yes!
A critique of the claim that passive investing is a bubble
51–60 of 200 posts
Re: A critique of the claim that passive investing is a bubble
#52I 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.
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…
There are also a lot more liquidity providers than there were in the past, no? I know there are concerns that the high-frequency traders will turn off the computers in a crash, but if the index funds have to sell their small holdings at a deep discount, that’s an opportunity for someone to step in and buy them on the cheap.
I guess there are more legitimate concerns for funds that hold bonds or real estate or other less-liquid assets. But the solution to that is just, don’t put yourself in a position where you have to liquidate those funds in a crunch.
Re: A critique of the claim that passive investing is a bubble
#53I 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.
This was mentioned in the article > Liquidity is not a huge problem for index funds. But, Ben, what if everyone rushes to the exits all at once? Index funds and ETFs are going to cause a massive crash! > 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.
> > 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.
Yeah, I wanted to highlight that that's not true. Of course there is a market impact, it'll go down. The author might have wanted to say that there is no differential market impact, ie all shares would go down to the same extent (so that there is no impact, say, on capital allocation), but even that is not necessarily true, it clearly depends on the homogeneity (or lack thereof) of the liquidity/elasticity on the other side of those trades.
Re: A critique of the claim that passive investing is a bubble
#54Earlier quoted context omitted.
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…
Right, but consider that the sub-prime mortgage market was a tiny portion of the overall mortgage market in 2007. Derivatives written against sub-prime holdings tipped the balance when the fan was hit. There are tons of derivatives written against the indices, thus indirectly against those funds.
No, not against those funds. Pass a royal decree that banishes all index funds from the face of the earth. The tons of derivatives written against the indices remain, unchanged.
Those derivatives might be "somewhat in the neighborhood of the funds" or something, but it's not analogous to mortgages.
Re: A critique of the claim that passive investing is a bubble
#55The "this time is different" crowd rides again.
Burry highlighted two simple truths of financial markets: people will buy shit they don't understand, and people who make financial products will try to earn a liquidity premium by transforming something illiquid to something liquid (which always blows up).
Most people (who I have met) who own passives have no idea what they are buying but are sure that buying passives makes them very smart. This blows up every time.
I also don't think Burry was making some bombastic claim about 100% of ETFs causing the end of civilisation. He was making a limited, reasonable claim about trends in markets. Yes, he generalised but, in my estimation, he has earned that right.
Simply, going from 0 to $300m+ earns you that right. Very few people have achieved that. Very few people have done it in the way he did (taking real risk). The views of a triggered financial adviser leeching off his clients don't hold as much weight (and shows all the self-awareness of a financial adviser to write a post implying they should).
Re: A critique of the claim that passive investing is a bubble
#56I 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.
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 title is terrible.
The fundamental problem he seems to be pointing at is that notional replicating portfolios can work like an engineering marvel in good times and become inoperable in bad (liquidity) times.
There were many elements to the CDO crisis -- including bad faith by the rating agencies and a prolonged asset-price mania much beyond this stock-market rally. The simpler metaphor is the emission of vanilla stock options. In principle, a bank is only able to offer options because he has the ability to replicate it and neutralize his risk. But if market conditions diverge from the asset replication model, then boom you get LTCM.
Re: A critique of the claim that passive investing is a bubble
#57I think someday we will think that index funds were pernicious but we don't understand entirely why yet.
If you believe, for instance, that there is an "S&P 500" bubble then there is difficulty turning that into an investable thesis. The S&P 500 is about 80% of the valuation of the stock market. If the S&P 500 pops, then relatively the other 20% of the market will go up, but how much can it go up?
The most harmful effect we know now of the passive funds is that they have a strong incentive (when they vote their shares) to discourage competition. If they own both AT&T and Verizon they would rather both of these be profitable at the expense of consumers rather than work hard to gain market share for one or the other.
Re: A critique of the claim that passive investing is a bubble
#58If an index selloff could cause a drop in underlying stock price, wouldn't we see this effect when stocks are relegated from various indexes? Does this effect exist?
This effect does exist, but changes to indexes are public, so this information is mostly included in the price already.
Re: A critique of the claim that passive investing is a bubble
#59I 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 ri…
I found an inconsistency in the article. > We’re just seeing a shift from closet indexing to ETFs and other index funds en masse now that investors have wisened up. So active managers are copying the indexes. > Index fund investors are simply buying what the active investors have laid out for them. But indexes buy what the active managers pick. The author appears to be confused as to who is the tail and who is the do…
No inconsistency.
> > We’re just seeing a shift from closet indexing to ETFs and other index funds en masse now that investors have wisened up.
Some active managers used to (clandestinely more or less) copy the indexes, but investors move away from active managers into passive funds.
The prices are determined on the margin, by the remaining active investors. That's all consistent.
> index funds are still the best choice for a retail investor
Yes, index funds or index-linked ETFs. Agreed.
Re: A critique of the claim that passive investing is a bubble
#60Earlier quoted context omitted.
They are mostly not doing physical replication (physically owning all the shares) but using synthetic means.
Not really. The most popular index funds physically invest their capital in the stocks making up the index: https://www.investopedia.com/articles/markets/101415/4-best-...
That wasn't what the Article being critiqued said though.