A critique of the claim that passive investing is a bubble • Hacker News Board

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

#151

Post by gridlockd » Thu, Sep 05, 2019, 7:00 PM UTC

Back in 2007 you could've made a similar chart to show that CDOs are a small amount of the market.

What's unclear is the impact that ETFs have on prices. This "debunking" doesn't address the point about low volume.

Let's suppose most of those non-ETFs owners are buy and hold investors that bought in a long time ago and wouldn't buy anywhere near today's prices.

That would mean ETF holders, especially those who joined late, could still be responsible for a disproportionate share of today's prices. If the market shows signs of weakness, these people need to get out, especially if they bought on leverage.

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

#152

Post by jeffdavis » Thu, Sep 05, 2019, 7:03 PM UTC

Excel_Wizard wrote: post #119

jeffdavis wrote: post #116

At some point, someone (or a collective) needs to make a decision about how capital is allocated among different firms. Traditional money managers may not be the right way to do that, but we should be clear that decisions are still being made somehow. I guess it's not the investors plowing money into the first index fund they find. And it's not the index fund, because they don't do a lot of management. So I guess it'…

Index funds do not contribute to the process of price discovery. As long as a certain fraction of trades are performed by active investors, price discovery will continue to be accurate. Currently, active traders dominate, making up the majority of trades. This fraction could be much smaller than it currently is and still be OK.

There are still people discovering prices, and they are still getting paid somehow, probably by first-mover advantage.

Are we sure that the right model is to just watch these first-movers and do what they do?

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

#153

Post by gridlockd » Thu, Sep 05, 2019, 7:10 PM UTC

human20190310 wrote: post #10

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.

> ...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.

After 1989 it took the Nikkei more than a decade to finds its bottom (and then another bottom in 2009) and it hasn't recovered since. How many years of "discount buying" are you planning in?

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

#154

Post by domnomnom » Thu, Sep 05, 2019, 7:17 PM UTC

dcolkitt wrote: post #92

mrep wrote: post #11

Earlier quoted context omitted.

How would they lose liquidity? Authorized participants [0] are always in the market for ETFs. If an ETF share price is crashing out of line with the index it tracks, they will step in and buy shares, swap them with the ETF issuer for the shares of the underlying stock in the index, and sell those shares for an arbitrage profit. Even if one of the underlying stocks becomes illiquid, a big enough price divergence on al…

Burry's point wasn't that the ETFs would lose liquidity, but rather than the lightly-traded names in the index would. If the index instruments have a lot more liquidity than the underlying names, then that means they won't be able to gracefully absorb the liquidity shocks from an unwind in the index. Here's some back of the envelope calculations. Between SPY, IVV, and VOO alone, there's $500 billion in S&P 500 index…

I hate when people use acronyms without first defining them, they are literally impossible to google. What is ADV?

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

#155

Post by dkarl » Thu, Sep 05, 2019, 7:20 PM UTC

christophilus wrote: post #141

dkarl wrote: post #70

As others have noted, there's a lot here that isn't relevant to Burry's argument, but this seems like the key rebuttal to me: Active funds literally own the market. When you buy an index fund of the total stock market, you are literally buying the stock market in proportion to the shares held by all active investors. If you sum up the collective holdings of active managers, what you basically get is a market-cap-weig…

> Index fund investors are simply buying what the active investors have laid out for them. That works until it doesn't. If passive becomes big enough, the indices themselves will be the ones steering the ship. The active managers won't be significant enough to sway the indices. I heard this analogy on a podcast (I think it was Invest Like the Best): Indices are like a drunk person, and active managers are like the so…

As I understand it, the index funds aren't drunk and aimless, forced in a certain direction as a side effect of the trades of active investors. They are intentionally and methodically following the active investors.

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

#156

Post by aynyc » Thu, Sep 05, 2019, 7:22 PM UTC

domnomnom wrote: post #154

dcolkitt wrote: post #92

Earlier quoted context omitted.

Burry's point wasn't that the ETFs would lose liquidity, but rather than the lightly-traded names in the index would. If the index instruments have a lot more liquidity than the underlying names, then that means they won't be able to gracefully absorb the liquidity shocks from an unwind in the index. Here's some back of the envelope calculations. Between SPY, IVV, and VOO alone, there's $500 billion in S&P 500 index…

I hate when people use acronyms without first defining them, they are literally impossible to google. What is ADV?

Average Daily Volume

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

#157

Post by laminarflow » Thu, Sep 05, 2019, 7:22 PM UTC

For those interested in this topic, Horizon Kinetics' 2016 presentation "Indexation: Capitalist Tool" is a fascinating read, as it points out some baffling structural mismatches between indexes and their underlying securities beyond just liquidity (which was the main focus of Burry's analysis).

http://www.grantspub.com/files/presentations/Grant's%20Confe...

Edit Some highlights:

> Does an asset allocation program or roboadvisor tool seeking foreign market exposure know that 6 of the top 10 holdings of the iShares MSCI Spain Index get 70% or more of their revenues from outside of Spain? That a purchase of the ETF is, essentially, investing outside Spain? The same holds true for emerging markets ETFs.

> the business demand of ETF organizers for liquid stocks has only increased, with the influx of funds directed into the same limited population of liquid stocks. ExxonMobil is one of the most liquid. Ergo, it will be found almost anywhere one can imagine that it can be placed. It’s Growth, It’s Value, Its’ a Bird, It’s a Plane...

> Would an active manager of a low-risk strategy be permitted the risk of a near-50% weighting in financials? ... These largest-in-class ETFs can legitimately be characterized as low volatility, since of late the financial sector has not been volatile. And the high weighting enables the ETF to attain its advertised low Beta.

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

#158

Post by walshemj » Thu, Sep 05, 2019, 7:22 PM UTC

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…

Liquidity can be a very serious problem for open ended funds and they have to keep cash on had to meet redemptions unlike closed ended funds like investment trusts.

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

#159

Post by falcolas » Thu, Sep 05, 2019, 7:23 PM UTC

Meta: I read articles like this, and some of the 5+ paragraph comments on this site, and it makes a ton of sense to me why people are downright afraid of the work required to learn how the economy works at a low level. It's crazy how often probabilities are presented as fact.

My mother-in-law works for the state doing financial investing, and I've seen some of the functions and constant values she's had to memorize to get her degrees. Constants that are based on models that are often decades old. It's all ultimately a form of forecasting based on models, but it's treated as gospel of how it will all occur.

Perhaps that's why it works at all - everyone's using the same models, and they behave in a set pattern (established by schooling and "how it's always been done") based off those models, which makes the models accurate.

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

#160

Post by vkou » Thu, Sep 05, 2019, 7:29 PM UTC

rocqua wrote: post #149

vkou wrote: post #146

Earlier quoted context omitted.

An evil mirror universe twin of you, instead of owning an ETF, owns a bunch of shares of APPL, a bunch of shares of GOOGL, a bunch of shares of stock X. If you are panicked, and are selling your ETF, your evil twin is panicked, and selling all their stocks. This causes the exact same downwards pressure on the market. I don't buy an ETF because I want someone to do financial malarkey with my money. I buy it because I…

Unless everyone has an evil twin, there is less chance of everyone wanting to exit X at the same time. Hence there won't be a run on X. Moreover, if my evil twin a) owned a managed fund or b) sold in a slightly smarter way, then they would lose less on X due to liquidity. Moreover, the hit on Xs price also has a slight hit on the ETF value. Hence there is a small positive feedback loop.

Everyone thinks they will be smart about their panic-selling when a market crash hits, but the reality is, most of them won't be... And the decision you should be making is not when to sell, but 'how much to buy'.