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Bogle Sounds a Warning on Index Funds

wsj.com

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Re: Bogle Sounds a Warning on Index Funds

#71

Post by hangonhn »

pmiller2 wrote: post #63
nthot wrote: post #49

Earlier quoted context omitted.

Anecdotally, I have a few friends who work in the railroad industry and they are currently seeing something close to this. The company is almost entirely owned by large institutional funds. Union Pacific has a huge drive for constantly increasing efficiency. Their profits are up significantly year over year, but this fall they cut about 500 jobs from their headquarters in Omaha, around 6% of their Nebraska employees,…

You forgot: there's a hard ceiling to how high they can raise prices, because they have to compete with trucks. Together, that all implies that if they want higher earnings, cost cutting is the only way.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known as containers. Of course electric automated trucks could change all that.

Re: Bogle Sounds a Warning on Index Funds

#72

Post by Hermel »

timerol wrote: post #44
SilasX wrote: post #37

Earlier quoted context omitted.

Why would that matter? If they are obligated by their funds' charters not to intervene, then all the governance decisions happen exactly as if they hadn't invested, right? 10% vs 90% of share votes being on auto-pilot shouldn't matter? Is the argument that the vast majority of them could change their funds' charter to allow them to be actively involved with governance? If so, that would be really hard to achieve even…

If 90% of shares are non-intervening that means hostile takeovers are now 10x cheaper to implement. It would be weird to be a company with market cap $100M, where $10M could buy a controlling interest in voting shares.

Non-intervening usually means the vote according to the recommendations of the board, and not that they abstain from voting.

Re: Bogle Sounds a Warning on Index Funds

#73

Post by jkulubya »

gomox wrote: post #41
turc1656 wrote: post #30

I work in this industry. I'm on the indexing side of it, not the ETF/fund side. We obviously have relationships with all the major fund providers, especially the three big names mentioned in the article. And I happen to work for the big dog - S&P. "Why? Partly because of two high barriers to entry: the huge scale enjoyed by the big indexers would be difficult to replicate by new entrants; and index fund prices (their…

I find your comment fascinating but even though I think I understand perfectly what an index fund is, I don't quite understand what it is that S&P sells for so much money. Could you clarify this for me? I.e. who buys from you, and what is it they buy?

I think the comment is referring to the canonical list of the constituent securities of an index such as the S&P 500 or DJIA. You pay license fees to S&P to name any fund you create “S&P XYZ Fund”.

I suspect you could legally create a fund with the constituents of the S&P 500 without paying them, but you wouldn’t be able to advertise that fact easily.

Re: Bogle Sounds a Warning on Index Funds

#74

Post by foolsgold »

mcguire wrote: post #47
zAy0LfpBZLC8mAC wrote: post #20

(Index) funds solve a problem that we shouldn't really have anymore. The problem is that (semi) manually trading securities is inherently expensive. Funds solve that problem by massively reducing the number of transactions that are required: 1000 people investing in a fund investing in 1000 companies needs 2000 transactions instead of the 1000000 transactions needed when 1000 people invest in 1000 companies directly.…

Tracking the index on your own would be more than a full time job. You could do it automatically, but that just reinvents the fund The S&P500 had 500 stocks. Do you want to vote ~1.5 times a day?

That's like saying that you could launch your own space station and live in orbit, but you'd just be recreating NASA.

I worked for Vanguard and worked with the people who run the index funds, it's just a little harder than it looks.

Re: Bogle Sounds a Warning on Index Funds

#75

Post by nradov »

koboll wrote: post #40
alehul wrote: post #9

Earlier quoted context omitted.

Index fund investors are classified as "passive investors," while others are "active investors." The main investment risk to index funds growing is that, if everybody is a passive investor, then the passive investors are worse off as there are very few active investors who actually try and value companies appropriately. On the other hand, if the market is littered with active investors, then the market is likely more…

As an "active investor" your competition is HFT algos on servers located as physically close as possible to the stock market in order to achieve superhuman reflexes. Which you have absolutely zero hope of beating. I'd rather see slower, predictable gains than bet my nest egg trying to go toe-to-toe with hyperefficient machines -- or hand it off to some Manhattan finance bro making that bet on my behalf.

Stock pickers managing active mutual funds aren't competing with high-frequency traders at all. The human stock pickers are buying with the intent to hold for at least several days (usually even longer).

If you want slow, predictable gains then invest in highly rated bonds. Handing investment decisions off to some Manhattan finance bro is unlikely to improve your long-term risk-adjusted returns.

Re: Bogle Sounds a Warning on Index Funds

#76

Post by ethbro »

hangonhn wrote: post #71
pmiller2 wrote: post #63

Earlier quoted context omitted.

You forgot: there's a hard ceiling to how high they can raise prices, because they have to compete with trucks. Together, that all implies that if they want higher earnings, cost cutting is the only way.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known…

> Of course electric automated trucks could change all that.

Unmanned trucks crossing long distances of rural America sounds like a recipe for hijacking loads.

Re: Bogle Sounds a Warning on Index Funds

#77

Post by mruts »

bluGill wrote: post #18
brianliou91 wrote: post #3

This is fascinating. Selfishly though this seems to signal for investors of index funds (such as myself) that they will only continue to be good investments unless major government regulation occurs. Does anyone know of any investment risk to index funds if everyone is now doing it?

The risk is because index funds don't do stock analysis (instead they buy and hold all stocks) they will invest in bad companies and prop their price up. Then when the bad company goes bankrupt (as everyone paying attention knows will happen) the index funds are left holding all the stock suddenly worth nothing. Which is to say the traditional more expensive managed funds that actually pay attention to the fundamenta…

This is not exactly true. Many (most?) indices are market cap weighted, so if a company’s stock is tanking (i.e, their market cap proportional to other tickers in the index is going down), the index will sell the shares.

In my view, index funds aren’t really passive at all, they are crowdsourcing the best ideas of active management. This is why many indices (like S&P 500) produce pretty good returns.

If you created an index held every US equity in equal proportions, regardless of price movement, that would be like what you’re talking.

If you compared the returns of the S&P 500 against this theoretical index (let’s make it an ETF and call it “DUMB”), you would find that the S&P 500 would have much better returns.

The takeaway from this is that many indices produce stellar returns and aren’t as “passive” as one might think. Think of factor indices or whatever.

Re: Bogle Sounds a Warning on Index Funds

#78

Post by pmiller2 »

hangonhn wrote: post #71
pmiller2 wrote: post #63

Earlier quoted context omitted.

You forgot: there's a hard ceiling to how high they can raise prices, because they have to compete with trucks. Together, that all implies that if they want higher earnings, cost cutting is the only way.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known…

> Trains are cheaper [...] over a long distance.

Right there's your hard cap. Make trains too expensive relative to trucks, and, suddenly, everything goes most of the way by truck.

Re: Bogle Sounds a Warning on Index Funds

#79

Post by pmiller2 »

ethbro wrote: post #76
hangonhn wrote: post #71

Earlier quoted context omitted.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known…

> Of course electric automated trucks could change all that. Unmanned trucks crossing long distances of rural America sounds like a recipe for hijacking loads.

Automated trucks don't necessarily have to be unmanned.

Re: Bogle Sounds a Warning on Index Funds

#80

Post by azinman2 »

hangonhn wrote: post #71
pmiller2 wrote: post #63

Earlier quoted context omitted.

You forgot: there's a hard ceiling to how high they can raise prices, because they have to compete with trucks. Together, that all implies that if they want higher earnings, cost cutting is the only way.

Uh... not sure if that's actually the case. Trains are cheaper and actually faster over a long distance. The optimal way to ship is actually intermodal: ship for between countries/continents, trains for long trips over land, and then trucks for the last leg. They don't really compete with each other as much as they work together, especially since they have a standardized protocol for inter-process communication known…

But why? I would think that trains, which aren’t constrained to gasoline and have dedicated tracks, should be able to obtain higher efficiencies compared to trucks going the same long distances?
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