look at BNSF (bought by Buffet) vs Union Pacific. Buffet takes the long view, as a result BNSF has been spending billions on capital projects and hiring. Wall St is known for encouraging short-term thinking.

BNSF is spending money on capex because it's the smart thing to do in that industry right now. That's not a consequence of a Buffet investment. Buffet also invested in Heinz and they immediately fired thousands and are cutting costs left and right.

Re: Bogle Sounds a Warning on Index Funds

#142

Post by scott_s »

jandrese wrote: post #120
dmurray wrote: post #97

Earlier quoted context omitted.

The big index funds aren't exactly known as activist investors. Even if it's "Wall Street" collectively, it's not Vanguard or State Street that is pushing Union Pacific to cut costs.

It's a side effect of having real number feedback on how you're doing. Management can't just make up their own metrics anymore, there is a third party that tells you how well you are doing, and that third party wants to see constant growth or they'll start dropping your price and the financial press will pick up on that and start writing articles about how millennials are killing the rail industry. It takes real gump…

Your comment still assumes active investors who are looking for value stocks. Index funds don't discriminate, they just buy stocks in the entire market.

Re: Bogle Sounds a Warning on Index Funds

#143

Post by bluGill »

zAy0LfpBZLC8mAC wrote: post #91
bulletsvshumans wrote: post #69

Earlier quoted context omitted.

I don't want to vote for each of the thousands of stocks I own indirectly through my index fund. I want Vanguard to vote on my behalf such that it proportionately replicates the votes of the non-index shareholders. This strategy is just an extension of the idea behind index funds in the first place: mirror the existing market.

In other words: You want them to not vote at all. Which is a dumb idea, of course, as that just leaves the control over your capital to your adversaries. Passive investing works because goals are aligned: The only way to influence an index fund on the investing side of things into doing something stupid is by doing something stupid yourself. If you want to make an S&P500 index fund buy some penny stock, you have to b…

No, I want Vanguard to hire an independent expert for each company I'm invested in and make the right decisions for me. It is not possible for a human to make an informed decision on voting for each of the thousands of stocks out there. That is one advantage of the fund is they can do that for me.

I have noticed when I vote the shares of the few shares I own that I'm almost always voting with the board of directors. When I've seen a proposal the directors have recommended a No vote on it is always some activist who has their own interests in mind at the expense of me. Sometimes the directors recommend things I disagree with, but those are generally minor details where either way is not harmful to my interests.

Re: Bogle Sounds a Warning on Index Funds

#144

Post by jandrese »

scott_s wrote: post #142
jandrese wrote: post #120

Earlier quoted context omitted.

It's a side effect of having real number feedback on how you're doing. Management can't just make up their own metrics anymore, there is a third party that tells you how well you are doing, and that third party wants to see constant growth or they'll start dropping your price and the financial press will pick up on that and start writing articles about how millennials are killing the rail industry. It takes real gump…

Your comment still assumes active investors who are looking for value stocks. Index funds don't discriminate, they just buy stocks in the entire market.

Right. In fact index funds should be better for management since they won't be rocking the boat so much.

Re: Bogle Sounds a Warning on Index Funds

#145

Post by ethbro »

jandrese wrote: post #139
ethbro wrote: post #133

Earlier quoted context omitted.

Given: (1) sensors necessary to autonomously navigate, (2) large stretches of rural America (out west, maybe 100+ miles to the nearest police station), (3) adaptable human adversay, (4) no humans to injure on the vehicle ... I just don't see how you economically protect a vehicle (vs cargo value). And more sensors simply mean more things to steal. The minimum law enforcement response time along your entire route is t…

These thieves have to steal from a moving vehicle? Sure it's not impossible, but it's more Hollywood heist than something you'd see in real life. It will almost certainly happen a few times, but for practical purposes the amount of stuff stolen before the guys are caught will be less than what it costs to hire tens of thousands of rent-a-cops to sit in the backs of trucks. Plus, these are thieves we are talking about…

You can get a 50 BMG rifle for a few thousand dollars and put a hole right through an engine block.

Unload truck at your leisure.

That's not even getting into ways to make an automated system stop by putting up an emergency / stop sign in the middle of the road.

The risk to stealing is directly proportional to the chance of getting caught, which broadly correlates into something unexpected happening, which is drastically diminished by not having a human driver.

Re: Bogle Sounds a Warning on Index Funds

#146

Post by whatok »

gammateam wrote: post #125
whatok wrote: post #124

Earlier quoted context omitted.

State Street also used that as a marketing stunt to launch an ETF while they were being sued for sexual harassment and pay discrepancies between male and female employees. Marketing is marketing is marketing.

yes, and also 300 companies added female directors nothing exists in a vacuum

Nothing exists in a vacuum just like solely attributing companies adding female directors to a marketing stunt. There was large momentum on this front already that would have happened with or without this.

Re: Bogle Sounds a Warning on Index Funds

#147

Post by jonbarker »

bluGill wrote: post #24
jonbarker wrote: post #16

Earlier quoted context omitted.

A risk is one of the options, which is a breakup of existing funds: "Force giant index funds to spin off their assets into a number of separate entities, each independently managed. Such a drastic step would—and should—face near-insurmountable obstacles, for it would create havoc for index investors and managers alike."

So long as the two broken up funds are both index funds it won't matter. Index funds all work the same way so a million tiny funds will have the same effect as one large one.

I believe breakups would drive up the expense ratio which is why Bogle said that it would be damaging to individual investors. Part of the reason why Vanguard is so cheap to operate is because of its size contributing to economies of scale. You can see small variations in the expense ratios now (for example Fidelity is slightly higher cost than Vanguard across most apples to apples comparison funds) for this reason.

Re: Bogle Sounds a Warning on Index Funds

#148

Post by joshcain »

bluGill wrote: post #24
jonbarker wrote: post #16

Earlier quoted context omitted.

A risk is one of the options, which is a breakup of existing funds: "Force giant index funds to spin off their assets into a number of separate entities, each independently managed. Such a drastic step would—and should—face near-insurmountable obstacles, for it would create havoc for index investors and managers alike."

So long as the two broken up funds are both index funds it won't matter. Index funds all work the same way so a million tiny funds will have the same effect as one large one.

Theoretically, yeah, but like a lot of tech companies, index funds are a high-ish fixed cost and low marginal cost business. The staff/IT/compliance/etc. costs to run a fund don't scale linearly with invested assets so functionally a million tiny funds would be much more expensive to operate (collectively) than one big one. You'd have to have somebody at each fund voting in all those shareholder votes, right?

Re: Bogle Sounds a Warning on Index Funds

#149

Post by guelo »

Glyptodon wrote: post #130
fipple wrote: post #119

The summary: if Coke and Pepsi are owned by different guys, Coke will take an action that makes them an additional $1 million, even if (especially if) it causes Pepsi to lose $1 billion. Most commonly, cut prices. If the two companies are owned by the same guy, they have the incentive not to compete with each other since their owner cares about the sum of their profits. This is why one wouldn’t be allowed to acquire…

Even without index funds the drive towards large portfolios and diversification would do the same thing. I'd go so far as to say that unified ownership of competing firms by large investors is just unhealthy in general. Not really sure what can be done about it though since many companies are rather multi-industry.

If all the companies in an industry are owned by the same entity couldn't they be considered one company and then monopoly regulations would apply?

Re: Bogle Sounds a Warning on Index Funds

#150

Post by conanbatt »

gregorymichael wrote: post #2

A bit click-baity, but the warning here from the father-of-index-funds is not that they've become a bad investment, but that their popularity is leading toward a handful of financial institutions holding controlling interests in most of the largest companies. Pretty interesting unitended consequence.

Index-funds also have a huge risk: as they become too large, they become distorting how pricing of companies work: i.e. just IPO'ing gets you purchasers.

At some point, the phrase "passive management > active management" will become verifiably false.

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