Author Topic: If everyone Indexed?  (Read 17503 times)

Heckler

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If everyone Indexed?
« on: March 27, 2015, 08:53:30 AM »
If every investor bought index funds, would there still be a stock market? 

Doesn't an index require individual stocks to be traded by others?

matchewed

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Re: If everyone Indexed?
« Reply #1 on: March 27, 2015, 09:07:11 AM »
If all the oxygen in the world suddenly turned into wood, wouldn't we all die?

There are few things in the world I would quickly put down as impossible. Your initial premise is one of them. I'm not sure if this is an interesting question at all given that. You're talking about many other events happening other than index funds being the only thing investors bought. You're talking about eliminating compensation through stocks, that every person in the entire world who invests would all come to the same lockstep conclusion, and frankly what would be the point of any small company going public given the premise.

So there would still be individual stocks, investors would still exist, therefore the market would still exist and your premise would instantly disappear.

nereo

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Re: If everyone Indexed?
« Reply #2 on: March 27, 2015, 09:19:13 AM »
an index fund is nothing more than a collection of companies.  We need those companies to exist and have publicly traded stocks in order to have index funds.
Also, there are literally hundreds (if not thousands) of different index funds available today.  They are all different combinations of the same stocks; you could have five different index funds that all include Apple (e.g. Large Tech index, US Large Cap, SP500, California Companies,  US Companies which sell mostly abroad...)

So.. no.  Even if everyone were required to invest in index funds, the underlying company stocks would still exist.  They have to.

brooklynguy

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Re: If everyone Indexed?
« Reply #3 on: March 27, 2015, 09:21:55 AM »
I'm not sure if this is an interesting question at all given that.

It is an interesting question, because while the premise in its absolute sense is (practically speaking) impossible, weaker forms of the premise (i.e., what if most investors (or investors of a certain category, like retail investors) started exclusively investing via index funds?) are already starting to materialize in reality.  The trend of an increasing percentage of the investing population limiting themselves to index strategies (and thereby shrinking the pool of investors who actually set market prices (i.e., active investors)) can and does have real-world implications.

And there has been lots of considered thought given to this question already, as a google search for "what if everyone started index investing" will reveal.

matchewed

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Re: If everyone Indexed?
« Reply #4 on: March 27, 2015, 09:25:36 AM »
I'm not sure if this is an interesting question at all given that.

It is an interesting question, because while the premise in its absolute sense is (practically speaking) impossible, weaker forms of the premise (i.e., what if most investors (or investors of a certain category, like retail investors) started exclusively investing via index funds?) are already starting to materialize in reality.  The trend of an increasing percentage of the investing population limiting themselves to index strategies (and thereby shrinking the pool of investors who actually set market prices (i.e., active investors)) can and does have real-world implications.

And there has been lots of considered thought given to this question already, as a google search for "what if everyone started index investing" will reveal.

Sure, I can agree with what you said. But that isn't what was asked.

An interesting question is what would the effects of a smaller percentage of investors driving the market have on market performance?

Not interesting, what if everyone indexed, would there be a market?

Could be that you're reading between some lines and getting at something I'm not seeing and I'm just taking at face value what was asked.. but whatev's :)

brooklynguy

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Re: If everyone Indexed?
« Reply #5 on: March 27, 2015, 09:38:16 AM »
Could be that you're reading between some lines and getting at something I'm not seeing and I'm just taking at face value what was asked.. but whatev's :)

Yes, I'm reading between the lines (whether intended by the OP or not, I don't know), that the question asked is a stepping stone to the question I addressed.

What would happen if everyone started exclusively indexing?  The entire market would freeze in place and cease to operate, because there would no longer be any active investors to set market prices.

But as matchewed said, that won't happen.  But it leads to the more interesting question of the effect of removing substantial amounts of active-investing dollars from the market (especially the subset of those dollars (like retail investors) that have a tendency to behave in a certain ways).

matchewed

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Re: If everyone Indexed?
« Reply #6 on: March 27, 2015, 09:44:29 AM »
Could be that you're reading between some lines and getting at something I'm not seeing and I'm just taking at face value what was asked.. but whatev's :)

Yes, I'm reading between the lines (whether intended by the OP or not, I don't know), that the question asked is a stepping stone to the question I addressed.

What would happen if everyone started exclusively indexing?  The entire market would freeze in place and cease to operate, because there would no longer be any active investors to set market prices.

But as matchewed said, that won't happen.  But it leads to the more interesting question of the effect of removing substantial amounts of active-investing dollars from the market (especially the subset of those dollars (like retail investors) that have a tendency to behave in a certain ways).

Yeah a much more interesting question. And here's my take.

The market would be driven by those who feel that they can detect inefficiencies in the market, just like today. IMO no matter how many people do indexing (speaking in the realistic sense of it or <100%) there will be a market which behaves very similar to the market we see today. Would it be any more volatile... perhaps. Would it be more vulnerable to influence from particularly powerful investors/investors with more market power? Yeah, but that's no different from before common people were involved in the market. In fact I'd probably guess the number of people driving the market was probably smaller 80 years ago and it didn't lead to any real bad effects. The markets still functioned. They had their ups and downs. Indexing is throwing your hat in on economies continuing to prosper. What the market does on any particular day is just background noise.

Retire-Canada

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Re: If everyone Indexed?
« Reply #7 on: March 27, 2015, 09:48:09 AM »
Anyone know what the % of $ in the markets is index investments? Google isn't telling me. ;)

-- Vik

brooklynguy

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Re: If everyone Indexed?
« Reply #8 on: March 27, 2015, 09:58:36 AM »
I agree.  If the percentage of dollars in the market representing mom-and-pop investing decision-makers were significant enough, I would think the trend towards index investing would increase the efficiency of the market (because it would remove from the active-investor population a disproportionately high percentage of a subset of investors having what I would guess is in turn a disproportionately high tendency to trade on personal feelings about companies and water-cooler speculation instead of hard data), but I don't know if that percentage is in fact significant enough for its disappearance from the market to have any meaningful effect.

forummm

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Re: If everyone Indexed?
« Reply #9 on: March 27, 2015, 10:11:36 AM »
If all the oxygen in the world suddenly turned into wood, wouldn't we all die?

Technically, when trees grow they release oxygen...

matchewed

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Re: If everyone Indexed?
« Reply #10 on: March 27, 2015, 10:12:38 AM »
If all the oxygen in the world suddenly turned into wood, wouldn't we all die?

Technically, when trees grow they release oxygen...

I'm saying spontaneously and wood, nothing was mentioned about leaves. :D

forummm

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Re: If everyone Indexed?
« Reply #11 on: March 27, 2015, 10:17:22 AM »
If everyone indexed, then the market would still exist. Some people would be selling and other would be buying. The sellers and buyers would just be big index funds.

And then some smart people would realize that the index funds are inefficiently allocating the percentage of their index devoted to a particular set of stocks, thereby making the price of that stock out of balance with respect to others in the market in terms of its price. So those smart people would buy the undervalued stocks, increasing their price, and earning the extra dividends that those stocks are returning. Those people would get wealthier than those investing in the index, and more and more people would start doing securities analysis and finding out where the market was mispriced. And eventually you'd have more or less what you have today again.

forummm

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Re: If everyone Indexed?
« Reply #12 on: March 27, 2015, 10:19:49 AM »
If all the oxygen in the world suddenly turned into wood, wouldn't we all die?

Technically, when trees grow they release oxygen...

I'm saying spontaneously and wood, nothing was mentioned about leaves. :D

Yeah, just couldn't resist teasing. :D

brooklynguy

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Re: If everyone Indexed?
« Reply #13 on: March 27, 2015, 10:30:44 AM »
If everyone indexed, then the market would still exist. Some people would be selling and other would be buying. The sellers and buyers would just be big index funds.

No, if literally every investor indexed, all selling and buying would cease to occur.  The last trade would happen whenever the last active-investor holdout converted to exclusive indexing.  After that point, all companies are 100% owned by index funds, and there are no active investors to trade (including to achieve the kind of arbitrage you describe in your next paragraph), so market prices would never change and would remain static forever (until less than 100% of investors exclusively indexed, which then renders the premise no longer true).

Quote
And then some smart people would realize that the index funds are inefficiently allocating the percentage of their index devoted to a particular set of stocks, thereby making the price of that stock out of balance with respect to others in the market in terms of its price. So those smart people would buy the undervalued stocks, increasing their price, and earning the extra dividends that those stocks are returning. Those people would get wealthier than those investing in the index, and more and more people would start doing securities analysis and finding out where the market was mispriced. And eventually you'd have more or less what you have today again.

This is explaining one of the reasons why in the real world it will never be the case that literally 100% of the investing population consists of exclusive index investors.

Rein1987

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Re: If everyone Indexed?
« Reply #14 on: March 27, 2015, 10:54:41 AM »
Anyone know what the % of $ in the markets is index investments? Google isn't telling me. ;)

-- Vik

I do not remember when, but I asked the question to Vanguard and their answer is 11% or 13% (I forget the exact answer but either 11% or 13%).

RapmasterD

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Re: If everyone Indexed?
« Reply #15 on: March 27, 2015, 10:55:40 AM »
In all due respect, is this speculative question worth thinking about since it will never happen?

Witness today's "news." http://www.cnbc.com/id/102541062

Look at the sentence that refers to SPY redemptions being 8X higher than the fund with the second highest redemption level.

And to these people, I say, "Thank you. And please....stay out."

matchewed

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Re: If everyone Indexed?
« Reply #16 on: March 27, 2015, 11:06:52 AM »
Also previous discussions on this here.

brooklynguy

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Re: If everyone Indexed?
« Reply #17 on: March 27, 2015, 11:50:14 AM »
Also previous discussions on this here.

Thanks for the link!  That thread was great.  My favorite quote:

If index investing creates a value imbalance, investors will take advantage of it by buying the undervalued stock. Thus the cycle continues onward.
Put another way, the Efficient Market Hypothesis holds only because of the people who operate on the assumption that it doesn't.

forummm

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Re: If everyone Indexed?
« Reply #18 on: March 27, 2015, 11:56:34 AM »
If everyone indexed, then the market would still exist. Some people would be selling and other would be buying. The sellers and buyers would just be big index funds.

No, if literally every investor indexed, all selling and buying would cease to occur.  The last trade would happen whenever the last active-investor holdout converted to exclusive indexing.  After that point, all companies are 100% owned by index funds, and there are no active investors to trade (including to achieve the kind of arbitrage you describe in your next paragraph), so market prices would never change and would remain static forever (until less than 100% of investors exclusively indexed, which then renders the premise no longer true).


No, even if literally every investor indexed, the index funds would still have to buy and sell as people put money into their funds and took money out. They would just be buying and selling with other index funds on the other side of the trades.
« Last Edit: March 28, 2015, 08:28:40 AM by forummm »

Kaspian

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Re: If everyone Indexed?
« Reply #19 on: March 27, 2015, 12:36:01 PM »
Right up there with "What if everyone became as frugal as MMM?  The economy would collapse!"

Another excuse for me to post this fallacy.


Indexer

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Re: If everyone Indexed?
« Reply #20 on: March 27, 2015, 04:34:14 PM »
If 100% of investing dollars was in index funds the market would lose all efficiency. 

Now let me point out why that would never happen.  "The market would lose all efficiency." 

Index funds rely on a fairly efficient market to operate.  If prices had no clear reflection of a company's' actual value based on available information then an investor with just a little research could pick the right stocks and outperform.  There was once a time active mutual funds actually did outperform as a group because they were competing more with average investors than they were other mutual funds(early 1900s).  Individual investors bought based on emotions and companies they liked so a fund manager with professional training could outsmart the average.

Today markets are very efficient.  All the super smart money managers with their armies of analysts are competing more against each other than they are the average investor.  So they have a very hard time outperforming themselves, and after fees as a group they underperform the very markets they were hired to outperform. 

So if index funds became big enough to make the markets less efficient then active funds would actually have a chance to outperform again.  However once active funds started to get popular the markets would become more efficient and they would underperform again.  So there is a break even point.  IMO its around 95-99% of the market being index funds.  Even 1-5% of the market being actively traded will be enough to keep the prices reflective of a company's underlying value.... at least for the larger stocks.  You could argue micro caps already aren't as efficient, but that is in large part because there are less analysts running the numbers, and there is less information available to analyze.  There are also tons of micro caps so you might have to analyze hundreds of them to find the diamond in the ruff, and since there is less information available properly analyzing a company that small is going to require a lot of due diligence(and likely phone calls/meetings with the company) so there is a reason professional analysts don't bother.

So 100% indexing would make markets less efficient, but the very fact that it would make markets less efficient is what will prevent it from ever happening.

Retire-Canada

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Re: If everyone Indexed?
« Reply #21 on: March 27, 2015, 05:17:28 PM »

I do not remember when, but I asked the question to Vanguard and their answer is 11% or 13% (I forget the exact answer but either 11% or 13%).

Thanks. I was curious what the rough % was. Doesn't sound like an index fund take over of the market is near at hand. ;)

-- Vik

ChrisLansing

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Re: If everyone Indexed?
« Reply #22 on: March 27, 2015, 09:28:06 PM »
http://www.joshuakennon.com/mail-bag-index-investing-vs-picking-individual-stocks/

"While we are on the subject, consider this paradox: If a significant majority of investors began to index, indexing would no longer work for a lot of structural reasons as the underlying equity market would break down and become non-functional.  It’s also interesting that indexes are far less diversified than people like to think.  The Dow Jones Industrial Average contains 30 stocks, but 56% of the assets are held in the top 10 of those stocks."

Heckler

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Re: If everyone Indexed?
« Reply #23 on: March 28, 2015, 09:05:24 AM »
If everyone indexed, then the market would still exist. Some people would be selling and other would be buying. The sellers and buyers would just be big index funds.

No, if literally every investor indexed, all selling and buying would cease to occur.  The last trade would happen whenever the last active-investor holdout converted to exclusive indexing.  After that point, all companies are 100% owned by index funds, and there are no active investors to trade (including to achieve the kind of arbitrage you describe in your next paragraph), so market prices would never change and would remain static forever (until less than 100% of investors exclusively indexed, which then renders the premise no longer true).

Quote
And then some smart people would realize that the index funds are inefficiently allocating the percentage of their index devoted to a particular set of stocks, thereby making the price of that stock out of balance with respect to others in the market in terms of its price. So those smart people would buy the undervalued stocks, increasing their price, and earning the extra dividends that those stocks are returning. Those people would get wealthier than those investing in the index, and more and more people would start doing securities analysis and finding out where the market was mispriced. And eventually you'd have more or less what you have today again.

This is explaining one of the reasons why in the real world it will never be the case that literally 100% of the investing population consists of exclusive index investors.


Brooklyn gets what I was implying.  I know it'll never happen due to the open market that forummm accurately explained, but theoretically, individual companies would not change in price relative to each other.

Heckler

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Re: If everyone Indexed?
« Reply #24 on: March 28, 2015, 09:06:20 AM »
And for an uninteresting question, many an interesting word were spilled!
« Last Edit: March 28, 2015, 09:07:56 AM by Heckler »

a1smith

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Re: If everyone Indexed?
« Reply #25 on: March 29, 2015, 12:39:33 AM »
Wow, no one has brought up the impact of market makers.  Market makers will still be required if everyone is indexing just because of daily imbalances between how much is being invested in index funds/ETFs versus being redeemed. 

http://en.wikipedia.org/wiki/Market_maker

The market makers don't provide this service for free; they want to make a living as well.  So, for example, when there are more sells than buys; they steer the price downward.  They are also profiting on the bid/ask spread. Bad news while the market is closed, there is your gap open.  Etc.

rmendpara

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Re: If everyone Indexed?
« Reply #26 on: March 29, 2015, 11:01:39 AM »
Absolutely. Funds of all sorts are simply vehicles to get cheaper access to baskets of securities at a lower cost than entering those positions and maintaining the portfolio manually.

The fund structure doesn't impact or add efficiency to the pricing mechanism as a market functions over time. Pricing is relative, not absolute, for different investors. Even for the exact same asset.

If two things happened, then maybe the market would stop:
1) expectations - all investors agree on the nominal value of all investments
2) needs - all investors have similar needs from investing (I.e. There is  the same expected return/discount rate/opportunity cost/etc for all investors)

Over the past few decades, we've made a lot of progress on #1, as trading has become far cheaper and investments are very accessible. However, i don't see a path toward #2. A pension fund, personal retirement fund, hedge fund, PE fund, etc, have different needs and I don't see how those expectations will converge in the future. Two people can value the same asset differently, based on their needs, even if they agree on the theoretical price (present value of future earnings).
« Last Edit: March 29, 2015, 11:09:40 AM by rmendpara »

lostamonkey

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Re: If everyone Indexed?
« Reply #27 on: March 29, 2015, 11:33:22 AM »
If everyone indexed (which would never happen), the market would become terribly inefficient and provide many opportunities to make more profits by actively investing. Some rational investors will use these opportunities and the market will become more and more efficient as the number of indexers decreased.

forummm

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Re: If everyone Indexed?
« Reply #28 on: March 29, 2015, 12:30:01 PM »
If everyone indexed the skeezy financial "advisors" and funds with high expense ratios would be shoved out of the market. I could live with that.

dividendman

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Re: If everyone Indexed?
« Reply #29 on: March 31, 2015, 10:14:46 PM »
Seems apropos money.cnn.com/2015/03/31/investing/investing-index-funds-warning/index.html

According to cnn 18.4% of all stock assets are held by index funds.

Heckler

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Re: If everyone Indexed?
« Reply #30 on: March 31, 2015, 10:19:53 PM »
Fired my wife's adviser of 10 years today.  It's about time.

Guess why.


Wolf359

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Re: If everyone Indexed?
« Reply #31 on: April 01, 2015, 07:40:20 AM »
Seems apropos money.cnn.com/2015/03/31/investing/investing-index-funds-warning/index.html

According to cnn 18.4% of all stock assets are held by index funds.
Warren Buffet (through Berkshire Hathaway) famously buys and holds stocks, locking them up for decades.  He has had 14.5% of all American Express stocks, 9% of Mellon Bank, and 9% of Coke and won't sell them.  All three stocks are still considered liquid and haven't had a problem finding a price.  In other words, we're already there, and it hasn't been a problem.

Speculation and trading still run rampant in the markets.  It's human nature.  Do you consider yourself an above average driver?  Most drivers do (and of course it's statistically impossible for a majority of drivers to be above average.)  The same applies to the investing world.  Most investors believe they can beat the market.  This is especially true of professionals.  As long as they do, there will be enough people to make the market. 

At least some of the index volume is being caused by speculators and professionals.  They're buying and selling the ETFs like stocks, or to hedge positions.  They're not buying and holding, so the indexed stocks in those holdings aren't dropping out of the market.

The only time there won't be enough trading to make the market, is if there is an external force exerting its influence.  Think the vibrant Cairo or St. Petersburg stock markets, which were major trading centers in their day.  Cairo went from being the 5th largest exchange to dormant when Nassar nationalized the companies in 1961.  The old St Petersburg stock exchange was closed by the Communists to form the ultimate index fund (all the common people own all the businesses). 

a1smith

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Re: If everyone Indexed?
« Reply #32 on: April 01, 2015, 12:35:18 PM »
Fired my wife's adviser of 10 years today.  It's about time.

Guess why.

Wow.  2.58% and 2.74% expense ratios.  Highway robbery.

brooklynguy

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Re: If everyone Indexed?
« Reply #33 on: May 02, 2016, 07:33:28 AM »
Reviving this old thread to link to a great new Philosophical Economics article that directly addresses and expands upon some of the ideas discussed upthread:  "Index Investing Makes Markets and Economies More Efficient".

mrpercentage

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Re: If everyone Indexed?
« Reply #34 on: May 02, 2016, 09:53:55 AM »
http://www.joshuakennon.com/mail-bag-index-investing-vs-picking-individual-stocks/

"While we are on the subject, consider this paradox: If a significant majority of investors began to index, indexing would no longer work for a lot of structural reasons as the underlying equity market would break down and become non-functional.  It’s also interesting that indexes are far less diversified than people like to think.  The Dow Jones Industrial Average contains 30 stocks, but 56% of the assets are held in the top 10 of those stocks."


Boom! Why not just buy those and cut away the rest? Thats basically what they are doing anyway unless they are buying equally weighted. ETF's are much worse. Last time I looked Apple was 15% of QQQ and that is supposed to be the top 100 Nasdaq stocks. They tell you that its a 100 companies but put 15% in one------ Riiiiiiight

forummm

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Re: If everyone Indexed?
« Reply #35 on: May 02, 2016, 11:13:10 AM »
http://www.joshuakennon.com/mail-bag-index-investing-vs-picking-individual-stocks/

"While we are on the subject, consider this paradox: If a significant majority of investors began to index, indexing would no longer work for a lot of structural reasons as the underlying equity market would break down and become non-functional.  It’s also interesting that indexes are far less diversified than people like to think.  The Dow Jones Industrial Average contains 30 stocks, but 56% of the assets are held in the top 10 of those stocks."


Boom! Why not just buy those and cut away the rest? Thats basically what they are doing anyway unless they are buying equally weighted. ETF's are much worse. Last time I looked Apple was 15% of QQQ and that is supposed to be the top 100 Nasdaq stocks. They tell you that its a 100 companies but put 15% in one------ Riiiiiiight

I wouldn't buy a DJI or QQQ fund. The DJIA is a stupid metric that's only a holdover from early 1900s when it was too complicated to weight and sum 500 companies. The price weighted DJIA was simple because you just added up 30 numbers without adjustment. It's not an "index" that people should invest in. Kennon's point about the DJIA is dumb for that same reason. If he wanted to argue that AAPL was 4% of the S&P500 at one point, then OK.

And I think his assertions about indexing also don't make any sense. For reasons discussed in many threads.

Aphalite

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Re: If everyone Indexed?
« Reply #36 on: May 02, 2016, 02:17:08 PM »
Kennon's point about the DJIA is dumb for that same reason.

Did you read his article? He agrees with you: "Likewise, why would I want to own $5.21 worth of IBM for every $1.00 I owned worth of Coca-Cola?  Both are good businesses but I do not find IBM 5.21x cheaper or more attractive than Coke at present levels.  That seems like an irrational allocation decision; the numbers do not warrant it.  The only reason it is this way is because the Dow weights stocks based on share price, which is entirely arbitrary!  IBM is now $192.88 per share and Coca-Cola is $36.96 per share due to Coke’s stock split last year."

And I think his assertions about indexing also don't make any sense. For reasons discussed in many threads.

You mean like: "This may sound like an odd statement given what I just said, but for many people, especially those with small amounts of money and simple needs, indexing is the superior strategy.  If something were to happen to me, I would want my extended family to put everything into a low-cost index fund at Vanguard, reinvest or live off the dividends, and ignore it for long periods of time.  I wouldn’t want them selecting individual equities.* [See Update in Footnotes] That’s because the list of stocks in the Dow Jones, overall, is very good.  It is.  For someone who can’t value a business, owning that basket makes a lot of sense.  (With the portfolio I own now, they wouldn’t have to make the switch right away.  The stocks held in our accounts are among the most stable, blue chip firms in the world, bought at attractive prices over the past few years.  The portfolio should continue to run itself with no turnover for the next decade.)" from the same article? I think that's your (and most other posters') viewpoint correct?

Aphalite

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Re: If everyone Indexed?
« Reply #37 on: May 02, 2016, 02:24:50 PM »
Reviving this old thread to link to a great new Philosophical Economics article that directly addresses and expands upon some of the ideas discussed upthread:  "Index Investing Makes Markets and Economies More Efficient".

I could buy that theory - the less "dumb" money that's out there, the less chance of you getting a situation where there's runaway exuberance or fear. Both could still exist of course

The tough thing with "what if" scenarios is the same as with investing, there's more variables at hand than we expect/can know and the way they intermingle and affect results are also beyond the scope of rational expectations. Howard Marks put it best when he says that risk is the indeterminable nature of future events (that you can guess/predict some things, but not all, and we tend to underestimate that which we can't measure and over rely on that which we can measure). It could very well be that everyone buying an index results in small cap unliquid companies being raised to obscene valuations, and it could also very well be that everyone buying an index results in only the smart or rational folks setting prices, leading to a closer range of pricing versus intrinsic value.

Human nature being what it is, I think there is more of a chance that market makers would take advantage of robo/index buy/sell logic, but who's to say?

brooklynguy

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Re: If everyone Indexed?
« Reply #38 on: May 04, 2016, 10:25:03 AM »
Reviving this old thread to link to a great new Philosophical Economics article that directly addresses and expands upon some of the ideas discussed upthread:  "Index Investing Makes Markets and Economies More Efficient".

For the sake of completeness, here's a link to a follow-up article Philosophical Economics just put out that expands upon the first one:  "The Impact of Index Investing:  A Follow-Up".

I could buy that theory - the less "dumb" money that's out there, the less chance of you getting a situation where there's runaway exuberance or fear. Both could still exist of course

It's interesting to consider the second- (and third-, and so on) order effects of removing material amounts of "dumb" money from the market, which would ripple through all levels of the Keynesian Beauty Contest that is the market, including the "smart" money to the extent it intentionally trades in reliance on expectations about the behavior of the "dumb" money ("rational irrationality" and all that).

AdrianC

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Re: If everyone Indexed?
« Reply #39 on: May 04, 2016, 03:38:07 PM »
For the sake of completeness, here's a link to a follow-up article Philosophical Economics just put out that expands upon the first one:  "The Impact of Index Investing:  A Follow-Up".

The last paragraph is interesting:

But the decision of what asset classes to invest in more broadly, or whether and when to invest at all–whether to just keep the money in the bank, and for how long–is a decision that is much more difficult to offload onto someone else, or onto a systematic process.  Even if an advisor is used, the client still has to make the decision to get started, and then the decision to stick with the plan.  “The stock market is doing really well, at all time highs.  But I’m not invested.  Should I be?”  “This isn’t working.  Our stuff is really down a lot.  Are we in the right setup here?”  Naturally, we should expect a space in which unskilled investors are forced to make these decisions for themselves–without experts or indices to rely on–to exhibit greater degrees of inefficiency, and greater amounts of opportunity.

Most of us here are sold on passive investing (of one form or another). We argue about asset allocation and market timing.