Your passive investing is harming society!

[MissNancyPryor]

I haven't seen this linked yet-- pretty unbelievable crap.  They are attempting to assign altruism to active investment managers not because of a fiduciary duty to the individual account holders (the lack of which is why there are looming new laws of conduct) but as drivers of a sustainable and healthy economy.  Oh puhleez. 

I suppose the churn of other peoples' money and the fees it generates sloshing around in the pockets of active managers keeps their personal economy humming along just fine, meanwhile Joe and Jane Investor get pinched.   

http://www.bloomberg.com/news/articles/2016-08-23/bernstein-passive-investing-is-worse-for-society-than-marxism

[arebelspy]

Dick move of Bloomberg to put "Bernstein" in the title, leading you to think of the author, not (what turns out to be) some company no one's heard of. Click bait junk.

And yeah, laughable.

I'd have posted this in the Anti-Mustachian Wall of Shame and Comedy.

[Vagabond76]

The basic premise to the article is correct. If all the capital in the world was spread evenly along a market cap basis, that would be a gross misallocation. There would be no new capital to finance new technologies. Quite conversely, we would be stuck with old technology because the capital allocated to existing systems will be stuck there.

Now is this article going to entice me to buy expensive actively-managed mutual funds? No, I don't need to pay for that service. However, I will keep some portion of my portfolio in individual companies.

[Paul der Krake]

Dick move of Bloomberg to put "Bernstein" in the title, leading you to think of the author, not (what turns out to be) some company no one's heard of. Click bait junk.

Be right back, registering "Large Buffett, LLC".

[MustacheAndaHalf]

There would be no new capital to finance new technologies.

You're assuming existing companies have no cash flow to fund R&D.  Apple's sales provide billions in cash which it uses to fund iPod, iPhone, and whatever that watch thing is called.  Point being that existing companies with existing cash flow can fund new technologies.

[Vagabond76]

They would have the cash but no incentive to use it. The threat of a start-up taking over the market is a powerful incentive to improve.

[jjandjab]

Pretty silly argument. Basically this is saying if somehow all investment dollars ended up in passive indexes we would be sunk by a flat market. What a crock.

There will always be money outside of index funds and there will always be individual investors. And not only that, much of the innovation in society comes from either small private businesses or venture capital/hedge funds/private equity money. They are ever going to be in index funds. Someone is always going to trying to beat the market and make investments outside of publicly traded companies.

Apple will spend its cash sometime - at some point their in-house gravy train is going to dry up with Mr. Jobs and they will acquire companies, etc...

The guy talking in the article is probably mad because his fund company and active management style can't beat the SP500.

[nobodyspecial]

The basic premise to the article is correct. If all the capital in the world was spread evenly along a market cap basis, that would be a gross misallocation. There would be no new capital to finance new technologies. Quite conversely, we would be stuck with old technology because the capital allocated to existing systems will be stuck there.

After the initial IPO the stock market doesn't fund companies, and now with VC/private capital, not even then
And the equity market doesn't set the value of companies - the much bigger and much tougher bond market does

[JetBlast]

Dick move of Bloomberg to put "Bernstein" in the title, leading you to think of the author, not (what turns out to be) some company no one's heard of. Click bait junk.

And yeah, laughable.

I'd have posted this in the Anti-Mustachian Wall of Shame and Comedy.

In fairness to Bloomberg, the company is often simply referred to as 'Bernstein' when their analysts appear on or are quoted on CNBC, Bloomberg, and Fox Business. They are part of AllianceBernstein, which has offices in 22 countries and somewhere around half a trillion in assets under management.

[k9]

The interesting point is that, if enough people were investing in index funds (lets say, 3/4 of the market, for instance), it would be much easier for an active fund (or an active investor, or even a "smart beta" fund) to beat plain index funds, since companies would almost never be priced to their fair value.

In other words: it won't happen, because the very fact that index funds handle too much money for the market to be efficient would be arbitraged.

[brooklynguy]

The interesting point is that, if enough people were investing in index funds (lets say, 3/4 of the market, for instance), it would be much easier for an active fund (or an active investor, or even a "smart beta" fund) to beat plain index funds, since companies would almost never be priced to their fair value.

See the discussion in this thread ("If everyone indexed?") (and the Philosophical Economics articles cited therein) for arguments why the opposite is true.

[AdrianC]

Heeeere's Larry:

Swedroe: Passive Investing Won’t Break Market
http://www.etf.com/sections/index-investor-corner/swedroe-passive-investing-wont-break-market

As American novelist Upton Sinclair wrote, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

I'm a fan of passive investing, though I don't do it very much...

A bit like "Give me chastity and continence, but not yet."

[MustacheAndaHalf]

Can a market be 100% passively invested in total stock market when people have different points of view?

If 1% of the market is owned by small/value investors, they prevent total stock market funds from indexing the entire market.  Upon reaching 80% held in total stock market funds and 1% small value held in small value index funds, there's 0% small value left.  The remaining 19% of the market can't be indexed with total market nor with small value.

Similarly if 10% of the market believes in holding large/value stocks passively, that again prevents the total stock market indexing from going above 80%.  That leaves 0% large/value stocks to include in more of the total stock index.

Different viewpoints on what to passively invest can prevent the stock market from becoming 100% passively indexed.

[k9]

Yeah, anyway, tilted passive investing (for instance, small cap and/or value indexes) would prevent most of these problems. I mean, even if everybody actually indexed, which will never be the case.

[chasesfish]

It's an interesting academic theory, but not practical.  There have always been and always will be value hunters (i.e. Benjamin Graham and Warren Buffett) that find mispriced securities and can beat the market from time to time.  There is value in analyzing and understanding the underlying business, but that game isn't for everyone

On another note, my spouse had an Alliance Bernstein Simple IRA for a while.  5% loads and almost a 3% annual fee.  The fees are up the entire match, but we had to take it because the IRS rules allowed us to put away $12k before tax in a simple and could only do half that in a regular.  I view the company sending this theory out as shitty and protecting their jobs.

[Retire-Canada]

Why do we support click-bait crap like this by posting it and getting other people to visit the offending site? We are just rewarding bad behaviour.

[MustacheAndaHalf]

Why do we support click-bait crap like this by posting it and getting other people to visit the offending site? We are just rewarding bad behaviour.

It's better to show that click-bait articles are unreasonable than to ignore them, in my view.  I think people will be better able to [spot] articles making false claims about passive investing when they are informed. 

Something to consider - if that article's traffic mostly consists of MMM visitors, aren't they already a lost cause?

EDIT: Wording.

[Leisured]

Innovators need Other People's Money to fund their innovations. The other investors need not be active in the company. Investors provide finance, whether actively managed or passively, and the company's engineers use that money to get on with innovation.

[nobodyspecial]

Innovators need Other People's Money to fund their innovations. The other investors need not be active in the company. Investors provide finance, whether actively managed or passively, and the company's engineers use that money to get on with innovation.

So when your pension fund buys a share of Microsoft from another pension fund - does Microsoft R&D get a cut ?

[Retire-Canada]

Something to consider - if that article's traffic mostly consists of MMM visitors, aren't they already a lost cause?

MMM is not the only place on the internet filled with reasonably intelligent people that could ignore this type of click bait. Those websites are successful because people choose to make them successful. If you don't feed them they wouldn't keep coming back with more garbage.