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Active vs Passive

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  • Active vs Passive

    For all the blind believers in indexing, check out todays cover in barrons. Does this have parallels to the subprime mortgage market being "too small" to affect the market?

    Man vs. Machine: How Has Indexing Changed the Market?

    [Remainder of post deleted by moderator WCI as it violates copyright law. Please read up on "fair use" before copying and pasting entire articles. For those interested, here is a link to the article:

    Looks like you'll need to buy a subscription unfortunately. 

    For those unfamiliar with "fair use" here's a primer:

    Basically, you can quote a paragraph or two, but not the entire article. Doing so on this forum gets us both into trouble, so thanks for not doing so.]

  • #2
    I wouldn't call all index fund investors "blind believers." I'm no analyst or expert, but I'm not blind to what I'm buying.

    In the article, the comparison of people who invest in a basket of stocks (index investors) to banks loaning money to people who can't pay it back (subprime mortgages) makes no sense. The former has a surplus of money; the latter has a deficit. I fail to see the connection.

    "Vanguard Group now owns a 5% stake or more in 491 S&P 500 stocks" The company doesn't own them -- the investors do.

    "With cap-weighted indexes, index buyers have no discretion but to load up on stocks that are already overweight (and often pricey) and neglect those already underweight. That’s the opposite of buy low, sell high." Based on this assumption, large cap stocks are by definition "overweight" and overvalued, whereas small caps are apparently undervalued. Markets are at least somewhat efficient. Not to mention, there are indexes for small caps.

    Also, taking Bogle quotes out of context doesn't do much for me. He is the creator of passive index funds and its biggest champion.

    I'm not saying there are no problems with passive index funds (but there certainly are problems with this article), and I don't know what would happen if > 90% of investors were in passive index funds. I also know that's extremely unlikely as long as Barron's, CNBC, WSJ, etc... exist. Just like I don't worry about what would happen if > 90% of physicians retired early. Not gonna happen -- there will always be too many ways to spend that money.




    • #3
      The comparison is not to the people who borrowed money. The comparison is to investors who bought more and more subprime mortgages on the faith of the credit rating agencies saying that if you put lots of subprime mortgages together they merit a triple a rating. And even though subprime was a small part of the overall credit market it brought down everything. The point is that the move to passive investing by investors could be causing the market to keep going higher because the stocks with the biggest market capitalization continue increasing and increasing ina feedback loop because index investors buy and buy without respect to the overall price they are paying or the fundamentals of the underlying stocks.

      Dont get me wrong I believe everyone should be indexing at least a portion of their portfolio because of its merits but everyone must understand the limitations of the process. And indiscriminate buying without respect to fundamentals in a continuous positive feedback loop and in an illiquid etf market could turn out badly for everyone. I don't think we're there yet but it's going to reach a point where if there are too few active investors setting prices based on fundamentals indexing won't have a basis in reality.


      • #4


        • #5
          WCICON24 EarlyBird
          There is no comparison to 2008, either the home buyers or or the subprime mortgage buyers. THe whole system was playing with nonexistant money (banks were leveraged 33 to 1 in 2008, compared to 2-3 to 1 today and most of history).