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re: Michael Burry calls passive investments/index funds a bubble
Posted on 9/7/19 at 1:37 pm to Fat Bastard
Posted on 9/7/19 at 1:37 pm to Fat Bastard
I take it by the considerable discussion by the more knowledgeable posters of the MB that you guys think Burry’s portrayal in the Big Short is more or less accurate.
Hope he’s not right again on this one.
Hope he’s not right again on this one.
1
Posted on 9/7/19 at 5:01 pm to Sigma
Haven't read the whole thread, but another consideration is that when you buy a cap weighted index it naturally pushes higher cap companies higher. No one is looking at fundamentals with an index fund, and essentially indexers are getting a free ride off of active managers evaluating fundamentals. If the scale ever tips to where the active managers and those who evaluate fundamentals don't move the stock prices, then a bubble is occurring.
Posted on 9/8/19 at 8:00 am to SlowFlowPro
I'm not saying this guy's argument is meritless, but if Christian Bale played me in a Hollywood movie I'm sure people would take everything I say much more seriously as well.
Posted on 9/8/19 at 10:55 am to SlowFlowPro
quote:
"A proliferation of index funds, though accounting for ever-increasing amounts of investment monies, would lead to an inefficient market. A stock’s price would become more a function of the monies flowing into index funds than a reflection of its investment merits. The efficient market hypothesis would be dead."
Written by director of research at Chase to the Wall Street Journal editors on December 8, 1975.
Stocks rose and fell prior to the creation of the index fund and they rise and fall today. We've been through the dot com bubble and the subprime mortgage bubble and crash. I'm not worried.
Also, if you look into Burry's actively-managed Scion Asset Management fund he says he focuses on small-cap value stocks because they are not common index components. However, if you look at his fund's most recent Form 13F you'll see large allocations to names that are very prevalent in major indices. Almost half of his stock capital is exposed to stocks of major indices. He also had almost 10% of his capital in Alibaba a favorite stock among China-related indexes.
If there is any contagion, I'll use it to buy, and guess what people will do with the capital they took out of index funds? Eventually reinvest. Actively managed funds suck, and indices are efficient in putting these shysters out of business.
This post was edited on 9/8/19 at 6:05 pm
Posted on 9/8/19 at 3:32 pm to LSURussian
I think he's talking about a bubble caused by indiscriminate buying of relatively unknown stocks because of index investing rather than fundamentals. Thanks Sherlock, you say, but the issue comes when people, particularly the index holders but also the derivatives traders/holders tied to the indices, want out. The lack of popularity means it will be hard finding buyers of those relatively unknown stocks, so they'd crater, regardless of their fundamentals, just to find buyers. The longer we wait for such selling, the harder it'll be to find buyers for the unpopular stocks because Moody's projects passive investing to overtake active in 2021.
If he's right and if I understand, the big, well-known names would probably be more secure ("AAPL at $150? Buy, buy, buy!!")*. Of course, then there would be lots of good value picks in those smaller stocks, so
*Who here is paying attention to AAPL, AMZN, XOM, BRK, V, T, etc? Now who is paying attention to #350 by weight in the S&P 500, HOLX? #400, LW? #450, KSS? #296, MTD? Go through the S&P 500 components, and you'll see a lot of names you don't recognize. You'll recognize even less in the Russell 2000.
If he's right and if I understand, the big, well-known names would probably be more secure ("AAPL at $150? Buy, buy, buy!!")*. Of course, then there would be lots of good value picks in those smaller stocks, so
*Who here is paying attention to AAPL, AMZN, XOM, BRK, V, T, etc? Now who is paying attention to #350 by weight in the S&P 500, HOLX? #400, LW? #450, KSS? #296, MTD? Go through the S&P 500 components, and you'll see a lot of names you don't recognize. You'll recognize even less in the Russell 2000.
Posted on 9/9/19 at 12:29 am to SlowFlowPro
It seems to me that he is indicating that many ETF "investors" are not financial advisors, so they know very little about what they are doing. If these investors get nervous, they will start a sell-off. Once the sell-off begins the "herd-mentality" will kick-in and many of these investors will cash out of the ETFs, thus popping the bubble.
I could be wrong, but this is how I read his comments. When he says a bubble exists, he has the track record which will cause me to reflect on what he is saying.
This bubble could continue 5 or 10 years. This is what he does not know.
I could be wrong, but this is how I read his comments. When he says a bubble exists, he has the track record which will cause me to reflect on what he is saying.
This bubble could continue 5 or 10 years. This is what he does not know.
Posted on 9/9/19 at 11:08 am to barry
quote:I read an article last week stating that we have passed that point (more passively managed money). Can't remember how they backed up their claim, I'll try to find it and link it.
Unless the amount of passive investors grows to critical mass and you can't overcome this large amount of "dumb" money holding onto a stock. I don't think we are anywhere near this level of passive investing.
Posted on 9/9/19 at 12:30 pm to lsu13lsu
quote:
The average person doesn't realize that an S&P 500 mutual fund/ETF doesn't really own the underlying stock.
I always thought that mutual funds do hold the individual stocks, and ETFs may be more of a synthetic derivative.
For Burry to be right, you would be able to show that individual stock performance was mostly based on its current percentage in the index. Individual stocks make moves that are opposite of the index they are in all of the time. On a particular day Facebook may exceed its earnings expectation and Google does not... you would see Facebook's stock value increase more than Googles's.
Edit: If this were true that the index itself was taking away the ability for price discovery, then the 5-year return of IBM and GE stock should be roughly in line with the S&P 500 - and news flash it isn't. Those companies have had disappointing earnings for years and the market has punished their stock price accordingly.
This post was edited on 9/9/19 at 12:34 pm
Posted on 9/9/19 at 12:37 pm to castorinho
quote:
I read an article last week stating that we have passed that point (more passively managed money). Can't remember how they backed up their claim, I'll try to find it and link it.
I would like to know more. If that's true, it's huge.
Posted on 9/9/19 at 12:50 pm to Ragnar Danneskjold
quote:
I would like to know more. If that's true, it's huge.
Not really... Even if passive becomes two or three times as much as active money, there would still be plenty of price discovery. Nobody knows at what point you would lose price discovery.
Gambling is a good proxy for understanding price discovery. How many gamblers do you need before you have a line that isn't going to move much (assuming no new information in a 24 hour period)? It doesn't take much to get close to true price discovery.
Posted on 9/9/19 at 1:05 pm to CivilTiger83
quote:
Edit: If this were true that the index itself was taking away the ability for price discovery, then the 5-year return of IBM and GE stock should be roughly in line with the S&P 500 - and news flash it isn't. Those companies have had disappointing earnings for years and the market has punished their stock price accordingly.
Imagine where the price of these stocks would be if there weren't inelasticity of demand.
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