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Learning, Sharing, and Teaching => Investor Alley => Topic started by: HBFIRE on September 04, 2019, 09:36:36 AM

Title: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: HBFIRE on September 04, 2019, 09:36:36 AM
Some of the reasoning behind index investing is that stock prices already closely reflect all information known to a typical investor. Hence, unless you have spectacularly better research than most or you're Warren Buffet, you are best off just going with the index.   

What Michael Burry seems to be claiming here is that there is a saturation point where index funds market share reaches an inflection point and it is no longer reflecting "real market value" -- a "bubble point" -- supposedly at around 50% of total investment share.  I'm not sure what the current ratio is or how this ratio was determined.

https://finance.yahoo.com/news/big-short-michael-burry-explains-104146627.html
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: EvenSteven on September 04, 2019, 09:53:42 AM
Discussion at bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=289725&newpost=4733284


My take away was the same as this poster, but I'm no expert:

Quote
Yes - his primary objection in the article appears to not be the index funds themselves but rather the "trillions of dollars of assets... indexed to these stocks". In other words various derivatives and such. Much like in CDOs it wasn't just the underlying assets themselves that were a problem but rather the Credit Default Swaps that were indexed to the CDOs themselves. Those CDS essentially created massive leverage against the much smaller market of mortgage backed securities that were held within the CDOs. (As a side note CDO is a very broad term and I'm here only referring to those that held actual securities - there are also "synthetic CDOs" that really are essentially CDS instead).

Now of course the interviewee doesn't get to pick the title of the article. So the reporter who needs a bunch of clicks created the misleading click-bait title which seems well beyond what the person interviewed was saying.

He does state an objection to the index funds themselves with regard to price discovery but it seems the larger warning and the analogy to the CDO/CDS crisis is rather the derivatives linked to indexes.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: HBFIRE on September 04, 2019, 10:05:25 AM
I just figured he's shilling for active investment :).

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 04, 2019, 10:09:23 AM
He does put in a good word for Gamestop. He's obviously not a gamer; it's hard not to guffaw at that recommendation.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: EvenSteven on September 04, 2019, 10:12:01 AM
I just figured he's shilling for active investment :).

Well, that too.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: fattest_foot on September 04, 2019, 10:39:16 AM
Doesn't really make any sense to me.

Assuming the index is large enough, it just means more opportunities for arbitrage for active traders. Which means the ones at the "bottom" of the index fall off anyway. And the larger companies should have enough trading that the index should never impact them anyway.

This sounds a lot like a doom and gloom scenario where index funds somehow become 80%+ of the market and cause irrational propping up of the companies indexed. But that requires so many assumptions, like everyone owning the same indexes and people no longer looking to actively trade, that it seems like a non-issue.

I also want to say, at least according to that article, it completely misunderstands why CDO's were a problem. The problem with them was they were leveraged, and leveraged against each other, no less (CDO's taken out against CDO's, etc). Index funds are always backed by the underlying assets. In fact, the more I think about this, the dumber it all sounds. Burry may have been right once, but I'm wondering if maybe it wasn't a fluke. I remember calling the housing bubble on Fatwallet back in 2006 or 2007. It's not like it came out of nowhere. He's just one person who had the assets required to make a fortune, and the balls to actually time it correctly. I'm not sure we should celebrate that.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 04, 2019, 10:57:40 AM
Burry may have been right once, but I'm wondering if maybe it wasn't a fluke. I remember calling the housing bubble on Fatwallet back in 2006 or 2007. It's not like it came out of nowhere. He's just one person who had the assets required to make a fortune, and the balls to actually time it correctly. I'm not sure we should celebrate that.

There are a lot of one-hit wonders in the investing world.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: merula on September 04, 2019, 11:29:07 AM
BH mods merged a bunch of links, so the updated thread there is: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=289284

One thing that really struck me was:

Quote
Rob Arnott, in a recent Morningstar podcast, that if you subtract all of the index investors’ holdings you are left with the aggregate holdings of active investors. Which looks exactly like the market, obviously.

I'd never thought about it in precisely those terms, but now that I read it, it's self-explanatory.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: PathtoFIRE on September 04, 2019, 12:01:35 PM
Josh Brown/ (https://thereformedbroker.com/2019/08/29/the-real-bubble-has-always-been-in-active-management/) has a good semi-rebuttal to Burry's comments.

TL;DR, index fund-style retirement plans bear a closer resemblance to pension-style plans of yore than to the active management-style ideals that Burry represents and that only became a real force in the 1980s and are on the wane since 2000 and 2008; therefore, its the active management-style investments that are the aberrancy, at least for funding retirements for the masses, and not the other way around that Burry would have you believe.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 04, 2019, 04:52:49 PM
Discussion at bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=289725&newpost=4733284


My take away was the same as this poster, but I'm no expert:

Quote
Yes - his primary objection in the article appears to not be the index funds themselves but rather the "trillions of dollars of assets... indexed to these stocks". In other words various derivatives and such. Much like in CDOs it wasn't just the underlying assets themselves that were a problem but rather the Credit Default Swaps that were indexed to the CDOs themselves. Those CDS essentially created massive leverage against the much smaller market of mortgage backed securities that were held within the CDOs. (As a side note CDO is a very broad term and I'm here only referring to those that held actual securities - there are also "synthetic CDOs" that really are essentially CDS instead).

Now of course the interviewee doesn't get to pick the title of the article. So the reporter who needs a bunch of clicks created the misleading click-bait title which seems well beyond what the person interviewed was saying.

He does state an objection to the index funds themselves with regard to price discovery but it seems the larger warning and the analogy to the CDO/CDS crisis is rather the derivatives linked to indexes.
Seems to me that discussing an article that is critical of index investing at Bogleheads is analogous to debating the dangers of a vegan diet at PETA.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: vand on September 05, 2019, 12:57:53 AM
Bogle himself was clear that if everyone tried to index the result would be chaos, but he also qualified it with saying that the chances of everyone indexing was virtually zero.

However... sometimes the originators of ideas have no idea how far their concepts are taken once they permeate the public subconcious and are adopted as orthodoxy.

I'll bet Bogle didn't really think Indexing would become as popular as it is today, just as I'm sure Keynes never imagined that we could take the ideas of countercyclical fiscal and monetary policy and run with it to the point where we have unprecedented peace-time budgetary deficits and parts ofthe world are issuing return-free risk on 100yr bonds.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: terran on September 05, 2019, 06:07:52 AM
Maybe I'm wrong, but if indexes ever make the market inefficient, won't some active manager(s) come in a make a boatload of money and make the market efficient again? Isn't that the whole point of a market with as much transparency and liquidity as the global stock markets?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: JAYSLOL on September 05, 2019, 09:53:14 AM
Maybe I'm wrong, but if indexes ever make the market inefficient, won't some active manager(s) come in a make a boatload of money and make the market efficient again? Isn't that the whole point of a market with as much transparency and liquidity as the global stock markets?

You are not wrong, the moment it’s more profitable for the average active investor than the average index investor it’ll level out on its own from a rush of new or returning active investors.  The only way I see an “index bubble” doing harm to index investors is if those new active investors are the ones not valuing companies properly which throws off everything, but even then I can’t see it as much more than normal blip.  As far as valuations being thrown out of whack by tons of money being invested that normally wouldn’t be by the popularity of index investing rising, I could see that causing a bubble and a crash, but I don’t see why it would be much worse than the normal boom/bust fluctuations in the market. 
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: talltexan on September 05, 2019, 11:37:56 AM
Bogle himself was clear that if everyone tried to index the result would be chaos, but he also qualified it with saying that the chances of everyone indexing was virtually zero.

However... sometimes the originators of ideas have no idea how far their concepts are taken once they permeate the public subconcious and are adopted as orthodoxy.

I'll bet Bogle didn't really think Indexing would become as popular as it is today, just as I'm sure Keynes never imagined that we could take the ideas of countercyclical fiscal and monetary policy and run with it to the point where we have unprecedented peace-time budgetary deficits and parts ofthe world are issuing return-free risk on 100yr bonds.

It's not fair to blame Keynes for the zero-lower-bound problems we're having today. Keynesians wanted more gov't stimulus, but Republicans asked for Sequester here in US, and the conservatives asked for Austerity in Britain.

The large deficits in the US are procyclical, but the slowing in growth we are seeing (and will see through 2020) proves Keynes right.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Travis on September 05, 2019, 04:57:00 PM
Why does the market go down?  If indexing is taking over and creating a bubble because we're buying stocks whether they deserve our capital or not, wouldn't prices continue to rise?  Clearly somebody still has enough influence over the market for prices to drop when the tea leaves get read and it's not "buy and hold" index investors.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Daisy on September 05, 2019, 09:11:47 PM
*sigh*

@grantmeaname gave an excellent talk on index investing at last year's CM*TO. I brought up the issue of price discovery and my concerns. He was able to convince me that it wasn't an issue due to the price being determined by the active investors. He was successful in convincing me at the time.

However, every time I read an article like this I start getting worried again.

I think I will stalk @grantmeaname at this year's CM*TO and have him explain it all to me again. Now I worry after publicly admitting this, that he will ignore me at camp and we won't be able to even share a Maple Fluff together.

Oh well, let's hope he actually doesn't avoid me at camp.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Montecarlo on September 05, 2019, 09:28:45 PM
Yeah, index investing is basically being a freeloader, but it works since if everyone did it there would so many inefficiencies any idiot could kill it stock picking.  Imagine no one reprising BP after deep water horizon.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: vand on September 06, 2019, 05:17:15 AM
Bogle himself was clear that if everyone tried to index the result would be chaos, but he also qualified it with saying that the chances of everyone indexing was virtually zero.

However... sometimes the originators of ideas have no idea how far their concepts are taken once they permeate the public subconcious and are adopted as orthodoxy.

I'll bet Bogle didn't really think Indexing would become as popular as it is today, just as I'm sure Keynes never imagined that we could take the ideas of countercyclical fiscal and monetary policy and run with it to the point where we have unprecedented peace-time budgetary deficits and parts ofthe world are issuing return-free risk on 100yr bonds.

It's not fair to blame Keynes for the zero-lower-bound problems we're having today. Keynesians wanted more gov't stimulus, but Republicans asked for Sequester here in US, and the conservatives asked for Austerity in Britain.

The large deficits in the US are procyclical, but the slowing in growth we are seeing (and will see through 2020) proves Keynes right.

Keynes' proposal was counter-cyclical, but today there is never any true tightening during expansions, only various degrees of stimulus and monetary loosening. When was the last time the US actually posted a budgetary surplus? there was a brief period during the Clinton era, but apart from that it has been continual deficit spending. Do you think that debt can ever be repaid? They can't even repay the interest on the existing debt, hence the need to continually issue more debt.

It goes to show you how absurd an idea can reach when it becomes the orthodoxy and is allowed to run and run.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: matchewed on September 06, 2019, 06:14:59 AM
Burry's argument, from my layman PoV, is that due to the large volume in index funds and similar investments that if a crash were to happen then individuals in index funds and ETF's would escalate the crash by pulling out when the drop starts.

I don't doubt the reasoning behind it, but keep playing that scenario out. The economy recovers, where do these people start putting their money? All those individuals who pulled out of ETF's and index funds when they got spooked, what do they do after? I doubt burying the cash in the backyard is a choice.

My bet would be they put it back into a/the market some how and that in turn will help in the recovery from whatever future crash happens.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: talltexan on September 06, 2019, 07:42:03 AM
Bogle himself was clear that if everyone tried to index the result would be chaos, but he also qualified it with saying that the chances of everyone indexing was virtually zero.

However... sometimes the originators of ideas have no idea how far their concepts are taken once they permeate the public subconcious and are adopted as orthodoxy.

I'll bet Bogle didn't really think Indexing would become as popular as it is today, just as I'm sure Keynes never imagined that we could take the ideas of countercyclical fiscal and monetary policy and run with it to the point where we have unprecedented peace-time budgetary deficits and parts ofthe world are issuing return-free risk on 100yr bonds.

It's not fair to blame Keynes for the zero-lower-bound problems we're having today. Keynesians wanted more gov't stimulus, but Republicans asked for Sequester here in US, and the conservatives asked for Austerity in Britain.

The large deficits in the US are procyclical, but the slowing in growth we are seeing (and will see through 2020) proves Keynes right.

Keynes' proposal was counter-cyclical, but today there is never any true tightening during expansions, only various degrees of stimulus and monetary loosening. When was the last time the US actually posted a budgetary surplus? there was a brief period during the Clinton era, but apart from that it has been continual deficit spending. Do you think that debt can ever be repaid? They can't even repay the interest on the existing debt, hence the need to continually issue more debt.

It goes to show you how absurd an idea can reach when it becomes the orthodoxy and is allowed to run and run.

Why does the debt need to be repaid? Government debt need only be serviced, because the Sovereign government can tax within its own currency forever, it's not like a human being, whose earning power will eventually diminish due to old age and death.

Our economy grew by about 3% during 2018 (roughly $600 billion worth of goods/services). The interest on the debt that year was $324 billion (chart: https://fred.stlouisfed.org/series/FYOINT ), which was less than 10% of Federal revenue.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 06, 2019, 10:13:06 AM
*sigh*

@grantmeaname gave an excellent talk on index investing at last year's CM*TO. I brought up the issue of price discovery and my concerns. He was able to convince me that it wasn't an issue due to the price being determined by the active investors. He was successful in convincing me at the time.

However, every time I read an article like this I start getting worried again.

I think I will stalk @grantmeaname at this year's CM*TO and have him explain it all to me again. Now I worry after publicly admitting this, that he will ignore me at camp and we won't be able to even share a Maple Fluff together.

Oh well, let's hope he actually doesn't avoid me at camp.

I hope he doesn't avoid you so you can share the insights. :-)

Here's the "problem" I see with the argument: active investors are becoming less and less common due to indexing.  Not really a problem for your large cap stocks because there still a large number of analysts and individual investors watching them.  On the small and mid cap side, notsomuch. So fewer people watching and investing allows for some interesting price moves.  The reason I air quote the word "problem" is that I see an interesting opportunity for individual investors.  So it's not really a problem for me.  See my tagline.

And here's another structural issue that isn't being talked about; the reduction in the number of publicly traded companies in the US over the last 20-25 years.  The number of companies has dropped by about half. I wonder how much indexing is exacerbating that.   


Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: MustacheAndaHalf on September 06, 2019, 10:43:08 AM
"Today I counted 1,049 stocks that traded less than $5 million in value during the day."

There are about 5,000 stocks in the U.S. stock market, so is he talking about penny stocks?  The most inclusive U.S. ETFs are the Total Stock Market ETFs of iShares (ITOT) and Vanguard (VTI).  But those hold 3540 - 3606 stocks.  They ignore the bottom ~1500 stocks in the market.  So anything that happens to the bottom 1,000 stocks has no impact on the total stock market ETFs, let alone the rest of the investments that include even fewer stocks.


"almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this."

This quote turned my opinion on Michael Burry.  "linked to" doesn't mean anything - he's selling us a pile of something.  Yes, the smallest stock in the S&P 500 is "linked to" the S&P 500.  But it's impact is trivial.  But let me be more specific than Mr Burry.  Vanguard holds $68 M in the S&P 500 stock, and $67 M in the S&P 501 stock.  Footlocker is the S&P #501 stock - it has a trading volume is $156 million / day (3 mo avg).  And yet even this stock, with 150x the above limit, is still only 0.013% of the S&P 500.  A stock worth 0.013% is still "linked to" the S&P 500, even if it comprises about 1% of 1%.  Instead of saying "linked to", why not state how much money rests on stocks he mentioned?


"The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks."

The S&P #198 stock is Hilton Hotels (NYSE:HLT).  For the past 30 days, it averaged $179 million/day in trading volume.  But if you look at only the past 10 days, the trading volume was $122 million a day.  There are 17 analysts covering NYSE:HLT.  Does it lack price discovery?  Or is the $150 million criteria wrong?

I'd like to see determined the assets allocated to those 266 stocks he mentioned.  The S&P 500 is top heavy.  The top 10 stocks have 23% of it's asset value, and the top 50 hold about half.  If Microsoft experiences it's own 2008 event, then that -50% loss hits the S&P with a -2.1% loss.  If the same thing happens to Hilton Hotels, that -50% drop would map to a 0.057% loss, so you'd keep 99.94% of your assets intact.  And that's a stock which goes above and below Mr Burry's borderline of $150 million.


I really dislike how he used vague language to avoid being accountable for his statements.  He says "linked with" hundreds of billions in assets.  But he doesn't admit that penny stocks have almost no impact on those assets.  He says some S&P 500 stocks lack price visibility because they don't meet his $150 million/day criteria, but he doesn't say why that criteria is accurate - and ignores analysts covering these stocks.  He says "trillions" of derivative assets when the S&P 500 has $24 trillion in assets.  Overall, he's vague or misleading through most of the article, and I find myself having to limit my good opinion of him to his prediction of the 2008 crisis.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 06, 2019, 07:59:22 PM
*sigh*

@grantmeaname gave an excellent talk on index investing at last year's CM*TO. I brought up the issue of price discovery and my concerns. He was able to convince me that it wasn't an issue due to the price being determined by the active investors. He was successful in convincing me at the time.

However, every time I read an article like this I start getting worried again.

I think I will stalk @grantmeaname at this year's CM*TO and have him explain it all to me again. Now I worry after publicly admitting this, that he will ignore me at camp and we won't be able to even share a Maple Fluff together.

Oh well, let's hope he actually doesn't avoid me at camp.
There is no force stronger than the magnetism between maple fluff and my heart.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 06, 2019, 08:04:06 PM
It's a self-correcting problem. The thinner the analyst attention on a stock, the more informationally inefficient the stock's price is. The more informationally inefficient a stock's price is, the more money an astute analyst can make by identifying and taking advantage of a mispricing. The more money an analyst can make on a stock, the more attention they will pay to it.

The rest of us? We are "free riding" on the analyst's hard work to identify an investment opportunity and correct mispricing because we get a more correct price. On the other hand, the market pays the analyst a tiny, tiny piece of excess returns so they keep digging.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Daisy on September 06, 2019, 08:38:30 PM
*sigh*

@grantmeaname gave an excellent talk on index investing at last year's CM*TO. I brought up the issue of price discovery and my concerns. He was able to convince me that it wasn't an issue due to the price being determined by the active investors. He was successful in convincing me at the time.

However, every time I read an article like this I start getting worried again.

I think I will stalk @grantmeaname at this year's CM*TO and have him explain it all to me again. Now I worry after publicly admitting this, that he will ignore me at camp and we won't be able to even share a Maple Fluff together.

Oh well, let's hope he actually doesn't avoid me at camp.
There is no force stronger than the magnetism between maple fluff and my heart.

It will make you big and strong.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 06, 2019, 09:15:46 PM
Like a maple tree
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 07, 2019, 08:41:44 AM
It's a self-correcting problem. The thinner the analyst attention on a stock, the more informationally inefficient the stock's price is. The more informationally inefficient a stock's price is, the more money an astute analyst can make by identifying and taking advantage of a mispricing. The more money an analyst can make on a stock, the more attention they will pay to it.

The rest of us? We are "free riding" on the analyst's hard work to identify an investment opportunity and correct mispricing because we get a more correct price. On the other hand, the market pays the analyst a tiny, tiny piece of excess returns so they keep digging.

I agree that inefficiency tends towards self-correction, but not always and less so in the very short to short term. Which is part of the reason why I enjoy doing individual stocks as a hobby.  I like to put relatively small amounts of money on the line with so-called value stocks and see if I can do better.   

Every now and then the market really gets it wrong. Its with no small irony that we're discussing whether markets are efficient on a topic about Michael Burry.  Who was one of a few people who profited greatly from the last time the market got it gobsmackingly wrong.

I think you're right in noting that we're free riding on the collective analysts work. With fewer and fewer individual investors in the market, we're relying on fewer and fewer voices to be the "wisdom of the crowd." For the large cap stocks, that's not a problem. Lots of people and analysts looking. Not so true as you move to medium, small, and micro caps. Fewer individual investors, fewer analysts. And decreasing over time.  And here's an interesting thing I've noticed: the same names are analysts for multiple companies in the same industry.  So the same biases that Joe or Jim or Sally have for or against an industry are being replicated.  And there is almost certainly a herd mentality at work.  Again, let's look at the example of Michael Burry.  What set him apart in my view view wasn't so much that he noticed the CDO problem, it was that he and a few others were willing to stand up, say that this is BS, and risk a lot of money on it.  Does your average analyst have that same willingness or ability to do so at the micro-level?  Would they be willing to risk their tiny, tiny piece of the excess returns to stand alone, even if they were convinced they were right?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 09, 2019, 08:41:29 AM
I think it's also worth considering the various secular forces that have been in play to create the majority of the massive gains the market has experienced this past decade. There are 2 main ones that come to mind. China and the fed.

But my point is that China and the Fed aren't going to do what they did in the last decade. China's growth story has slowed, expansionary policies can't expand the economy forever, and we should heed Bogle's warning that we shouldn't expect returns more than 4 or 5%... if we're investing in total market index funds.

But, if we abandon the total market because its full of stagnant businesses in stagnant industries, we probably can expect superior gains from companies that have consistently demonstrated superior performance and tea leaf reading in growth industries.  I am long companies like MSFT, V, SQ, CSCO and I trim and grow my positions in them based on market overreactions. I have 10-30% individual REIT exposure (also future focused picks, such as CONE and CCI) depending on current valuations.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: ender on September 09, 2019, 08:47:30 AM
Aren't passive managed funds still under 1/2 the actual market too?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: vand on September 09, 2019, 09:19:25 AM
Bogle himself was clear that if everyone tried to index the result would be chaos, but he also qualified it with saying that the chances of everyone indexing was virtually zero.

However... sometimes the originators of ideas have no idea how far their concepts are taken once they permeate the public subconcious and are adopted as orthodoxy.

I'll bet Bogle didn't really think Indexing would become as popular as it is today, just as I'm sure Keynes never imagined that we could take the ideas of countercyclical fiscal and monetary policy and run with it to the point where we have unprecedented peace-time budgetary deficits and parts ofthe world are issuing return-free risk on 100yr bonds.

It's not fair to blame Keynes for the zero-lower-bound problems we're having today. Keynesians wanted more gov't stimulus, but Republicans asked for Sequester here in US, and the conservatives asked for Austerity in Britain.

The large deficits in the US are procyclical, but the slowing in growth we are seeing (and will see through 2020) proves Keynes right.

Keynes' proposal was counter-cyclical, but today there is never any true tightening during expansions, only various degrees of stimulus and monetary loosening. When was the last time the US actually posted a budgetary surplus? there was a brief period during the Clinton era, but apart from that it has been continual deficit spending. Do you think that debt can ever be repaid? They can't even repay the interest on the existing debt, hence the need to continually issue more debt.

It goes to show you how absurd an idea can reach when it becomes the orthodoxy and is allowed to run and run.

Why does the debt need to be repaid? Government debt need only be serviced, because the Sovereign government can tax within its own currency forever, it's not like a human being, whose earning power will eventually diminish due to old age and death.

Our economy grew by about 3% during 2018 (roughly $600 billion worth of goods/services). The interest on the debt that year was $324 billion (chart: https://fred.stlouisfed.org/series/FYOINT ), which was less than 10% of Federal revenue.

Do you ever actually think about the logical extension of what you write?

Debt is expanding a a faster rate than GDP.

If it never needs to be repaid then what's the point of someone lending you the money they will never get back? Why can't every single country simply run up infinite debt?

The fact that the US can't operate with a balanced budget that simply stops the debt from increasing is a sign of an inherently unsustainable system. No country or civilisation in the history of the world has ever been able to run up debt to infinity. At some point it will stop. If something cannot go on forever then it will end. It may not be in our lifetime, or it may be tomorrow, but it will end.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: BECABECA on September 09, 2019, 10:19:36 AM
...
Again, let's look at the example of Michael Burry.  What set him apart in my view view wasn't so much that he noticed the CDO problem, it was that he and a few others were willing to stand up, say that this is BS, and risk a lot of money on it.  Does your average analyst have that same willingness or ability to do so at the micro-level?  Would they be willing to risk their tiny, tiny piece of the excess returns to stand alone, even if they were convinced they were right?

It doesn’t have to be an analyst doing this... Burry or somebody with big enough pockets could buy a bunch of a random small stock, artificially inflating its share price enough to get into one of the indexes. Then once it’s purchased by enough of the funds that track that index, raising its price considerably, they dump it and short it. Obviously if nobody is actively trading then they could pull this off, but not sure what the active vs index traders inflection point would have to be for this to work for them. You’d see this happen with small cap index funds before large cap, so I figure if someone is really worried about this scenario then they ought to stick to large cap index investing?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 09, 2019, 12:10:34 PM
...
Again, let's look at the example of Michael Burry.  What set him apart in my view view wasn't so much that he noticed the CDO problem, it was that he and a few others were willing to stand up, say that this is BS, and risk a lot of money on it.  Does your average analyst have that same willingness or ability to do so at the micro-level?  Would they be willing to risk their tiny, tiny piece of the excess returns to stand alone, even if they were convinced they were right?

It doesn’t have to be an analyst doing this... Burry or somebody with big enough pockets could buy a bunch of a random small stock, artificially inflating its share price enough to get into one of the indexes. Then once it’s purchased by enough of the funds that track that index, raising its price considerably, they dump it and short it. Obviously if nobody is actively trading then they could pull this off, but not sure what the active vs index traders inflection point would have to be for this to work for them. You’d see this happen with small cap index funds before large cap, so I figure if someone is really worried about this scenario then they ought to stick to large cap index investing?
1) index funds do not declare the date on which they are going to add a stock that has been added by an index
2) index funds do not hold all of the stocks that comprise the index that they track, just enough of them to produce a statistically similar performance. This is even more so true of small/mid cap indices and the smallest stocks in the indices (the ones just being added to the bottom of the 500/1000/2000)
3) if the active trader creates a massively overvalued stock in the meantime there is a mispricing opportunity for other active analysts to exploit by underweighting/shorting the stock
4) pretty sure this is illegal even if it could work. see pump and dump (https://en.wikipedia.org/wiki/Pump_and_dump)
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: PathtoFIRE on September 09, 2019, 12:18:56 PM
Not to mention that, at least for the large common indices, adding and removing stocks is done by a committee that has some degree of agency. We're not talking about some completely reductive automated algorithm. Which also puts a bit of a dent in the arguments of those trying to draw clear distinct lines between "passive" and "active"; it's really more like "more active" and "less active" in reality.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: BECABECA on September 09, 2019, 01:16:36 PM
...
Again, let's look at the example of Michael Burry.  What set him apart in my view view wasn't so much that he noticed the CDO problem, it was that he and a few others were willing to stand up, say that this is BS, and risk a lot of money on it.  Does your average analyst have that same willingness or ability to do so at the micro-level?  Would they be willing to risk their tiny, tiny piece of the excess returns to stand alone, even if they were convinced they were right?

It doesn’t have to be an analyst doing this... Burry or somebody with big enough pockets could buy a bunch of a random small stock, artificially inflating its share price enough to get into one of the indexes. Then once it’s purchased by enough of the funds that track that index, raising its price considerably, they dump it and short it. Obviously if nobody is actively trading then they could pull this off, but not sure what the active vs index traders inflection point would have to be for this to work for them. You’d see this happen with small cap index funds before large cap, so I figure if someone is really worried about this scenario then they ought to stick to large cap index investing?
1) index funds do not declare the date on which they are going to add a stock that has been added by an index
2) index funds do not hold all of the stocks that comprise the index that they track, just enough of them to produce a statistically similar performance. This is even more so true of small/mid cap indices and the smallest stocks in the indices (the ones just being added to the bottom of the 500/1000/2000)
3) if the active trader creates a massively overvalued stock in the meantime there is a mispricing opportunity for other active analysts to exploit by underweighting/shorting the stock
4) pretty sure this is illegal even if it could work. see pump and dump (https://en.wikipedia.org/wiki/Pump_and_dump)

Your point #2 is the most reassuring. And I agree, #3 corrects the situation as long as there are enough people actively trading individual stocks to notice the overvalued stock. But as for #4, it’s my understanding that what makes pump and dump illegal is putting out false information to trick other people into buying the stock and inflating the price, especially when the people putting out that false info are associated with the company. I don’t think it’s illegal for someone not affiliated with the company to buy a bunch of a stock to artificially inflate the price with their own money. Anyway, this is a really far out hypothetical since there are still plenty of active traders to correct an artificial inflation like this.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: BECABECA on September 09, 2019, 01:20:09 PM
Not to mention that, at least for the large common indices, adding and removing stocks is done by a committee that has some degree of agency. We're not talking about some completely reductive automated algorithm. Which also puts a bit of a dent in the arguments of those trying to draw clear distinct lines between "passive" and "active"; it's really more like "more active" and "less active" in reality.

This is really good to know, thanks for the info. What with seeing algorithm trading do some pretty crazy things to the Chinese stock market a few years back, it makes me feel a lot more secure about index investing knowing there’s still a human in the loop.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Scandium on September 09, 2019, 05:01:54 PM
Not to mention that, at least for the large common indices, adding and removing stocks is done by a committee that has some degree of agency. We're not talking about some completely reductive automated algorithm. Which also puts a bit of a dent in the arguments of those trying to draw clear distinct lines between "passive" and "active"; it's really more like "more active" and "less active" in reality.
Uhm, no. This is not accurate
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Scandium on September 09, 2019, 05:02:33 PM
Not to mention that, at least for the large common indices, adding and removing stocks is done by a committee that has some degree of agency. We're not talking about some completely reductive automated algorithm. Which also puts a bit of a dent in the arguments of those trying to draw clear distinct lines between "passive" and "active"; it's really more like "more active" and "less active" in reality.

This is really good to know, thanks for the info. What with seeing algorithm trading do some pretty crazy things to the Chinese stock market a few years back, it makes me feel a lot more secure about index investing knowing there’s still a human in the loop.
Algorithmic/HST and indexing are not the same thing.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: HBFIRE on September 09, 2019, 06:46:35 PM
Not to mention that, at least for the large common indices, adding and removing stocks is done by a committee that has some degree of agency.

You sure about that?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 12, 2019, 11:12:51 AM
The man himself (https://www.mrmoneymustache.com/2019/09/12/michael-burry-index-funds/)
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: techwiz on September 12, 2019, 11:14:49 AM
The man himself (https://www.mrmoneymustache.com/2019/09/12/michael-burry-index-funds/)

Prefect timing!
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: CorpRaider on September 13, 2019, 07:07:07 AM
I think Burry has already been proven prescient on the small cap value call (maybe he caused it).  He's also probably right that there will be more frequent and/or more severe flash crashes because of some of these products (we've already seen that a few times), but if you don't panic out, it shouldn't impact us long-term. 

I do wonder about the securities lending risks, especially from some of the marginal "johnny come lately" players, as they get more desperate to make "off expense ratio" profits from lending out the securities (which belong to the fundholders, for hidden profits...not exactly great incentives for rational behavior).  It seems like there has to be some way for that blow up at a certain point.  It is lending.

Sounds to me like he would feel that he was right/correct if the U.S. has a nasty, fast, 1987-style crash (maybe without the nearly immediate bounce back) and Japan/EAFE did really well.  I don't think that would shake the faith of most index proponents (even using Bogle's expected return formulae it would make sense).  It's also certainly within the range of observed outcomes in history.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: talltexan on September 13, 2019, 07:22:46 AM
I've finally had time to read this, as well as MMM's blog post.

What I haven't seen mentioned anywhere is that prices aren't determined by the weight of all money invested, but by the weight of the active money. Because passive investors aren't dancing in and out, they're never the marginal investors. The active traders are. So the active traders--the ones who are buying or selling based on price and price movement--are determining the price. And that's fine.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 13, 2019, 10:27:11 AM
That was one of my main points. We passive folk are free riding off the active participants. Someday we may have to pay them a tiny slice of alpha to make all their work worth it, but incredibly they are doing it today for free!
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: merula on September 13, 2019, 10:40:28 AM
I think passive or long-term investors are ALWAYS paying active traders "a tiny slice of alpha" (great way to put it, btw), but that's a heck of a lot cheaper than management fees or transaction costs.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 13, 2019, 10:50:56 AM
Yeah, that's a good way to think about it. More than nothing, less than the cost of their research and transaction fees.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: dessie360 on September 13, 2019, 12:57:39 PM
It sounds like everyone is shooting down the contrarian view here before it’s had chance to breathe. Shouldn’t we be a little less presumptuous and examine the debate with a bit more diligence? Surely this community, given the comparatively non-traditional life-choices we’re making, is one that should be more open to diverse opinion and alternative insights, not least because it may potentially aid us.

Don’t get me wrong, I too am a massive advocate of passive index investing. I currently have 95%+ of my money invested that way and I have previously worked for a well-known UK version of Betterment, so I totally get the industry, the investment style and the historical landscape to active / passive.

I agree with the MMM blog post, of course, in that the financial media is full of irrelevant speculative guff, designed to baffle the punter and line the pockets of those in the industry. The old adage rings true - if these so-called experts really knew what was going to happen then they wouldn’t be in mid-salary jobs writing about it, they’d be retired on a beach somewhere enjoying the profits.

But I also agree that it’s very different when someone like Burry speaks up, given his rare credentials. (He seldom gives interviews so why he’s chosen to come out about this right now I’m not sure. I see he’s been pushing certain US and Japanese small cap stocks that he’s recently heavily invested in so maybe it’s linked to that??)

Anyway, I think it’s foolish to tear up Burry’s assessment without full investigation and on reflection I believe he makes a lot of very salient points…

1. I totally agree with Burry that there’s a fake environment being created as a result of the very fast rise in passive investing. The switch from active to passive has been dramatic in the last few years! As a result, value and price discovery - essential components of a well-functioning open financial market - are rapidly being disabled. That’s not good. We need true pricing. I believe the more money people throw into the likes of Betterment model portfolios - sold on the undeniable principles of diversification, low fees, rebalancing, auto-reinvest of dividends, etc - then more capital flows to the mainstream funds and ETFs used in constructing said portfolios, and the further the share prices within them get propped up and inflated (on mass) on the FTSE, the S&P and the rest. Active trading is split - buy / sell. The vast majority of passive trading is buying, not selling. So, with the latter, all the buying is simply pumping up the prices without any care for valuation. 

2. I can therefore see why Burry has shifted his investor focus to niche industries and small caps, since ETFs and other passive funds are often more focused on mid and large cap indexes, meaning the smalls are retaining more of their genuine price and so that’s where value can be discovered.

3. MMM says “A small exit door only matters if everyone is running for the exits at once. And even then, as index fund investors (as opposed to active stock traders), we don’t do that”… With the utmost respect, I don’t think passive investors as a whole have the knowledge and acumen to sit tight if things get rocky. They won’t. They’ll run for the hills. Passive investors are now your everyman and everywoman on the street - not just the likes of us. Institutional orgs and pension funds will also get spooked and go running back to their familiar foes at the first glint of mayhem. We’ve recently seen chaos in the UK with the highly popular Woodford Fund where a trickle of withdrawals suddenly became an avalanche. Humans aren’t good at riding out the rollercoaster. 

4. The tipping point MAY not be far off. We simply don’t know. The gap is closing fast between active and passive. And certain activity masks how close things really are. For example - “active trading still outweighs index fund trades by 22-to-1” - yes, of course it does, because by nature there is a high volume of trading in the active style and a low volume of trading in the passive style. But in terms of total value held on the major western indexes, it’s now pretty much a 50/50 split. What even IS the 'tipping point'? We’ve never experienced this before! Who’s to say the prices aren’t hugely inflated already and a bubble-burst is round the corner? We don’t KNOW for certain.

5. Re the MMM blog post on this, to look only at the two ends of the spectrum - the 100% active scenario and the 100% passive scenario - as being workable is a mistake. Yes, both scenarios MAY function fine, but that doesn’t mean every mix of the two along the spectrum would also work ok and not present problems.

6. To say, ‘well, if people withdraw they’ll have to re-invest it again somewhere’ is fair enough to a point, but that doesn’t mean it’ll go back into traditional markets, large cap stocks, or even stocks at all. We MAY end up realising in hindsight that current market valuations on big index firms are actually 30%+ over-priced right now and that they settle back down to that much lower true valuation after a bubble-burst. That would hurt us all, a lot.

Personally, I’m still cogitating and researching. We all have to make our own decision on this stuff. But I would implore everyone to NOT be over-complacent and make sure your decision is a fully-informed one. Don’t hold on to the comfort blanket of passive investing (that you’ve found to be so successful to date) for the sake of it. Nothing lasts forever. Arrogance is easy.

Of course, I don’t know either. But for me, gut feel right now says:

1) A more harmonious combination of active and passive investing may ultimately become the new norm - eg, ‘active’ analysts deciding which stocks go into an ETF, based on risk profile and other factors, not just whether it’s a basket of FTSE 100s or S&P 500s or whatever, which is actually incredibly basic and pretty dumb when you think about it. (Why are investment choices still so dominated by indexes run on size of company, geography and industry??)  


2) A new level of diversification may be needed to combat the risks of a potential passive bubble - eg, I may look to take XX% of my investments out of passive portfolios and spread it across a mix of other investments - small niche caps a la Burry, commodities, the credit markets, the currency markets, etc. Ultimately, I don’t want to have to do this, I want someone doing it for me, but at the moment all passive / index portfolio investment firms seem to have a fairly similar model and are dead set on mid/large cap globalised equity-based funds. YAWN!!!
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 13, 2019, 02:25:45 PM
3. MMM says “A small exit door only matters if everyone is running for the exits at once. And even then, as index fund investors (as opposed to active stock traders), we don’t do that”… With the utmost respect, I don’t think passive investors as a whole have the knowledge and acumen to sit tight if things get rocky. They won’t. They’ll run for the hills. Passive investors are now your everyman and everywoman on the street - not just the likes of us. Institutional orgs and pension funds will also get spooked and go running back to their familiar foes at the first glint of mayhem. We’ve recently seen chaos in the UK with the highly popular Woodford Fund where a trickle of withdrawals suddenly became an avalanche. Humans aren’t good at riding out the rollercoaster. 

Why would an active fund investor be more sanguine about a sustained market drop? Yeah, if you're in one of Taleb's (former) funds, you'd be rubbing your hands but how did Burry's fund do in late December during the drop? Even a long-short fund would have trouble treading water in an overall market decline.

(How did his fund do during his water play?)

Quote
2) A new level of diversification may be needed to combat the risks of a potential passive bubble - eg, I may look to take XX% of my investments out of passive portfolios and spread it across a mix of other investments - small niche caps a la Burry, commodities, the credit markets, the currency markets, etc. Ultimately, I don’t want to have to do this, I want someone doing it for me, but at the moment all passive / index portfolio investment firms seem to have a fairly similar model and are dead set on mid/large cap globalised equity-based funds. YAWN!!!

?? Passive index investing isn't only limited to the Total Market. Plenty of index investors slice-and-dice/factor tilt.


Eta:

Quote
1) A more harmonious combination of active and passive investing may ultimately become the new norm - eg, ‘active’ analysts deciding which stocks go into an ETF, based on risk profile and other factors, not just whether it’s a basket of FTSE 100s or S&P 500s or whatever, which is actually incredibly basic and pretty dumb when you think about it. (Why are investment choices still so dominated by indexes run on size of company, geography and industry??)  


Simple. It's because even stock pickers that get one thing right often can't do it twice. We've seen this over and over and over again. It's why active funds routinely don't do as well as the market average, let alone do better, over a long period of time.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 13, 2019, 02:27:42 PM
The vast majority of passive trading is buying, not selling. So, with the latter, all the buying is simply pumping up the prices without any care for valuation. 

Totally agree. This is the most crucial piece right here.

Recently some underperforming mall REITs made news for how close they are to becoming majority passive owned. Who wants to own a company propped up by autopilot purchases? They're like Bernie, and passive inflows are like the bros having a weekend at Bernie's.

We might not be able to pick all the winners, but most of us probably would have avoided buying mall REITs 5 years ago if we were able to remove a few sectors from our indexes.

Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't. So why not grow a stable of your own buy and hold positions? Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.



 

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: PathtoFIRE on September 13, 2019, 03:04:43 PM
Re: "passive" money is mostly buying, not selling...is there data to support this? Just take a step back. If someone is buying, by definition there is a counterparty selling. So is the contention that the buying side is overweighted by "passive" funds, etc., and the selling side is...who? I'm not going to just accept this statement at face value, I would like to know what the research and data show.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: ysette9 on September 13, 2019, 03:14:18 PM

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't. So why not grow a stable of your own buy and hold positions? Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.

Really? If it were that simple we would have a bunch of people beating the indices and beating the market. But that doesn’t happen. 
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 13, 2019, 03:53:53 PM
It sounds like everyone is shooting down the contrarian view here before it’s had chance to breathe. Shouldn’t we be a little less presumptuous and examine the debate with a bit more diligence? Surely this community, given the comparatively non-traditional life-choices we’re making, is one that should be more open to diverse opinion and alternative insights, not least because it may potentially aid us.


I read your post and thought “wow, this is really a great post! Why don’t I recall seeing this poster before?” And then I noticed that this was your very first post. welcome to the MMM forums.

Your post is far too detailed and content-rich to respond to at once so I’ll have to defer and respond over time. I hope that’s OK.

But I will answer your first question. My answer is yes. We are shooting down the contrarian view. Unfortunately that’s a pretty common reaction within the FI community in my experience. Still, you’ll find some very sharp people with great and unique insights. They’re what keep me coming back for more.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 13, 2019, 05:32:51 PM
The vast majority of passive trading is buying, not selling. So, with the latter, all the buying is simply pumping up the prices without any care for valuation. 

Totally agree. This is the most crucial piece right here.

Recently some underperforming mall REITs made news for how close they are to becoming majority passive owned. Who wants to own a company propped up by autopilot purchases? They're like Bernie, and passive inflows are like the bros having a weekend at Bernie's.

We might not be able to pick all the winners, but most of us probably would have avoided buying mall REITs 5 years ago if we were able to remove a few sectors from our indexes.

Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't. So why not grow a stable of your own buy and hold positions? Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.

You’re absolutely correct. And that’s pretty much my strategy for equities going forward, although I’m a bit more methodical in my picking of stocks. I do indexes, but treat them as a somewhat necessary evil. Not what I aspire to.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 13, 2019, 05:43:02 PM

Really? If it were that simple we would have a bunch of people beating the indices and beating the market. But that doesn’t happen.

In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.

So this group of people who in general have far higher incomes, far higher savings rates, who have their financial lives down pat otherwise just sort of say “well gosh I can’t do any better than average!” and go on their way.

I don’t get it. I really don’t.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: ysette9 on September 13, 2019, 05:54:53 PM
Because “average” in this case is market returns, which is much better than what the average bear gets, whether you are talking about stock pickers, professional or amateur, mutual fund managers, or what have you. There are plenty of studies published on this. You can search for Vanguard white papers on the benefits of index investing or how actively managed mutual funds tend to underperform. So by index investing an getting market returns you are already doing better than the vast majority of everyone else. If you think you can be in the 3 or 5% who can consistently beat everyone else in what you acknowledge is a zero sum game, best of luck to you. The odds are not on your side.

Personally I can reach my goals very nicely without taking on that additional risk, so I don’t see a reason to try when the likelihood of success is so small.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: chevy1956 on September 13, 2019, 06:02:57 PM
Because “average” in this case is market returns, which is much better than what the average bear gets, whether you are talking about stock pickers, professional or amateur, mutual fund managers, or what have you. There are plenty of studies published on this. You can search for Vanguard white papers on the benefits of index investing or how actively managed mutual funds tend to underperform. So by index investing an getting market returns you are already doing better than the vast majority of everyone else. If you think you can be in the 3 or 5% who can consistently beat everyone else in what you acknowledge is a zero sum game, best of luck to you. The odds are not on your side.

Personally I can reach my goals very nicely without taking on that additional risk, so I don’t see a reason to try when the likelihood of success is so small.

We can discuss all we want about why it's good to enable contrary opinions and how we are all different etc however the problem is that if you are an index investor statistically you will outperform the active investor. Why would you take on additional risk for a statistically lower rate of return.

I can't see index investing as being a bubble. It's the smart way to invest in stocks (or bonds or commodities or real estate).
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 13, 2019, 06:54:38 PM
Wow, magical thinking has really taken over this thread in the time between lunchtime and now.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 13, 2019, 07:17:54 PM
Wow, magical thinking has really taken over this thread in the time between lunchtime and now.

Care to elaborate?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 13, 2019, 10:52:36 PM
It sounds like everyone is shooting down the contrarian view here before it’s had chance to breathe. Shouldn’t we be a little less presumptuous and examine the debate with a bit more diligence?
Assuming that everyone who disagrees with you is just misinformed

Quote
But I also agree that it’s very different when someone like Burry speaks up, given his rare credentials. (He seldom gives interviews so why he’s chosen to come out about this right now I’m not sure. I see he’s been pushing certain US and Japanese small cap stocks that he’s recently heavily invested in so maybe it’s linked to that??)
Appeal to authority

Quote
The switch from active to passive has been dramatic in the last few years! As a result, value and price discovery - essential components of a well-functioning open financial market - are rapidly being disabled. That’s not good.
An asinine argument that price discovery is somehow turned off when half of the assets in a system are managed passively, even though 1) something like 99% of the volume (https://advisors.vanguard.com/iwe/pdf/ISGINDX.pdf) still comes from active market participants, 2) and academic work shows that you only need a tiny minority of active trading and a large following herd of passive traders to perform the price discovery function, and 3) as has been repeatedly stated in this thread, there is an elegant mechanism in the market by which price discovery becomes more profitable the more people doing them. And no, volume is not an inappropriate metric - transactions perform price discovery, not the stock of assets sitting on the sideline.

Quote
The vast majority of passive trading is buying, not selling.
Unsubstantiated claim, which is obviously false on its face. Net passive inflows are something like 250b per year (https://www.wsj.com/articles/the-rise-of-passive-investing-marches-on-11563442202), vs 68T of trading volume in the equities market alone (https://data.worldbank.org/indicator/CM.MKT.TRAD.CD) and many, many times that in bonds (https://www.investopedia.com/terms/b/baskettrade.asp) which suggests trillions of dollars of index trading volume per year. And that doesn't include the fact that 1) index funds can net contributions and redemptions to avoid trading at all, and that the funds can conduct a "basket trade" with another market participant in which it transfers shares of the fund in exchange for a specified basket of constituent securities, and that these are not counted in market volume statistics as they are non-exchange transactions.

Quote
So, with the latter, all the buying is simply pumping up the prices without any care for valuation.
This is just a restatement of the idea that somehow you need much more than 99% of the market to be actively traded for the price discovery function to work, which is risible and has been repeatedly addressed in this thread.

Quote
I don’t think passive investors as a whole have the knowledge and acumen to sit tight if things get rocky... Institutional orgs and pension funds will also get spooked and go running
Unsubstantiated claim again. And, as discussed above, even a 'large' outflow from passive would be a tiny blip in total trading volume.

Quote
4. The tipping point MAY not be far off. We simply don’t know. The gap is closing fast between active and passive. And certain activity masks how close things really are... What even IS the 'tipping point'? We’ve never experienced this before! Who’s to say the prices aren’t hugely inflated already and a bubble-burst is round the corner? We don’t KNOW for certain.
Slippery slope fallacy

Quote
to look only at the two ends of the spectrum - the 100% active scenario and the 100% passive scenario - as being workable is a mistake. Yes, both scenarios MAY function fine, but that doesn’t mean every mix of the two along the spectrum would also work ok and not present problems.
Unsubstantiated claim. If peeing in 100% of your cheerios is a bad idea, and you argue that peeing in 0% of your cheerios is a good idea, it does not follow that there is some percentage of your cheerios strictly between 0% and 100% that is optimal to pee in.

Quote
We MAY end up realising in hindsight that current market valuations on big index firms are actually 30%+ over-priced right now and that they settle back down to that much lower true valuation after a bubble-burst.
Again presupposing price discovery has somehow been turned off with no evidence or logic to support that notion.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 13, 2019, 11:04:40 PM
In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.
1) You suffer very high transaction costs as an institutional investor. Think of each trade you make at your discount brokerage like a hand of blackjack. There are both winners and losers, but in the long run Charles Schwab is going to come out ahead. You don't just need to be right 50.1% of the time, but far more often to pay the house their cut.
2) Here are some of the people that are winners. You will note that "random guy in a home office in Ypsilanti who thinks he knows better" is not likely to be right more than 50% of the time because he is across the table from:
- The company itself, repurchasing its own stock when it believes based on inside information that its shares are undervalued (this is legal, although regulated and disclosed after the fact)
- Executives, selling their shares when they believe based on inside information that they are overvalued and buying when they believe the shares are undervalued (also legal, also somewhat regulated and disclosed too late for you to know it's affecting your transaction price)
- people with undisclosed inside information for which regulators do not have the evidence or the resources to establish a case
- high frequency traders, who trade hundreds of times a second and put out "trip line" single lot bids and asks just to feel out other market participants, move the market against those participants, and then fill the orders at a less favorable price to the counterparty
- strategic investors who can take large volumes of stock and use it to earn an economic return far beyond what a small shareholder can - consortia, JVs, M&A proposals, activist investors
- institutions with the securities sitting on their balance sheet (dealers) or who have access to the security to become your counterparty through dark pools (brokers)
- well connected institutional investors, who may not have "inside information" in the SEC sense of the term but golf with the CFO and call around to middle managers of the company and competitors to stay better connected to the industry than the Motley Fools and Alpha Seekers.

Given all of these, why is it so hard to believe the giant corpus of evidence demonstrating that individual investors who take a more active role in their investments underperform those who do not?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 13, 2019, 11:18:10 PM
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You (https://www.etftrends.com/2016/07/small-cap-bank-etfs-shine-as-wall-street-languishes/) absolutely (https://www.ishares.com/us/products/305296/ishares-global-green-bond-etf-fund) can (https://www.marketwatch.com/story/5-etfs-targeting-sinners-2019-05-14) get (https://www.forbes.com/sites/investor/2010/07/30/overweight-your-portfolio-with-fast-food-etfs/#681c103223c0) whatever (https://www.betashares.com.au/news/launch-agriculture-etf-qag/) niche (https://www.investopedia.com/articles/investing/080515/top-3-south-korea-etfs.asp) ETF (https://etfdb.com/esg-investing/social-issues/sharia-compliant-investing/) you (https://impactetfs.org/womn-etf/) want (https://etfdb.com/etfs/industry/shipping/).

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Telecaster on September 13, 2019, 11:39:53 PM

In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.

So this group of people who in general have far higher incomes, far higher savings rates, who have their financial lives down pat otherwise just sort of say “well gosh I can’t do any better than average!” and go on their way.

I don’t get it. I really don’t.

That's because by indexing you get by far better than average returns.  Average returns and worse are what active investors get.  I used this analogy before, but imagine if you could be in the top 15% of NBA basketball players, but without bothering to practice basketball.  Warren Buffett who is widely regarded as the greatest investor of all time has basically matched the index over the last 15 years.

I have no quibble with someone who wants to do something different than the index and wish them all the best.  I mean that sincerely.  But indexers are not average investors. They are among the elite performers. 

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 14, 2019, 04:12:29 PM
Don’t get me wrong, I too am a massive advocate of passive index investing. I currently have 95%+ of my money invested that way and I have previously worked for a well-known UK version of Betterment, so I totally get the industry, the investment style and the historical landscape to active / passive.

I agree with the MMM blog post, of course, in that the financial media is full of irrelevant speculative guff, designed to baffle the punter and line the pockets of those in the industry. The old adage rings true - if these so-called experts really knew what was going to happen then they wouldn’t be in mid-salary jobs writing about it, they’d be retired on a beach somewhere enjoying the profits.

But I also agree that it’s very different when someone like Burry speaks up, given his rare credentials. (He seldom gives interviews so why he’s chosen to come out about this right now I’m not sure. I see he’s been pushing certain US and Japanese small cap stocks that he’s recently heavily invested in so maybe it’s linked to that??)

Anyway, I think it’s foolish to tear up Burry’s assessment without full investigation and on reflection I believe he makes a lot of very salient points…


This is gonna take awhile.😁

I also have significant experience with index funds. I started with Vanguard back in the early 1990s. At the moment I am minimally exposed to index funds or passive equity funds. Particularly large caps. I am, however, slowly buying individual stocks that appeal to me. More as a hobby, but I anticipate that it’ll be a significant part of my portfolio at some point. 

Large cap index funds are the sure thing now. Just like real estate was 15 years ago. What ever could go wrong?

Michael Burry weighing in is yet another piece in the puzzle. I doubt he’s selling something. To what end? The guy made a humongous amount during the GFC. Assuming that he didn’t completely screw up after that, he’s probably a whole lot wealthier today. I would expect someone who is trying to market something to be a little more public with the message than sending an email. So I think we’re getting his sincere views. And given his history, his opinion should be listened to and carefully considered.

 And a lot of the FI community is invested in this idea that index funds are the holy grail of investment tools. From a historical perspective I’d be the first to agree that they’re correct. But as you will read on any investment prospectus, Past Performance is Not a Guarantee of Future Results.


Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 15, 2019, 11:24:45 AM
In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.
1) You suffer very high transaction costs as an institutional investor. Think of each trade you make at your discount brokerage like a hand of blackjack. There are both winners and losers, but in the long run Charles Schwab is going to come out ahead. You don't just need to be right 50.1% of the time, but far more often to pay the house their cut.
2) Here are some of the people that are winners. You will note that "random guy in a home office in Ypsilanti who thinks he knows better" is not likely to be right more than 50% of the time because he is across the table from:
- The company itself, repurchasing its own stock when it believes based on inside information that its shares are undervalued (this is legal, although regulated and disclosed after the fact)
- Executives, selling their shares when they believe based on inside information that they are overvalued and buying when they believe the shares are undervalued (also legal, also somewhat regulated and disclosed too late for you to know it's affecting your transaction price)
- people with undisclosed inside information for which regulators do not have the evidence or the resources to establish a case
- high frequency traders, who trade hundreds of times a second and put out "trip line" single lot bids and asks just to feel out other market participants, move the market against those participants, and then fill the orders at a less favorable price to the counterparty
- strategic investors who can take large volumes of stock and use it to earn an economic return far beyond what a small shareholder can - consortia, JVs, M&A proposals, activist investors
- institutions with the securities sitting on their balance sheet (dealers) or who have access to the security to become your counterparty through dark pools (brokers)
- well connected institutional investors, who may not have "inside information" in the SEC sense of the term but golf with the CFO and call around to middle managers of the company and competitors to stay better connected to the industry than the Motley Fools and Alpha Seekers.

Given all of these, why is it so hard to believe the giant corpus of evidence demonstrating that individual investors who take a more active role in their investments underperform those who do not?

Interesting perspective and thanks for taking the time to type it out.

There seems to be this underlying assumption that individual investors will be frequently trading. Or otherwise completely taking leave of their senses. As far as I’m concerned, frequent trading or worse day trading is more akin to gambling than investing. And I have zero interest in trading more than I must. To quote an author I’m reading right now: “the perfect portfolio never needs a trade.”  The idea is to buy and hold. Which is a point that I think JL Collins makes very well. The disagreement is with (1) index funds which I do invest in, although less over time and (2) particularly large cap indexes which I generally don’t.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 15, 2019, 11:39:17 AM
ok, but even if you trade infrequently 1) why do you think that there is a persistent market anomaly that makes small caps likely to outperform over your investment horizon, if you think that on average the market is reasonably efficient? and 2) even if so, what makes you sure that your specific selections are going to outperform over your investment horizon vs a small cap index fund?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 15, 2019, 04:57:08 PM
ok, but even if you trade infrequently 1) why do you think that there is a persistent market anomaly that makes small caps likely to outperform over your investment horizon, if you think that on average the market is reasonably efficient? and 2) even if so, what makes you sure that your specific selections are going to outperform over your investment horizon vs a small cap index fund?

1. It’s more a case of what I dislike less. I’m more attracted to international and small and mid cap value right now when it comes to index funds.

As for US large cap versus small cap question,  the point that MB is making I think is salient. Large caps are getting a whole lot of the passive investment pie. Worse, it’s being allocated for the most part on a existing cap basis. To me it’s something of a circular argument. Indexes disproportionately invest in companies 1-50 because of their relative market cap but the underlying reason they’re in that 1-50 is because indexes (in part) are investing in them based on their relative market cap.

As for the Efficient Market theory, I disagree with it at least in the short term. In the long term I think there’s something to it, at least in the weak form.

2. I’m not sure. Not at all. No such thing as guarantees here. However I’m willing to give it a try and in the end I’m probably not going to do all that much worse than the market in the long run so long as I avoid the things that usually kill individual investors such as trading too frequently or bailing out at the bottom of the market.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Daisy on September 16, 2019, 02:11:11 PM
In a more or less zero sum game there are both winners and losers. Maybe not an equal distribution. Probably a skewed distribution. But there are winners.
1) You suffer very high transaction costs as an institutional investor. Think of each trade you make at your discount brokerage like a hand of blackjack. There are both winners and losers, but in the long run Charles Schwab is going to come out ahead. You don't just need to be right 50.1% of the time, but far more often to pay the house their cut.
2) Here are some of the people that are winners. You will note that "random guy in a home office in Ypsilanti who thinks he knows better" is not likely to be right more than 50% of the time because he is across the table from:
- The company itself, repurchasing its own stock when it believes based on inside information that its shares are undervalued (this is legal, although regulated and disclosed after the fact)
- Executives, selling their shares when they believe based on inside information that they are overvalued and buying when they believe the shares are undervalued (also legal, also somewhat regulated and disclosed too late for you to know it's affecting your transaction price)
- people with undisclosed inside information for which regulators do not have the evidence or the resources to establish a case
- high frequency traders, who trade hundreds of times a second and put out "trip line" single lot bids and asks just to feel out other market participants, move the market against those participants, and then fill the orders at a less favorable price to the counterparty
- strategic investors who can take large volumes of stock and use it to earn an economic return far beyond what a small shareholder can - consortia, JVs, M&A proposals, activist investors
- institutions with the securities sitting on their balance sheet (dealers) or who have access to the security to become your counterparty through dark pools (brokers)
- well connected institutional investors, who may not have "inside information" in the SEC sense of the term but golf with the CFO and call around to middle managers of the company and competitors to stay better connected to the industry than the Motley Fools and Alpha Seekers.

Given all of these, why is it so hard to believe the giant corpus of evidence demonstrating that individual investors who take a more active role in their investments underperform those who do not?

Oh my, @grantmeaname is on fire (or FIRE?) on this thread. This is what he presented at CMTO last year.

I am again reassured by his thoughtful analysis. So much so, that he doesn't have to avoid me at camp this year because I am satisfied with his answer (again).

Now we can share maple fluff and talk about other things at camp. :)
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 17, 2019, 10:38:14 AM
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You (https://www.etftrends.com/2016/07/small-cap-bank-etfs-shine-as-wall-street-languishes/) absolutely (https://www.ishares.com/us/products/305296/ishares-global-green-bond-etf-fund) can (https://www.marketwatch.com/story/5-etfs-targeting-sinners-2019-05-14) get (https://www.forbes.com/sites/investor/2010/07/30/overweight-your-portfolio-with-fast-food-etfs/#681c103223c0) whatever (https://www.betashares.com.au/news/launch-agriculture-etf-qag/) niche (https://www.investopedia.com/articles/investing/080515/top-3-south-korea-etfs.asp) ETF (https://etfdb.com/esg-investing/social-issues/sharia-compliant-investing/) you (https://impactetfs.org/womn-etf/) want (https://etfdb.com/etfs/industry/shipping/).

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?

Shorting is not easy peasy. You have to open a margin account and make a bunch of decisions regarding price and timing. And of course there is always the risk of a short squeeze and regardless of how bad the fundamentals are, the classic Keynes quote "the market can remain irrational longer than you can remain solvent" applies here.

Regarding my comment about the companies we use personally, just imagine a stereotypical millennial. They're scrolling IG on their Iphone, they're buying IPAs at the brewery that uses Square chip readers that they put their Visa cards into, they use venmo to pay their friends back, at work they use Excel spreadsheets and Outlook inboxes, though they personally have gmail addresses, they're prime members with a netflix subscription too, drinking starbucks lattes and so on and so forth.

This stable of stocks behind those companies/products has totally crushed the S&P over the past decade and it's not even close. I didn't even try to select winners, just ones that millenials like. But pretty much every single one of those companies handily beat the S&P over the past 10 years. The point is when we notice how likely we ourselves as well as our peers are to choose one company's products/service that gives a good indication the companies are crushing it. It's basically the Jeff Bezos advice that you should invest in companies that change the way you live your life.





Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: matchewed on September 17, 2019, 10:51:55 AM
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You (https://www.etftrends.com/2016/07/small-cap-bank-etfs-shine-as-wall-street-languishes/) absolutely (https://www.ishares.com/us/products/305296/ishares-global-green-bond-etf-fund) can (https://www.marketwatch.com/story/5-etfs-targeting-sinners-2019-05-14) get (https://www.forbes.com/sites/investor/2010/07/30/overweight-your-portfolio-with-fast-food-etfs/#681c103223c0) whatever (https://www.betashares.com.au/news/launch-agriculture-etf-qag/) niche (https://www.investopedia.com/articles/investing/080515/top-3-south-korea-etfs.asp) ETF (https://etfdb.com/esg-investing/social-issues/sharia-compliant-investing/) you (https://impactetfs.org/womn-etf/) want (https://etfdb.com/etfs/industry/shipping/).

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?

Shorting is not easy peasy. You have to open a margin account and make a bunch of decisions regarding price and timing. And of course there is always the risk of a short squeeze and regardless of how bad the fundamentals are, the classic Keynes quote "the market can remain irrational longer than you can remain solvent" applies here.

Regarding my comment about the companies we use personally, just imagine a stereotypical millennial. They're scrolling IG on their Iphone, they're buying IPAs at the brewery that uses Square chip readers that they put their Visa cards into, they use venmo to pay their friends back, at work they use Excel spreadsheets and Outlook inboxes, though they personally have gmail addresses, they're prime members with a netflix subscription too, drinking starbucks lattes and so on and so forth.

This stable of stocks behind those companies/products has totally crushed the S&P over the past decade and it's not even close. I didn't even try to select winners, just ones that millenials like. But pretty much every single one of those companies handily beat the S&P over the past 10 years. The point is when we notice how likely we ourselves as well as our peers are to choose one company's products/service that gives a good indication the companies are crushing it. It's basically the Jeff Bezos advice that you should invest in companies that change the way you live your life.

I mean you do realize why they beat the S&P 500 right? New technology and new businesses will generally outperform old businesses with established technologies. The trick in your case is guessing who is the next business. As those companies you see mature their ability to outperform the S&P 500 will fade, and they will be just another 3% a year business (or whatever number).

IMO it is not so easy as to just look around and see what those crazy millennials are doing. Don't they also buy pants? Why haven't you included the pants manufacturers? Do they not eat food, how about grocery stores? Also scrolling IG on their iPhone (I'm legitimately confused as to what this is, rather I know what an iPhone is but what is scrolling IG)?

I think you may be oversimplifying how easy it is to select a company to outperform the S&P 500. Uber anyone? All my friends use it and I think it's a poop bucket of a company to invest in.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 17, 2019, 12:33:26 PM
Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 17, 2019, 01:20:01 PM
Makes you wonder how many dead weight stocks you'd want your ETF to shed if you could make that happen. I never like looking at the holdings, I see so many floundering names that will die a slow death and get sold for parts.

ETFs would be great if you uncheck certain boxes rather than getting all the channels like cable TV. But you can't.
You (https://www.etftrends.com/2016/07/small-cap-bank-etfs-shine-as-wall-street-languishes/) absolutely (https://www.ishares.com/us/products/305296/ishares-global-green-bond-etf-fund) can (https://www.marketwatch.com/story/5-etfs-targeting-sinners-2019-05-14) get (https://www.forbes.com/sites/investor/2010/07/30/overweight-your-portfolio-with-fast-food-etfs/#681c103223c0) whatever (https://www.betashares.com.au/news/launch-agriculture-etf-qag/) niche (https://www.investopedia.com/articles/investing/080515/top-3-south-korea-etfs.asp) ETF (https://etfdb.com/esg-investing/social-issues/sharia-compliant-investing/) you (https://impactetfs.org/womn-etf/) want (https://etfdb.com/etfs/industry/shipping/).

Want to uncheck boxes? Buy an ETF. Short whichever components of the ETF you don't love in proportion to their holding by the ETF. You're done, easy peasy. Buy $10k of SPDR, short 1 share of apple, and you can inexplicably sleep better at night.

Quote
Shit, you'd beat the SP500 easily if all you did was invest equal portions in companies whose products/services you have personally consistently & frequently enjoyed using/consuming.
Help me out with this. Are you arguing that 1) at the time that you wrote this post, relative to their peers the market was systematically undervaluing consumer companies that you patronize relative to all other companies, but this valuation gap is going to close during your investment horizon, or 2) the companies you patronize have faster growth prospects than the ones you don't patronize, but the big community of analysts that follow them haven't caught on yet, and you will realize an excess return because they will grow so much faster during your investment horizon that they will outperform independent of their valuation? And you've checked to make sure you're not taking any undue concentration risk by overweighting your portfolio to match only a few of the companies in consumer sectors?

Shorting is not easy peasy. You have to open a margin account and make a bunch of decisions regarding price and timing. And of course there is always the risk of a short squeeze and regardless of how bad the fundamentals are, the classic Keynes quote "the market can remain irrational longer than you can remain solvent" applies here.

Regarding my comment about the companies we use personally, just imagine a stereotypical millennial. They're scrolling IG on their Iphone, they're buying IPAs at the brewery that uses Square chip readers that they put their Visa cards into, they use venmo to pay their friends back, at work they use Excel spreadsheets and Outlook inboxes, though they personally have gmail addresses, they're prime members with a netflix subscription too, drinking starbucks lattes and so on and so forth.

This stable of stocks behind those companies/products has totally crushed the S&P over the past decade and it's not even close. I didn't even try to select winners, just ones that millenials like. But pretty much every single one of those companies handily beat the S&P over the past 10 years. The point is when we notice how likely we ourselves as well as our peers are to choose one company's products/service that gives a good indication the companies are crushing it. It's basically the Jeff Bezos advice that you should invest in companies that change the way you live your life.

I mean you do realize why they beat the S&P 500 right? New technology and new businesses will generally outperform old businesses with established technologies. The trick in your case is guessing who is the next business. As those companies you see mature their ability to outperform the S&P 500 will fade, and they will be just another 3% a year business (or whatever number).

IMO it is not so easy as to just look around and see what those crazy millennials are doing. Don't they also buy pants? Why haven't you included the pants manufacturers? Do they not eat food, how about grocery stores? Also scrolling IG on their iPhone (I'm legitimately confused as to what this is, rather I know what an iPhone is but what is scrolling IG)?

I think you may be oversimplifying how easy it is to select a company to outperform the S&P 500. Uber anyone? All my friends use it and I think it's a poop bucket of a company to invest in.

I don't think I am. Thanks for mentioning Uber. I did not leave it out intentionally. Anyways, you'd be down about 10% on that one. More than made up for by all of the massive wins from the other companies I mentioned.

Regarding pants and grocery stores, I am more referencing the things they do that are different than previous generations did when they were that age. But yes, food & clothing preferences - Chipotle, Panera Bread (no longer publicly traded), both have beat the S&P. Zara isn't publicly traded, not aware of many other millennial favorites for clothing especially ones that are publicly traded.

BTW by scrolling IG I meant Instagram, owned by facebook.

Besides Uber/Lyft, can anyone thinking of more companies beloved by millennials that could bring down this little S&P besting millenial faves index I'm creating here?

Yeah, I get that many of these companies are new. But many are not. Microsoft and starbucks and visa for example, all of which have completely shredded the S&P over the past decade.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 17, 2019, 01:28:32 PM
Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.

I'm referring to the things that are more unique to new generation that previous generations weren't known for as much.

So even for the more mature companies I just named, V and MSFT and SBUX, millennials are more likely to have a college degree and work at a computer, buy lattes, and use plastic to pay than previous generations.

Millenials are not more likely to own cars, and live in houses than previous generations. But they probably are more likely to have mental health problems than previous generations for various reasons which are completely tangential. The point is that it's common sense investing to bet on companies that are more popular with younger earners.

So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: matchewed on September 17, 2019, 01:43:53 PM
Wait there is a whole generation of avacado toast eating homeless people using excel?

Oh the humanity.

Sounds like a decent horror movie plot.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: ysette9 on September 17, 2019, 02:14:09 PM
Silly goose, they are using Google Sheets, not Excel. ;-)
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 17, 2019, 02:31:30 PM
So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.

What time frame? You mentioned 10 years but were millenials buying a lot of stock in 2009?

Chipotle, Uber, Subaru, Samsung, Amazon, and even Apple don't do as well as SPY over one or more of the 1/2/5 year time frames. Google and Starbucks are the only consistent top performers. And Target, if that's a millenial brand.

Of course, the big question is: when do these smarter-than-professional millenial stock pickers sell? Have they already sold their Uber stock at a loss? Did they sell their Chipotle stock in 2017 when the sickness problems were happening? Did they dump their Subaru stock when they realized that their Subie burned oil even under warranty? Are they still holding their Tesla stock because Tesla will change the world?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 17, 2019, 03:44:55 PM
So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.

What time frame? You mentioned 10 years but were millenials buying a lot of stock in 2009?

Chipotle, Uber, Subaru, Samsung, Amazon, and even Apple don't do as well as SPY over one or more of the 1/2/5 year time frames. Google and Starbucks are the only consistent top performers. And Target, if that's a millenial brand.

Of course, the big question is: when do these smarter-than-professional millenial stock pickers sell? Have they already sold their Uber stock at a loss? Did they sell their Chipotle stock in 2017 when the sickness problems were happening? Did they dump their Subaru stock when they realized that their Subie burned oil even under warranty? Are they still holding their Tesla stock because Tesla will change the world?

I think I'll try to sharpen my casual theory into a something that closer resembles the description of a fund. I'll it CurrentGen trading as CTGN.

We only own stock in companies that the youngest cohort of FT workers patronize in greater numbers per capita than previous generations.

They are not necessarily the companies that youngest earners invest in.

We initiate the position as soon as the relevant data is available. If the youngest cohort loses interest in the company, we trim our position accordingly. Positions are weighted by whose customer/user bases have the greatest volume and concentration of the youngest cohort.


To respond more directly, I'd question the assumption that millenials buy more subarus, teslas, and samsung gear per capita than gen xers and boomers. Millenials are buying less vehicles per capita than previous generations did, and Teslas are out of reach for most millenials. Median age of a Tesla owner is 52-54.

https://hedgescompany.com/blog/2018/11/tesla-owner-demographics/






Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 17, 2019, 03:50:59 PM
Silly goose, they are using Google Sheets, not Excel. ;-)

Ha! Maybe the ones freelancing on their AAPL device from a SBUX that they UBERed to in a TSLA.

I mainly mention it because in my office all of the millenials breeze through excel while everyone older seems to struggle and need refreshers on vlookups and pivot tables. Same with outlook and sharepoint. Though MSFT is an older company, I find younger people are far more comfortable in the office/sharepoint environment than boomers. Gen Xers are probably the most seasoned MSFT users though.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: grantmeaname on September 17, 2019, 04:09:21 PM
All you're doing is demonstrating survivorship bias. Of course all the risky growth companies from 10 years ago that are still around earned handsome returns.

But wework isn't working. Moviepass is bankrupt. Millennials used a lot of Napster on their Compaqs a generation ago.

That's why growth companies are growth companies.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: matchewed on September 17, 2019, 04:15:19 PM
Millennials used a lot of Napster on their Compaqs a generation ago.

(https://i.ytimg.com/vi/gtyHekHya5M/hqdefault.jpg)

https://www.youtube.com/watch?v=LeKX2bNP7QM (https://www.youtube.com/watch?v=LeKX2bNP7QM)
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Travis on September 17, 2019, 06:16:56 PM



We initiate the position as soon as the relevant data is available. If the youngest cohort loses interest in the company, we trim our position accordingly. Positions are weighted by whose customer/user bases have the greatest volume and concentration of the youngest cohort.



By the time this trend-setting data is available, how much growth is remaining to exploit?  If you begin with four companies competing for this next-gen space in the economy, what's to say the winning one or two don't just plateau which coincides with your demographic data becoming available?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Radagast on September 17, 2019, 08:13:27 PM
Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.

I'm referring to the things that are more unique to new generation that previous generations weren't known for as much.

So even for the more mature companies I just named, V and MSFT and SBUX, millennials are more likely to have a college degree and work at a computer, buy lattes, and use plastic to pay than previous generations.

Millenials are not more likely to own cars, and live in houses than previous generations. But they probably are more likely to have mental health problems than previous generations for various reasons which are completely tangential. The point is that it's common sense investing to bet on companies that are more popular with younger earners.

So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.
Off hand I can't think of any. Perhaps that might be a reasonable strategy: buy a share of whatever company every time you buy their product.

But this seems like it might be more obvious in hindsight. Can you give a list of ten companies meeting your criteria so we can experiment going forward? If they add up to less than about $210 I will even sell my share of BRK.B and buy them in Robinhood so I can both track and benefit from the profits!
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 18, 2019, 07:44:59 AM
Millennials also tend to buy cars, have health problems, and live in houses. Millennials participate in the whole economy. That doesn't mean the whole economy has outperformed the S&P500 over the last decade.

I'm referring to the things that are more unique to new generation that previous generations weren't known for as much.

So even for the more mature companies I just named, V and MSFT and SBUX, millennials are more likely to have a college degree and work at a computer, buy lattes, and use plastic to pay than previous generations.

Millenials are not more likely to own cars, and live in houses than previous generations. But they probably are more likely to have mental health problems than previous generations for various reasons which are completely tangential. The point is that it's common sense investing to bet on companies that are more popular with younger earners.

So someone play devil's advocate. Name some companies popular among millennials that prove me wrong and tank my index.
Off hand I can't think of any. Perhaps that might be a reasonable strategy: buy a share of whatever company every time you buy their product.

But this seems like it might be more obvious in hindsight. Can you give a list of ten companies meeting your criteria so we can experiment going forward? If they add up to less than about $210 I will even sell my share of BRK.B and buy them in Robinhood so I can both track and benefit from the profits!

SQ, PYPL, V, AMZN, FB, GOOGL, MA, AAPL, SBUX, MSFT

That's gonna be about 15 times more than a share of BRK.B :(
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 18, 2019, 07:59:38 AM



We initiate the position as soon as the relevant data is available. If the youngest cohort loses interest in the company, we trim our position accordingly. Positions are weighted by whose customer/user bases have the greatest volume and concentration of the youngest cohort.



By the time this trend-setting data is available, how much growth is remaining to exploit?  If you begin with four companies competing for this next-gen space in the economy, what's to say the winning one or two don't just plateau which coincides with your demographic data becoming available?

Plenty of growth remaining, as long as you are flexible about the data you're willing to use. Companies share plenty of meaningful data on earnings calls.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 18, 2019, 08:10:14 AM
All you're doing is demonstrating survivorship bias. Of course all the risky growth companies from 10 years ago that are still around earned handsome returns.

But wework isn't working. Moviepass is bankrupt. Millennials used a lot of Napster on their Compaqs a generation ago.

That's why growth companies are growth companies.

Fair point, but there is a point of distinction. Companies that are popular among the youngest earning cohort (YEC) are not the same as pre-earnings style growth companies. Uber would be a great example of a stock that is both, as would Square, though Square differs in that it has a clear path to profitability and is investing revenue in rapid growth.

At this point I should mention my fund does not simply consider popularity among the YEC, but considers fundamentals, industry trajectory, valuation, etc.





Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 18, 2019, 02:54:37 PM

SQ, PYPL, V, AMZN, FB, GOOGL, MA, AAPL, SBUX, MSFT

That's gonna be about 15 times more than a share of BRK.B :(

Devils advocate? I’m your huckleberry 😁

I’m extremely loathe to criticize alternative investment strategies. So individual stocks? Great! Derivatives?  Awesome! Commodities? So long as it works for you!

Digging deeper, I do see some trouble in River City! That’s Trouble with a T, and that rhymes with P, and that stands for Price Earnings ratios!

Taking a look at these stocks, I think I saw a grand total of one with a PE ratio less than the SP average. The rest of these stocks, excluding one of which isn’t profitable, are at very high PEs. I’m old fashioned. I view stock value as a function of its current and anticipated earnings. By having nosebleed PE ratios I gotta ask if there is any further room for growth that justifies the price? The market seems to think so. And as usual, I think the market needs to put down the pipe.

For most of these I really don’t see the upside potential.  Does SBUX really have the potential to open up more stores across the world for people who will line up to buy $5 FrappaCaffeMochaliciousSomethingorothers? Is AMZN really going to take over the retail world before getting split up in an antitrust action?  Not seeing the upside potential with this portfolio.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: SwordGuy on September 18, 2019, 07:22:17 PM
Bogle himself was clear that if everyone tried to index the result would be chaos, but he also qualified it with saying that the chances of everyone indexing was virtually zero.

However... sometimes the originators of ideas have no idea how far their concepts are taken once they permeate the public subconcious and are adopted as orthodoxy.

I'll bet Bogle didn't really think Indexing would become as popular as it is today, just as I'm sure Keynes never imagined that we could take the ideas of countercyclical fiscal and monetary policy and run with it to the point where we have unprecedented peace-time budgetary deficits and parts ofthe world are issuing return-free risk on 100yr bonds.

It's not fair to blame Keynes for the zero-lower-bound problems we're having today. Keynesians wanted more gov't stimulus, but Republicans asked for Sequester here in US, and the conservatives asked for Austerity in Britain.

The large deficits in the US are procyclical, but the slowing in growth we are seeing (and will see through 2020) proves Keynes right.

Keynes' proposal was counter-cyclical, but today there is never any true tightening during expansions, only various degrees of stimulus and monetary loosening. When was the last time the US actually posted a budgetary surplus? there was a brief period during the Clinton era, but apart from that it has been continual deficit spending. Do you think that debt can ever be repaid? They can't even repay the interest on the existing debt, hence the need to continually issue more debt.

It goes to show you how absurd an idea can reach when it becomes the orthodoxy and is allowed to run and run.

You clearly don't understand Keyne's proposal.    We don't do what he proposed, we only do 1/2 of it, so blaming Keynes is silly.     What you're doing is like asking for a recipe to a dish you really like, then substituting the ingredients and changing the cooking temperatures and times, then blaming the person who gave you the recipe.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 19, 2019, 09:50:25 AM

SQ, PYPL, V, AMZN, FB, GOOGL, MA, AAPL, SBUX, MSFT

That's gonna be about 15 times more than a share of BRK.B :(

Devils advocate? I’m your huckleberry 😁

I’m extremely loathe to criticize alternative investment strategies. So individual stocks? Great! Derivatives?  Awesome! Commodities? So long as it works for you!

Digging deeper, I do see some trouble in River City! That’s Trouble with a T, and that rhymes with P, and that stands for Price Earnings ratios!

Taking a look at these stocks, I think I saw a grand total of one with a PE ratio less than the SP average. The rest of these stocks, excluding one of which isn’t profitable, are at very high PEs. I’m old fashioned. I view stock value as a function of its current and anticipated earnings. By having nosebleed PE ratios I gotta ask if there is any further room for growth that justifies the price? The market seems to think so. And as usual, I think the market needs to put down the pipe.

For most of these I really don’t see the upside potential.  Does SBUX really have the potential to open up more stores across the world for people who will line up to buy $5 FrappaCaffeMochaliciousSomethingorothers? Is AMZN really going to take over the retail world before getting split up in an antitrust action?  Not seeing the upside potential with this portfolio.

I'm both a Tombstone fan and my high school put on the Music Man, so I'm catching all your references :)

Your criticism is quite valid. My fund looks to initiate/bolster positions during sell offs, but even those sell offs are probably too expensive for your taste. And you might be right that the growth story is mostly over for some of these stocks.

However, for some, it might just be getting started. For example SQ is probably my largest individual position. Jack Dorsey has 2050 vision. SQ is worth investing in for its bitcoin approach alone, and that's to say nothing of the incredible ecosystem they've built for smaller retailers (POS, capital, analytics). I don't own any bitcoin, but it's here to stay and SQ seems to be the most well positioned with the smartest approach towards it.

They are pre-earnings, but that doesn't alarm me one bit because the fintech space is not a particularly costly space to operate in, as opposed to something like ridehailing where squeeking out profits cuts right into the already low pay for the drivers who will soon have to be treated as employees in some jurisdictions.

SQ is deploying revenue to acquire more and more customers quickly and develop new technologies/offerings.

I also own MSFT and V. I also own REAL, which I believe is the first and only luxury consignment online retailer to IPO so far. Fast fashion boomed and is tapering down, and I believe the analysts predicting major growth in high end secondhand goods are 100% correct. Bonus points that the founder is the CEO, and it doesn't matter to me but some folks here would be happy to know the founder & CEO is a woman.


I will admit this, I definitely wouldn't buy SBUX or netflix right now. FB and GOOGL I would like to see clearer visions from, though the PE multiples are not off putting for me. AMZN is pricey but one could argue that AWS itself can justify the multiple it trades at. I'll probably wait for a dip and kick myself because it never came :)
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bthewalls on September 22, 2019, 04:28:52 PM
Let’s assume Berry is completely accurate. How would it play out?

Say indexing pops, everyone runs for the door and bottle necks...

Could anyone explain how serious this would be? Are we talking the average 1 to 2year recovery?

Baz

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 22, 2019, 06:40:25 PM
Let’s assume Berry is completely accurate. How would it play out?

Say indexing pops, everyone runs for the door and bottle necks...

Could anyone explain how serious this would be? Are we talking the average 1 to 2year recovery?

Baz

Great question. I get that he thinks indexes are a bubble, and I'm inclined to agree at least so far as the really large caps.  How does a bubble popping play out?  Do large cap stocks get killed relative to small caps and not recover for a long time in much the same way they did in the 1970s?  A 2001 sort of drop? A 1987 panic?  Something else?

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: vand on September 23, 2019, 05:01:35 AM
Here is an one argument against the case for indexing, which was recently made by Moneyweek magazine.


The JL Collins argument is that:

"The stock market always goes up... some companies may die, but they get replaced by new companies, some of which will grow and over time turn into very large companies."

This is very simplistic and makes some horrible assumptions that compnies will always seek to go public as a part of their growth path. However, what if we reach a point where that is no longer the case? And why might that happen?

Consider why companies float on the stock market in the first place - it is to raise capital for expansion. However, they will have a value which they think their company is worth which they expect to be reflected in their IPO and subsequent stock price.

In a world where index investing distorts fair prices so much the question has to be asked... why would any company want to raise capital in this way?

If a company thinks that their stock price will not reflect the true value of the company, why on earth would they ever want float in the first place? They would be better off finding the money privately.  We could reach a stage where as some public companies die,  they will NOT be replaced with new companies at the same rate, especially if you consider the increasingly burdensome regulatory environment which public companies are subject to.

Likewise, if a good, profitable company is continually overlooked by public investors, private money will almost certainly step in at some point and buy it, taking it out of public circulation.

As an example, my own employer has been a publically traded company for the last 20 years, but is being taken back into private ownership next month. Yes, shareholders will get a one-off nice cash payout for the existing shares, but that is now one fewer company publicly traded company in existence.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: matchewed on September 23, 2019, 05:54:17 AM
Here is an one argument against the case for indexing, which was recently made by Moneyweek magazine.


The JL Collins argument is that:

"The stock market always goes up... some companies may die, but they get replaced by new companies, some of which will grow and over time turn into very large companies."

This is very simplistic and makes some horrible assumptions that compnies will always seek to go public as a part of their growth path. However, what if we reach a point where that is no longer the case? And why might that happen?

Consider why companies float on the stock market in the first place - it is to raise capital for expansion. However, they will have a value which they think their company is worth which they expect to be reflected in their IPO and subsequent stock price.

In a world where index investing distorts fair prices so much the question has to be asked... why would any company want to raise capital in this way?

If a company thinks that their stock price will not reflect the true value of the company, why on earth would they ever want float in the first place? They would be better off finding the money privately.  We could reach a stage where as some public companies die,  they will NOT be replaced with new companies at the same rate, especially if you consider the increasingly burdensome regulatory environment which public companies are subject to.

Likewise, if a good, profitable company is continually overlooked by public investors, private money will almost certainly step in at some point and buy it, taking it out of public circulation.

As an example, my own employer has been a publically traded company for the last 20 years, but is being taken back into private ownership next month. Yes, shareholders will get a one-off nice cash payout for the existing shares, but that is now one fewer company publicly traded company in existence.

Bolded emphasis mine.

Well that's one of the cruxes of the argument. Who says it is not fairly priced? Since index funds are passively managed they aren't actively buying and trading to skew anything. They are reactionary to more active measures.

Index funds such as vanguard do not own all the companies within the index fund. Transaction costs would be too expensive. So your fear of one or two companies is unfounded as they may not even be in the sampling. And even if they were in the sampling so what? There are plenty others to replace it.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: matchewed on September 23, 2019, 05:56:31 AM
Let’s assume Berry is completely accurate. How would it play out?

Say indexing pops, everyone runs for the door and bottle necks...

Could anyone explain how serious this would be? Are we talking the average 1 to 2year recovery?

Baz

I disagree that this is a great question. What is an index "pop"?

Do you mean a market crash?

Because what happens during a market crash is fairly well known. Prices go down, lots of people sell, some others buy, and yes in a few years things generally recover.

My base point is that an "index pop" is no different and identical to a market crash.
Great question. I get that he thinks indexes are a bubble, and I'm inclined to agree at least so far as the really large caps.  How does a bubble popping play out?  Do large cap stocks get killed relative to small caps and not recover for a long time in much the same way they did in the 1970s?  A 2001 sort of drop? A 1987 panic?  Something else?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Radagast on September 23, 2019, 09:16:12 AM
Here is an one argument against the case for indexing, which was recently made by Moneyweek magazine.


The JL Collins argument is that:

"The stock market always goes up... some companies may die, but they get replaced by new companies, some of which will grow and over time turn into very large companies."

This is very simplistic and makes some horrible assumptions that compnies will always seek to go public as a part of their growth path. However, what if we reach a point where that is no longer the case? And why might that happen?

Consider why companies float on the stock market in the first place - it is to raise capital for expansion. However, they will have a value which they think their company is worth which they expect to be reflected in their IPO and subsequent stock price.

In a world where index investing distorts fair prices so much the question has to be asked... why would any company want to raise capital in this way?

If a company thinks that their stock price will not reflect the true value of the company, why on earth would they ever want float in the first place? They would be better off finding the money privately.  We could reach a stage where as some public companies die,  they will NOT be replaced with new companies at the same rate, especially if you consider the increasingly burdensome regulatory environment which public companies are subject to.

Likewise, if a good, profitable company is continually overlooked by public investors, private money will almost certainly step in at some point and buy it, taking it out of public circulation.

As an example, my own employer has been a publically traded company for the last 20 years, but is being taken back into private ownership next month. Yes, shareholders will get a one-off nice cash payout for the existing shares, but that is now one fewer company publicly traded company in existence.
There are trillions of dollars in the public markets hunting desperately for return, which is a strong incentive to go public. There might be extra costs resulting from extra regulatory requirements, giving a slight return premium to private markets, but also making public markets more transparent and less risky for investors. If prices in one or the other get out of balance in either way there will be a huge incentive to move to the other, just like any market. If index investing is causing a bubble that will be a huge incentive to go public, completely opposite of what you are saying. If index investing is creating bargains that might be an incentive to go private. Of course if active public market investors suspect a company will be taken private at a premium to its current price they will bid it up in advance. Routine market behaviour.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 23, 2019, 09:39:07 AM
Here is an one argument against the case for indexing, which was recently made by Moneyweek magazine.


The JL Collins argument is that:

"The stock market always goes up... some companies may die, but they get replaced by new companies, some of which will grow and over time turn into very large companies."

This is very simplistic and makes some horrible assumptions that compnies will always seek to go public as a part of their growth path. However, what if we reach a point where that is no longer the case? And why might that happen?

Consider why companies float on the stock market in the first place - it is to raise capital for expansion. However, they will have a value which they think their company is worth which they expect to be reflected in their IPO and subsequent stock price.

In a world where index investing distorts fair prices so much the question has to be asked... why would any company want to raise capital in this way?

If a company thinks that their stock price will not reflect the true value of the company, why on earth would they ever want float in the first place? They would be better off finding the money privately.  We could reach a stage where as some public companies die,  they will NOT be replaced with new companies at the same rate, especially if you consider the increasingly burdensome regulatory environment which public companies are subject to.

Likewise, if a good, profitable company is continually overlooked by public investors, private money will almost certainly step in at some point and buy it, taking it out of public circulation.

As an example, my own employer has been a publically traded company for the last 20 years, but is being taken back into private ownership next month. Yes, shareholders will get a one-off nice cash payout for the existing shares, but that is now one fewer company publicly traded company in existence.

Great point. The number of publicly traded companies in the US has dropped by about half since the 1990s.  And it doesn’t take a lot of brains to figure out why: increased regulatory costs, low costs to borrow capital elsewhere, and insane levels of volatility for individual stocks.  I own stock in a couple of companies in hated industries with PE ratios that are crazy low and with prices that go up and down like a yo-yo. No logic I can see for the volatility.

Looks to me like a divergence between very high priced large companies dominating the public equities market with an ever declining number of smaller companies. Not much out there worth owning in my view.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 23, 2019, 10:08:50 AM
Part I

Michael Burry mentions derivatives because his thesis is that index funds aren't actually buying the underlying -- they're buying derivatives to reflect the underlying. I.e., VTI buys SPX and TF instead of GOOG, AAPL, AMZN, etc.

From the VTI prospectus,

Quote
To track their target indexes as closely as possible, the Funds attempt to remain fully invested in stocks. To help stay fully invested and to reduce transaction costs, the Funds may invest, to a limited extent, in derivatives, including equity futures.

From the VTI annual report,

Quote
Long Futures Contracts                                                               
E-mini S&P 500 Index           March 2019               29,625               3,710,828               (106,471   )
E-mini Russell 2000 Index           March 2019               1,914               129,099               (6,420   )
E-mini S&P Mid-Cap 400 Index           March 2019               240               39,893               (1,764   )
                                                                                                                            (114,655   )

The emini S&P multiplier is $50, as is RTY, and I'll assume the SP400 emini is the same. The December S&P emini is around 2995, giving us a total exposure of ~$4.8B. The total assets are $672B, for a futures exposure of 0.7%.

There are also some total return swaps but those are minimal.

So, VTI isn't in danger of a blowup from derivatives.

I also looked at IJS, which has a futures exposure of only 160 eminis with $6.1B in assets. That's trivial.


I'm sure there are plenty of ETFs out there with large derivatives holdings. I'll check the ones I hold; you do the same.

Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 23, 2019, 10:22:07 AM
Part II

Burry is worried about the heartbeat trades and how they affect stock prices. Namely, redeeming stocks for an ETF and vice-versa will create a downward spiral during a crash.

It's unclear why this would occur. Can someone explain it with more reasoning besides "It'll happen this way."?

If there's a market drop, and the ETF gets out-of-whack with the index, a hedge fund will come along and do a creation/redeem.

1) Are Vanguard/Fido/iShares required to allow a creation/redeem if it's causing an index collapse?
2) Why does an ETF exchange cause MORE of a market drop? Especially since Burry is worried about thinly traded SC stocks that have little bearing on the large ETFs (remember, one complaint about VTI is that it's mostly the S&P 100 affecting price movement.)
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bacchi on September 23, 2019, 10:37:06 AM
https://www.bloomberg.com/news/articles/2019-08-28/the-big-short-s-michael-burry-sees-a-bubble-in-passive-investing

In this article, he's apparently worried about SCV stocks.

Quote from: bloomberg
The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally

The F&F value premium has disappeared for several years. Is that the problem? His fund strategy isn't working?
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: vand on September 24, 2019, 02:30:36 AM
Here is an one argument against the case for indexing, which was recently made by Moneyweek magazine.


The JL Collins argument is that:

"The stock market always goes up... some companies may die, but they get replaced by new companies, some of which will grow and over time turn into very large companies."

This is very simplistic and makes some horrible assumptions that compnies will always seek to go public as a part of their growth path. However, what if we reach a point where that is no longer the case? And why might that happen?

Consider why companies float on the stock market in the first place - it is to raise capital for expansion. However, they will have a value which they think their company is worth which they expect to be reflected in their IPO and subsequent stock price.

In a world where index investing distorts fair prices so much the question has to be asked... why would any company want to raise capital in this way?

If a company thinks that their stock price will not reflect the true value of the company, why on earth would they ever want float in the first place? They would be better off finding the money privately.  We could reach a stage where as some public companies die,  they will NOT be replaced with new companies at the same rate, especially if you consider the increasingly burdensome regulatory environment which public companies are subject to.

Likewise, if a good, profitable company is continually overlooked by public investors, private money will almost certainly step in at some point and buy it, taking it out of public circulation.

As an example, my own employer has been a publically traded company for the last 20 years, but is being taken back into private ownership next month. Yes, shareholders will get a one-off nice cash payout for the existing shares, but that is now one fewer company publicly traded company in existence.

Great point. The number of publicly traded companies in the US has dropped by about half since the 1990s.  And it doesn’t take a lot of brains to figure out why: increased regulatory costs, low costs to borrow capital elsewhere, and insane levels of volatility for individual stocks.  I own stock in a couple of companies in hated industries with PE ratios that are crazy low and with prices that go up and down like a yo-yo. No logic I can see for the volatility.

Looks to me like a divergence between very high priced large companies dominating the public equities market with an ever declining number of smaller companies. Not much out there worth owning in my view.

To be fair a lot of this will be because companies get merged/taken over too. But this also is not a good thing for long term total stock market performance, as it's reasonably shown that such corporate actions are overall value-destroying.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Montecarlo on September 24, 2019, 05:19:55 AM
Consider why companies float on the stock market in the first place - it is to raise capital for expansion.

That’s a little naive.  Most go public to pay off prior investors, get huge executive payouts on options, and pawn off failure risk to retail investors
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: vand on September 24, 2019, 09:32:21 AM
Consider why companies float on the stock market in the first place - it is to raise capital for expansion.

That’s a little naive.  Most go public to pay off prior investors, get huge executive payouts on options, and pawn off failure risk to retail investors

Well yes, there is all that too ^_^

There used to be an alternative IPO acronym: It's Probably Overpriced
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: slow hand slow plan on September 26, 2019, 10:52:37 AM
Wait there is a whole generation of avacado toast eating homeless people using excel?

Oh the humanity.

Sounds like a decent horror movie plot.
,
Go Pro , DXC, Trip advisory , Century link (those millennial and internet am I right? ) Cloud companies like F5, Juniper, Netapp, Citrix
Most of the "winners" you picked like netflix, amazon, apple, google are down more right now than the S & P index they are in and when there is a downturn they most likely will fall further then the index.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: merula on September 26, 2019, 03:51:06 PM
I work in a B2B industry, and a lot of my company's customers are themselves B2B.

Picking stocks based on consumer popularity with any group is fundamentally ignoring huge swaths of the economy, and in particular is ignoring the parts of the economy with steadier earnings, with customers who are less price-sensitive and less likely to lurch to the next big thing.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Buffaloski Boris on September 26, 2019, 07:45:38 PM
I work in a B2B industry, and a lot of my company's customers are themselves B2B.

Picking stocks based on consumer popularity with any group is fundamentally ignoring huge swaths of the economy, and in particular is ignoring the parts of the economy with steadier earnings, with customers who are less price-sensitive and less likely to lurch to the next big thing.

Shhhhhhhhh!!!

I like the way things are! 😁
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: J Boogie on September 27, 2019, 05:15:12 PM
Wait there is a whole generation of avacado toast eating homeless people using excel?

Oh the humanity.

Sounds like a decent horror movie plot.
,
Go Pro , DXC, Trip advisory , Century link (those millennial and internet am I right? ) Cloud companies like F5, Juniper, Netapp, Citrix
Most of the "winners" you picked like netflix, amazon, apple, google are down more right now than the S & P index they are in and when there is a downturn they most likely will fall further then the index.

GoPro I'll allow as a good example. The others don't seem to be well known or favored by millenials. Though they use the internet more, you never heard any millennial rave about their experience with an ISP. Citrix hasn't been a clear loser vs the S&P over most time frames.

I agree that netflix will fall further - much further. But I actually think the other FAANG members are pretty fairly valued right now and AMZN and GOOGL will continue to beat the S&P while AAPL matches it.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: bthewalls on September 27, 2019, 06:08:08 PM
Wonder what effect trumps impeachment will have on market...im secretly hoping for a market crash and index fund crash...sorry
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: harvestbook on September 27, 2019, 07:26:17 PM
Wonder what effect trumps impeachment will have on market...im secretly hoping for a market crash and index fund crash...sorry

Yes, and all the unforeseen and unintended consequences that might go with it, such as you losing a job, place to live, health issues at the wrong time, hard times for the people you love, a fundamental collapse of the entire economy, even the death of capitalism itself. Sounds like a fun ride.

I choose market agnosticism.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: talltexan on October 07, 2019, 07:20:24 AM
Wonder what effect trumps impeachment will have on market...im secretly hoping for a market crash and index fund crash...sorry

(disclosure: I am a registered republican #nevertrumper )

I believe impeachment will have no effect on the market. I believe Trump's removal from office by the Senate--if it should happen--will cause an upward surge, because it will mean the end of the Trade War.

If Trump serves out his term, but is defeated for re-election, I believe there will be a correction. If Warren defeats him, I think bank stocks will fall the farthest.

I'm 39 years old and own roughly 20% bonds.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Travis on October 07, 2019, 09:02:13 PM
Wonder what effect trumps impeachment will have on market...im secretly hoping for a market crash and index fund crash...sorry

(disclosure: I am a registered republican #nevertrumper )

I believe impeachment will have no effect on the market. I believe Trump's removal from office by the Senate--if it should happen--will cause an upward surge, because it will mean the end of the Trade War.

If Trump serves out his term, but is defeated for re-election, I believe there will be a correction. If Warren defeats him, I think bank stocks will fall the farthest.

I'm 39 years old and own roughly 20% bonds.

Everyone flipped out after the original Brexit vote a couple years ago. There was a 3 day blip in the market and it returned to normal because after the initial shock people realized that nothing actually changed.  If the above scenario(s) take place I think there will be a similar up/down for a few days, but return to normal until actual legislation and executive decisions start happening again.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: UnleashHell on October 08, 2019, 02:53:29 AM
Wonder what effect trumps impeachment will have on market...im secretly hoping for a market crash and index fund crash...sorry

(disclosure: I am a registered republican #nevertrumper )

I believe impeachment will have no effect on the market. I believe Trump's removal from office by the Senate--if it should happen--will cause an upward surge, because it will mean the end of the Trade War.

If Trump serves out his term, but is defeated for re-election, I believe there will be a correction. If Warren defeats him, I think bank stocks will fall the farthest.

I'm 39 years old and own roughly 20% bonds.

Everyone flipped out after the original Brexit vote a couple years ago. There was a 3 day blip in the market and it returned to normal because after the initial shock people realized that nothing actually changed.  If the above scenario(s) take place I think there will be a similar up/down for a few days, but return to normal until actual legislation and executive decisions start happening again.

the value of the pound dropped immediately after the brexit vote. still hasn't recovered. down 20% now which should see exports cheaper  - yet the benefits of a cheaper currency hasn't materialized. its more expensive to import if you are in the states and more expensive to travel abroad - part of the knock on effect that impacted Thomas Cook maybe (I think - haven't put any time into researching that!!).

I think that the /us economy is fine. the flat-lining of the markets since the beginning of 2018 is the effect of the leadership of the current president. Business needs/wants a stable environment to be able to plan and execute it plans and it doesn't have it. I think that the end of the trump leadership and the possibility of a new leader that will not be as business friendly (for taxation purpose) is being priced in right now. Banks may suffer slightly from a new leader but more stability and less trade wars will offset that. We could be flat for another year yet but I believe the markets will rise after that.

naturally I am so confident I now have rental income and some bonds just in case it doesn't....
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: AdrianC on October 08, 2019, 10:20:07 AM
NPR gets in on it with a silly headline:

Is Your Retirement Fund Ruining Our Economy?
https://www.npr.org/sections/money/2019/10/08/767884839/is-your-retirement-fund-ruining-our-economy

We now look back at the housing bubble with an astonishment at the mass delusion behind the idea that home prices could always go up, and that more people like Michael Burry didn't see it coming. It's possible that someday, we'll look at the promise that everyone can just buy and hold pieces of an entire market and nothing will go wrong the same way.

Huh? Stocks go up, stocks go down. The trend is generally up, but the ride is lumpy. It is known.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: Sanitary Stache on October 08, 2019, 01:34:38 PM
NPR gets in on it with a silly headline:

Is Your Retirement Fund Ruining Our Economy?
https://www.npr.org/sections/money/2019/10/08/767884839/is-your-retirement-fund-ruining-our-economy

We now look back at the housing bubble with an astonishment at the mass delusion behind the idea that home prices could always go up, and that more people like Michael Burry didn't see it coming. It's possible that someday, we'll look at the promise that everyone can just buy and hold pieces of an entire market and nothing will go wrong the same way.

Huh? Stocks go up, stocks go down. The trend is generally up, but the ride is lumpy. It is known.

I was not as upset about this article as the headline led me to believe I would be.  It seems like most of the people reporting on what Michael Burry said have absolutely no clue as to what he said and also don't care that they don't understand.
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: CSuzette on October 28, 2019, 05:52:50 AM
Trump is not going to be impeached and he is going to have  4 more years to fix the decades of bad trade deals made by prior administrations. It was like they thought we should be punished for being successful so they gave away the farm. As soon as these deals are inked the economy and stocks are going to go crazy. Great time to buy!
Title: Re: Michael Burry (Big Short) thinks index investing is the next market bubble.
Post by: talltexan on October 28, 2019, 12:26:18 PM
Csuzette-
It seems as though you believe the opposite of what I believe: that Trump's trade actions will eventually lead to higher share prices. Can you go into more detail about how you concluded this?