Author Topic: Index investing = "Mindless", "Robotic", "Parasitic", Idiotic", "Freeloading"...  (Read 6293 times)

Kaspian

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...And every other insult he could throw into a single article in the name of objective journalism.  Apparently, we've all "run amok" and creating a "major inefficiency".  ;)

"Parasitic and brainless investing"?!   Really?!!  Err..  I don't feel like a parasite nor do I feel stupid for indexing.  But maybe I am?

"...crowding out the hapless active money managers that seek to make investments on the basis of value " 

hap·less (hpls) adj. Luckless; unfortunate. See Synonyms at unfortunate. hapless·ly adv. hapless·ness n. hapless (ˈhæplɪs) adj 1. unfortunate; wretched ...

Awww..  Poor guys!  Now I feel bad.  :(  We should probably all go back to paying the managers 2% of our money a year so we can make less. 

Last paragraph says we're all screwed except the actively managed lot.  Hahaha.... 

http://www.valuewalk.com/2014/08/buy-low-sell-high-robotic-world-indexed-investing/

austin

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Wow, those people sure are bitter that they getting less suckers. They should probably start looking into a second career soon.  : )

mulescent

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I am an indexing fan, and invest solely in that style.  However, the article did raise one good point:  indexing depends for its effectiveness on non-indexing investors accurately setting prices in the market.  If everyone indexed, valuations wouldn't get adjusted based on performance.  So, in that sense, it is a parasitic strategy.  I don't worry, though, because I think there will always be plenty of folks who are willing to try their hand at beating the market. 

Kaspian

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Yeah, I don't think there's going to be a shortage of people who think they can beat the market anytime soon.  And many of the trendy investors who may have joined the index bandwagon lately are statistically likely to bail at the first sign of trouble and try something different.  The hidden, seething hate in this article makes me laugh out loud.  So, if we're stupid, what's Bogle?  King of the fools?

halfshellmeijin

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don't actively managed stocks really try to find hidden value and buy those stocks in anticipation of rising value? If we got to the point where stocks were grossly misvalued, wouldn't simple metrics show the opportunity? Like for instance dividend size, or gross profit. For instance, if you had a stock valued at 100 but due to no active managers the dividend is 50%. You would probably buy more of that because it is grossly undervalued. So in this example of a world with few active managers wouldn't the opportunity be in active managing? As a matter of fact, I would think that more index investors would decrease the amount of active managers, reducing the competition among active managers, making it easier to be one.

larmando

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Removing all the insults and of course the reason behind his rant, he does make the perhaps good point that by indexing one buys very much into all the bubbles and "super-excitement" into some particular area (be it tech, housing, or whatever else will come) just by the fact that the inflated stocks are going to be over-capitalized w.r.t. the whole market, and this helps making the bubble even larger.

Of course buying into a "value" fund doesn't help, as there are high chances that fund managers are (a) closet indexers that are just payed more, (b) invested as well in the bubble (maybe even more than the index, in order to overperform for a few years, before the crash), (c) over/underperforming by chance, (d) explicitly underperforming to avoid a bubble because they're smart, but we won't know until too late ( :) ) (unless the strategy is "buy underperforming managers and cross fingers", which sounds risky), (e) investing according to their impressions and knowledge, which might happen to be wrong...

So well, there are problems, but not necessarily solutions. :)

PloddingInsight

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Yes, indexing is parasitic.  In the sense that the investor is obtaining value from the market for his own benefit, without regard to how it impacts other investors.  And of course indexing only works when there are enough active traders to rationally set prices and provide liquidity.

You know what else is parasitic?  Active investing!  They are trying to extract value from the market too.  I don't see active investors losing sleep over the fact that they are making money off of the ignorance of those who are not as good at trading as they are!!  In fact I believe that is their definition of winning.

The active investors are upset that indexers are benefiting from their trades, while they try to benefit from the trades of other active investors.

Scandium

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I am an indexing fan, and invest solely in that style.  However, the article did raise one good point:  indexing depends for its effectiveness on non-indexing investors accurately setting prices in the market.  If everyone indexed, valuations wouldn't get adjusted based on performance.  So, in that sense, it is a parasitic strategy.  I don't worry, though, because I think there will always be plenty of folks who are willing to try their hand at beating the market.

So far only something like 11% of investments are in index funds.
And if "everyone" did indexing any fool could then go out and take advantage of inefficiencies, simply by being the only person not in the index. There will always be a balance.

slugline

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Since the the writer has revealed such great inefficiencies in index investing, we should be looking forward to the majority of actively-managed funds to handily beat those returns for their investors any day now.

Dr. A

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So far only something like 11% of investments are in index funds.
And if "everyone" did indexing any fool could then go out and take advantage of inefficiencies, simply by being the only person not in the index. There will always be a balance.

I wonder if there is any academic work done on estimating the minimum level of active investment needed to maintain a reasonably efficient market. My gut tells me it would be a surprisingly small percentage, say 10% of invested funds in active management to maintain stocks at roughly their intrinsic value. If not, it seems like an interesting topic for someone out there to ponder.

eyePod

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Clickbait website. They just want the traffic to get them $$ from their ads.

Kaspian

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Good observation, eyePod--likely just one of those articles written to be intentionally controversial and outrageous in order to get hits and make money from AdSense.  Sad thing, those.

So far only something like 11% of investments are in index funds.

I've also read that personal investment (i.e., everyday people like us) make up a such a small percentage of overall market investment that our beliefs, trends, and trades are close to negligible.  I'm not sure who accounts for the majority?  Giant firms, governments, corporations, pension funds?

Scandium

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Good observation, eyePod--likely just one of those articles written to be intentionally controversial and outrageous in order to get hits and make money from AdSense.  Sad thing, those.

So far only something like 11% of investments are in index funds.

I've also read that personal investment (i.e., everyday people like us) make up a such a small percentage of overall market investment that our beliefs, trends, and trades are close to negligible.  I'm not sure who accounts for the majority?  Giant firms, governments, corporations, pension funds?
That number i read in the Economist the other day. In the column on retirement/investing I think. And yes, it stated that a large part of investments come from (massive) pension funds, university endowments etc. And these often justify their existence by shuffling fund managers. I mean if they just stick it in an index fund and sit back what use are they...?

moneydummy

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It's an interesting article, but the author assumes that everyone is investing.  Which they aren't.  Most people aren't investing at all.  And most people aren't investing regularly either.  The long-term strategy of persistent buy-and-hold and indexing takes advantage of active investors who are willing to stick their neck out, as well as people who procrastinate in their investing until the last minute.  Long-term investors benefit from the fits and starts in price increases in the market, and they keep buying through the plateaus and troughs.  It's a sound strategy, and it's nice that you don't have to think about it at all.  :)

frugalnacho

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I am an indexing fan, and invest solely in that style.  However, the article did raise one good point:  indexing depends for its effectiveness on non-indexing investors accurately setting prices in the market.  If everyone indexed, valuations wouldn't get adjusted based on performance.  So, in that sense, it is a parasitic strategy.  I don't worry, though, because I think there will always be plenty of folks who are willing to try their hand at beating the market.

I don't understand, why can't valuations get adjusted if everyone indexed? Why can't the companies be independently valued based on their own performance? People will always have the option to invest in specific companies still.  Even if they didn't someone would recognize the inefficiency and say "hey, all these companies in this index fund are good except for x,y,and z which under perform significantly.  Why don't we create a new index fund that ditches those losers and keeps only the winners?".  Or the companies would just wither away and the company would die, and then it would get removed from the index anyway.

I get the sense you guys are talking about investing as if it's some kind of zero sum game where you have to beat other investors to get your share, and if they all indexed then there would be no one to beat. 

Yes, indexing is parasitic.  In the sense that the investor is obtaining value from the market for his own benefit, without regard to how it impacts other investors.  And of course indexing only works when there are enough active traders to rationally set prices and provide liquidity.

You know what else is parasitic?  Active investing!  They are trying to extract value from the market too.  I don't see active investors losing sleep over the fact that they are making money off of the ignorance of those who are not as good at trading as they are!!  In fact I believe that is their definition of winning.

The active investors are upset that indexers are benefiting from their trades, while they try to benefit from the trades of other active investors.

You aren't in the market for other investors, you are in it for yourself and the companies you put your money behind.  If you front capital to a business via index funds, and they perform work and pay you back dividends, how is that parasitic at all?  That is mutually beneficial - for both the investor and the company being invested in - and presumably everyone else in the economy as a whole.

Active investing is parasitic.  Active fund managers sitting back and sponging money from your account without actually adding any value.  They are the very definition of a parasite. 

Franklin

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I don't know.  I kind of think I'm intentionally being "Mindless", "Robotic", "Parasitic", and , "Freeloading" with my indexing.  But the terms are pretty inflammatory and clearly used for effect.  I would only consider myself "Idiotic" if indexing was my only form of investing.

Eric

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Since the the writer has revealed such great inefficiencies in index investing, we should be looking forward to the majority of actively-managed funds to handily beat those returns for their investors any day now.

This was my thought too.  In fact, the anger and tone is completely misplaced.  The indexers are creating incredible opportunities for these active investors to exploit the inefficiencies for huge returns.  You're all welcome.  :)

Kaspian

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You aren't in the market for other investors, you are in it for yourself...

Active investing is parasitic.  Active fund managers sitting back and sponging money from your account without actually adding any value.  They are the very definition of a parasite.

Hear, hear!!  Amen.