https://www.philosophicaleconomics.com/2016/05/passive/
https://www.philosophicaleconomics.com/2016/05/followup/
https://www.philosophicaleconomics.com/2016/05/indexville/
https://www.philosophicaleconomics.com/2016/05/passiveactive...
Looks like the blog stopped in 2020, unfortunate....
https://www.newyorker.com/business/currency/is-passive-inves...
March 9, 2016
> O’Neill fears that the result will be a “bubble machine”—a winner-take-all system that inflates already large companies, blind to whether they’re actually selling more widgets or generating bigger profits.
Part of the problem is that if you look at the stellar long-term performance of indexes, they are largely explained by a small number of stocks in the index that perform extremely well… but you don’t know ahead of time which stocks those are. If you want the performance of the S&P500, you need a similarly diversified portfolio, the theory goes. It is hard to get a portfolio with that kind of diversity unless you buy index funds.
When index funds grow to huge levels of assets under management, their own asset allocations come to make up a significant portion of the market cap of the stocks in the portfolio. Thus the cap-weighted investment strategy becomes a self-fulfilling prophecy.
Either you’re doing the math wrong or you’ve skipped some steps.
Let’s say you have companies X and Y, each with 50% of the market. X is a winner, and the stock price goes from $10 to $45. Y is a loser, and the stock price drops from $10 to $5. The new weight is X=90% and Y=10%.
But this cannot be a self-fulfilling prophecy for index funds, because the index funds do not have to buy or sell any shares of X or Y to keep up (I mean rebalance, specifically). In this scenario, the index funds are just holding. (By “holding” I mean “not rebalancing”.)
This is… an oversimplified scenario. But it illustrates the problem here with the “index funds cause a small number of stocks to be winners” theory. There are alternative theories that make sense, but not this one.
(What makes the scenario more complicated is when you think of buybacks, dividends, delisting, etc.)
I do understand how they can stabilize allocations where they are, which I think is the concern. Zombification rather than a positive feedback loop.
Trying to beat the market is playing a zero sum game. Someone has to lose for you to win. I understand savvy winners add information, but most winners are just lucky and it still makes me uneasy to play a zero sum game.
When you simply try to match the market, you float on the tide that mostly raises all boats and sometimes lowers them. That sits much better with me.
In other words, the risk is to miss the winners, not that you will invest in a loser.
The problem is that it is very hard to predict the winners, so it is best to invest in all companies to make sure you have the winners
"I used to keep this gate, and now it's all ruined!"
Edit:
The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs (2019)
You can find structural problems that should inevitably arise and create a dynamic where say a short seller will make a killing.
However it can take years, sometimes over a decade, for things to bubble up.
The collapse of 2008 was decades in the making for instance
https://www.google.com/finance/beta/quote/ORCL:NYSE?window=1...
Back to the stock market.
Operative word being moment. The volatility is irrelevant if you wait it out long enough, hence "long term". If you need a shorter term low-risk investment vehicle, that's what treasury bills/notes are for.
> watch it all decay away thanks to our inherently inflationary regime
Any alternative investment strategy is equally affected by inflation.
It’s a very different calculus when nominal bonds are paying 5% and TIPS are paying 2.6% above inflation.
The nowhere to go but the stocks holds more water when the ten year was paying 0.55%.
If you think it will go up just more slowly well that’s hardly all that bad?
It doesn’t. And the smart money recognized this a couple years ago. You’ve been presented with a false dichotomy.
Google the ticker and compare to VTI then get back to me. And that’s without even mentioning gold.
May be worth it for diversification, but you’d be very lucky if it outperformed the next 10 years.
A portfolio of things like gold, small cap value, long term treasuries did 10% a year while stocks did like 0% a year for a decade.
https://portfoliocharts.com/2021/12/16/three-secret-ingredie...
In fact you win even more if you feel like stocks are bubbly and wait in say gold or short term and you buy more stocks when they are cheap
Also US stocks have underperformed compared to EU when you take all factors into account and all US stocks have rather been focused on AI hype which once again is a bubble which will fundamentally break the US economy.
It's like saying 2008 crisis still made you money long term
Sure if you are 20 years deep and even then nobody could've predicted what happened. The sentiments were extremely low
I am one of the biggest index funds advisors usually and that's when I read finance books and wanted to go into finance but genuinely felt like index funds are just so great that the need is very low
In fact I must admit that I dislike saying Gold but its genuinely one of the best assets (although it may be overvalued now not sure), another investment is specifically globalize your index fund portfolio to extreme/exclude US. In fact if possible bet on index funds on the opposite side of AI which most likely feels gold and yes, I am a little sad about this fact but rules of the game changes at points of extremes so gold is valid option right now
but they are unlikely to be cheaper in the future than they are right now (https://www.guggenheiminvestments.com/advisor-resources/inte...).
so if you have the money but defer buying them, you lose out on the time value of money.
I invest in Index funds for peace of mind as well. That the market remains reasonably happy/sad and I can be for the long run.
People discount this fact but imagine your concerns if you feel like 25% of your savings just evaporated because a guy ten layers detached from you burnt all the money on AI compute and there is no moat (Ahem ahem)
If you don't want peace of mind, people should angel invest or build their own side hustles but then you are getting some savings anyway and its better to invest than keep it in banks (once you have a safe amount saved)
But if you are saving money and still facing 25% crisis. Yeah...
I understand where you are coming from but if you can expect a 50-75% dip in market this time (some companies are 2-5x overvalued just because they slap AI, their P/E ratio's straight up just don't make any sense at all!)
So if you are willing to consider such dip for unforseen amount of time for unforseen returns in future when you can get a pretty safe investment for X amount of years being very liquid and historically in such times there are times when bond prices have been larger than stock prices
If I remember correctly, Intelligent Investors suggests an intelligent approach towards this (in one of the starting chapters of the book)
You don't, because every single financial bubble in history has been caused by active investors speculating and gambling, in most cases with other people's money. And now that people want to stop giving them money (and the associated fees) they turn around and go "you don't know what you are doing, you'll totally cause a bubble". Give me a break.
Paper this article is based on (2021): https://www.nber.org/system/files/working_papers/w28967/w289...
Capital has been FLEEING the US for some time now. Passive investments aren’t inflating a bubble. They’re providing exit liquidity to smart money.
I am not kidding but the whole crypto market has bled so much when I have been in like +20% or something. Its crazy.
I highly recommend Paxos gold but I had around 100-200 bucks and hte isuse is of Ethereum 7$ gas fees which I shouldve known (I usually use polygon usdc 0 crypto bs only stablecoins)
I think Paxos,Xaut are some good options and there are probably some neobanking solutions to this as well
as a staunch avoider you know and do quite a lot in the space!
I have built cryptocurrency related stuff (usually for free) out of just mere curiosity on proving systems and other solutions and that's how I know some things
In fact I was just curious about proving something and then I took tournament just to explain that and got some simple but nice money (25$) which made me get to more tournaments and other things haha
Moral of the story is to be reasonable with your money and if you still wish to invest, invest in your companies/projects.
That being said, stablecoins are still pretty lucrative. I follow only stablecoin news because I find the idea of remittances etc. interesting.
I usually follow https://stablecoininsider.org/ but holy cow they write texts with LLM's and that sucks imo and I am following them less and less.
I just like the idea of stablecoins though because it can genuinely open up new possibilities if done properly
Even then when I was building my first such project, I actively avoided crypto but I just wanted to prove it lol and actively wanted to look for other projects
(The idea is basically using nano zero fees coin with vanity link generators and looped transactions to permanently store very few data (like bytes) free of cost in blocks permanently, useful in proving identity of someone who wrote something while providing a timestamp when it happened, thus nanotimestamps)
Nothing is being built on it even though I think the idea did have potential but eh, I am happy lol. I am a stablecoin fan usually/traditional finance fan of index funds because I wanted to go for finance field for so long and read books about it I guess