Author Topic: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"  (Read 1438 times)

jfer_rose

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https://www.theatlantic.com/ideas/archive/2021/04/the-autopilot-economy/618497/

I just found an article in the Atlantic decrying the rise in passive index investing. The article quotes a bunch of experts and lists ways that index investing could be bad for the economy and ends with, "The antidote lies not just in fixing passive investment, but in making markets be markets again. Perhaps we could all use a little more of that manic stock-picking energy, not less."

I'm curious what the mustachian masterminds think about the arguments in this article. I'm not sure this article even proves that there truly is a problem that needs to be solved-- it seems like it presents a bunch of hypotheticals.

hipsail

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #1 on: April 05, 2021, 12:30:05 PM »
I was just about to post this! I too am curious what others thoughts here are.

My thought was that I see articles like this come up every so often about how we should have more actively managed funds again... and how much better everything will be if we funnel our money towards that industry... and it makes me pretty skeptical.

The article didn't make a lot of sense to me, the end two paragraphs really lost me because she summarized what she believes the issue with the markets are.. and none of it really related much to index funds?

Hopefully more articulate folks than myself will add their discussion points, ha!

maizefolk

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #2 on: April 05, 2021, 12:54:47 PM »
The first half of the article comes up with lots of bad things which would happen in a world with zero active investing. And some of it may be right. But it ignores that in a world with zero active investing there is no reason to expect market pricing to be efficient, which means anyone who adopts active investing can likely dramatically outperform passive investors. So index investing is ultimately self limiting. I don't know where the line is when active investing start to make active sense, but I know it's somewhere before every share of every company is owned by an index fund.

The second half of the article talks about some interesting recent economics papers which may have found evidence that major public companies are becoming less competitive with each other as a result of large amounts of common ownership. This may or may not be happening today, but in a world where all companies have completely common ownership it clearly would be an issue. But again, this is a self limiting phenomenon when taken to extremes. If public airlines raise prices in concert to raise all of their profits, eventually prices get high enough that it becomes incredibly profitable for a private investor to start their own airline and undercut the prices of the public, commonly owned, airlines which are essentially functioning as a single company. Now maybe prices can go up a lot before that happens which would still be bad. But I think the article exaggerates.

RWD

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #3 on: April 05, 2021, 01:05:20 PM »
@maizefolk already beat me to it. But basically there will always be incentive for investors/hedge funds/bots to individually stock pick. A world where we suddenly have 100% of everyone in index funds is when bots will have a field day.

chemistk

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #4 on: April 05, 2021, 01:24:56 PM »
I went into the article looking for the author to lay out at least one or two alternate ideas and was sorely disappointed. If index funds are truly bad, what else is there (especially for common folk like us) apart from active stock picking?

With or without index funds, corporate apathy and collusion has always been destined to get worse. Index funds could very well be pushing corporations into that endgame faster but there's absolutely no way legions of cocaine-addled stock slingers are going to cause corporations to work toward the public interest.

YttriumNitrate

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #5 on: April 05, 2021, 01:48:04 PM »
I went into the article looking for the author to lay out at least one or two alternate ideas and was sorely disappointed. If index funds are truly bad, what else is there (especially for common folk like us) apart from active stock picking?

Usually the alternative presented in these types of articles is "Invest your money with me so I can charge you 1% a year on it" so I will give the author credit for not going that route.

cool7hand

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #6 on: April 05, 2021, 03:08:48 PM »
The irony of the article's title is that the Atlantic appears to lean Marxist.

less4success

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #7 on: April 05, 2021, 04:01:14 PM »
Before I click and possibly generate ad revenue for them, who wrote this article? My bet is they run an asset management firm.

Edit: I guess I’m too cynical these days. The author is Annie Lowrey and she’s a staff writer for The Atlantic and is apparently married to Ezra Klein. So no obvious ties to the investment management industry :)
« Last Edit: April 05, 2021, 04:12:32 PM by less4success »

maizefolk

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #8 on: April 05, 2021, 04:04:20 PM »
No, it appears to be one of the staff writers at the Atlantic. Although she certainly quotes a fair number of folks who run asset management businesses.

englishteacheralex

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #9 on: April 05, 2021, 04:06:44 PM »
No, it's a legit article (not somebody trying to make a buck in managed funds) and I had a lot of questions about it, myself.

Index funds have macro-economic implications that have been worrying me for a while.

But what's the alternative? Certainly not managed funds. Bonds? Real estate? Cash? Commodities? Precious metals? Bitcoin? All seem to have significant drawbacks.

Not sure what to do other than my status quo investment plan (pretty much all indexes).

jfer_rose

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #10 on: April 05, 2021, 04:33:34 PM »
The irony of the article's title is that the Atlantic appears to lean Marxist.

My first instinct was to roll my eyes, but I'm actually curious about your view of the world since you made this statement (unless you were just joking). Would you consider any left-leaning media outlet to lean Marxist? That seems odd to me considering the United States is so far right of the rest of the world, and most of what we consider leftist in the United States is considered centrist in Europe. If you look at the Media Bias Chart (URL at the bottom of my post), The Atlantic falls with in the "skews left" category which is just a smidge over from "middle" and nowhere near far left. It's also in the "Mostly Analysis or a Mix of Fact Reporting and Analysis" category which is the side of the chart where you want to look if you want reliable information.

https://www.adfontesmedia.com/static-mbc/#iLightbox[13d22628b594e40c352]/0

less4success

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #11 on: April 05, 2021, 06:29:28 PM »
I think the downsides of indexing are worth exploring, but I don't feel like this article contributed much to the discussion.

Couple of thoughts:

Quote from: article
Harvard Law professor John Coates has argued that in the near future, just 12 management professionals—meaning a dozen people, not a dozen management committees or firms, mind you—will likely have “practical power over the majority of U.S. public companies.”

The managers still have to follow the index. I'm sure it's more complicated in reality, but I imagine running an index fund is almost algorithmic (and not some secret proprietary algorithm either--it's laid out in the prospectus), so I'm not sure what I'm supposed to worry about here.

Quote from: article
They’ve gotten better returns for lower fees, as index funds shunt billions of dollars away from financial middlemen and toward regular families.

Ok, so there are massive benefits that accrue to ordinary people on the positive side of the scale. What's this article going to put on the other (negative) side of the scale?

Quote from: article
One primary concern comes from the analysts at Bernstein: “A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active, market-led capital management.”
...
That commitment to inertia worries the Bernstein analysts, who point out that in a world with exclusively passive investors, capital will get allocated only to the big companies and not necessarily to good, promising, or efficient companies.

What a ridiculous strawman argument to waste so much of this article on. We'll never get to 100% passive investing (and if we do, I'll personally start an active management firm).

Quote from: article
They start with a look at a somewhat different kind of index fund: a commodity-futures index fund
...
When one of these commodities ends up on an index, the firms that use that commodity in their business see a 6 percent increase in costs and a 40 percent decrease in operating profits, relative to firms without exposure to the commodity, the academics found.

I doubt this finding for commodity futures would extend to equities, which I thought was the main concern of this article...

Quote from: article
More broadly, the Bernstein analysts, among others, worry that index-linked investing is increasing correlation, whereby the prices of stocks, bonds, and other assets move up or down or sideways together

Finally, something legitimate! I'm not convinced that indexing is the only (or even primary) cause of increasing correlation, but this is something investors will have to keep in mind. Maybe asset allocation strategies and diversification will no longer provide a free lunch?

Quote from: article
far bigger concern is that the rise of the indexers might be making American firms less competitive, through “common ownership,” in which the mega-asset managers control large stakes in multiple competitors in the same industry.

Worth exploring. Let's see where the article takes this thread.

Quote from: article
Across firms, executive compensation seems to be more closely linked to a company’s performance when its shareholders are not invested in the company’s rivals, the study found. In other words, firms stop paying managers for performance when owned by the same people who own their rivals.

Really? Executive compensation? That's the concern? So firms that are owned by a higher percentage of index investors pay their executives less? Seems like a good thing to me.

Quote from: article
Vanguard, Fidelity, and State Street, not Mom and Dad, vote in shareholder elections.

A second legitimate concern. Maybe index-owned shares shouldn't be allowed to vote (I think Bogle himself proposed something like this) or the voting right should pass through to the fund owners. This seems solvable, but I'm glad the article highlights this problem.

Quote from: article
The antidote lies not just in fixing passive investment, but in making markets be markets again. Perhaps we could all use a little more of that manic stock-picking energy, not less. 

This is a disappointing end to the article. Index funds are still the best option for the vast majority of people; let's not trash them because otherwise people will lose money day trading or "investing" in cryptocurrencies/non-fungible tokens/Beanie Babies.
« Last Edit: April 05, 2021, 06:33:25 PM by less4success »

Abe

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #12 on: April 05, 2021, 09:08:04 PM »
I liked @less4success 's critique and decided to approach the article from a reviewer's standpoint (since I just had to review some scientific articles)

I think this is the central argument of the essay, buried in paragraph 7-8:

"Yet it has also moved the country toward a peculiar kind of financial oligarchy, one that might not be good for the economy as a whole...blah blah.. public markets have been cornered by a group of investment managers small enough to fit at a lunch counter, dedicated to quiescence and inertia."

What data is provided to support this argument?

1. Several paragraphs explaining why index funds are good for average investors.

2. A paragraph of quotes without evidence.

3. Then quoting some jokers who imagine a hypothetical world where I guess everyone is forced to invest in index funds? "Bernstein analysts, who point out that in a world with exclusively passive investors, capital will get allocated only to the big companies and not necessarily to good, promising, or efficient companies"

4. "When one of these commodities ends up on an index, the firms that use that commodity in their business see a 6 percent increase in costs and a 40 percent decrease in operating profits, relative to firms without exposure to the commodity, the academics found." They cite a paper that in Figure 1 shows no statistical difference in commodity prices before and after index funds start buying commodities, but shows significant differences in profits. I'm not an economics major so don't understand the details of their models, but they correlate this with managers not being able to find deals on commodities because index funds messed up their knowledge. How that happens isn't clear to me, but I have a hard time believing the 40% decrease in profits is due to index funds alone.

5. They raise the issue of correlation of bonds, stocks, etc. This is a valid concern, but unrelated to the central hypothesis of under-performing companies and again can't be blamed solely on indexing.

6. Strawman argument about monopoly power due to index fund managers voting on corporate boards to commit felonies. Even Blackrock (!) says the research papers the article mentions are nonsense. The author then backtracks on strawman argument and says it is accidental collusion because everyone is lazy due to index funds. No actual evidence beyond associations is provided, and no explanation for the mechanism behind this is provided.

7. Argument about executives being paid less for "performance". Not clear how this translates to actual performance, and no further discussion provided.

8. Contradictory arguments that index funds have at once too much influence due to their size but don't exert influence at shareholder meetings. No evidence that this is a problem.

9. Random statements about other aspects of the economy being too centralized, then the whole article goes out with a whimper.

10. No discussion of the obvious limitation of the above arguments: NO ONE IS FORCING EVERYONE TO INVEST IN INDEX FUNDS. If you have super-special knowledge of some awesomeness, you can invest in it and school us index fund weenies and save America!

Ugh. I'd give this paper a C at best. The best evidence they provide is a paper for a separate, unrelated investment field. Why are so many articles on the internet about some hyperbolic slippery-slope nonsense?

highflyingstache

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #13 on: April 06, 2021, 08:34:57 AM »
There is absolutely problems with indexing, no doubt about it.

In a general sense, at a certain size, the tail wags the dog. That's not so great for the best performing company, it's really great for the least performing company in the index. They all fall into more of a bell curve, less of a individual performance (outperformance, bankruptcy ends of spectrum), a little more, the more they're indexed.

There's been a lot of discussion recently, about BlackRock's active work on boards and during Annual Meetings. Essentially, BR holds enough weight to do something (on behalf of all of us, with indexs like ITOT, for example) and even better BlackRock does talk quite a bit about being a green leader in net-zero emmissions, yet they're effectively absent, since you and I are absent. So their 5-10% stake or more in big companies is, silence, which for a big investor, uncommon. And it does nothing to further their net-zero goals.

I think the most interesting, random, comprehensive guide to how index distorts stocks was actually one of Jim Cramer's books. He was discussing his history growing into working in the hedge world, and index/passive investing was becoming more common. He went to great lengths to essentially show how he continued to understand the evolving movement of passive investing. He had nothing to gain in (the 80s,90s?) but more or less noted how they were ways it was messing with his work as he was learning it.

Every style of investing has its pitfalls. Is Warren Buffet's "Value" really value anymore? Value's had a bad run the past 30 years too. Growth investing is relatively speculative, Dividend Arristocrats might underperform the index (if you chase high performing dividend Dogs of Dow for example), etc etc.

No form of investing is perfect, by any means. Of course the article can go to speculate with 100% passive what the world would look like. But as mentioned above, an active manager may in fact outperform because of the problems with indexs. Private companies might be all the rage. Academics will always have slants on everything we do, even if the theory doesn't match reality. Hell, just mentioning the company Long Term Capital Management should be good enough to show that.

Is it one of the worse built Atlantic articles I've read in a while...yep. I take it with a grain of salt.

caleb

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #14 on: April 06, 2021, 08:44:43 AM »
I wish Derek Thompson or Adam Davidson had written this article.  There are some interesting ideas, but they're not presented well.

If index funds distort stock prices and thereby distort firm incentives (or just plain let them be lazy), doesn't that shift incentives toward active management firms - whether through individual stock picking, hedging, or shorts - that would quickly be able to beat the market and win back customers?  If that's not happening, then why not?

I could see an argument that lots of money in the market cannot be actively managed because it's in employer sponsored plans that prohibit it.  But the author never even asks why the market isn't correcting.

maizefolk

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #15 on: April 06, 2021, 08:54:24 AM »
In a general sense, at a certain size, the tail wags the dog. That's not so great for the best performing company, it's really great for the least performing company in the index. They all fall into more of a bell curve, less of a individual performance (outperformance, bankruptcy ends of spectrum), a little more, the more they're indexed.

Some people, like I think you are doing in this quote above, say that indexing props up bad companies by reducing the reaction of stock prices  to individual company performance.

Other people say that indexing makes the market overreact by reducing the total number of shares which are potentially tradeable in response to news or price changes. So in principle the same amount of buying or selling can move the price more, increasing market volatility.

I don't follow the reasoning for the first one. Whether a company with 10M shares outstanding has 10M shares being actively traded or only 5M shares being actively traded, the active traders are still the ones setting the stock price and market cap. I think I follow the reasoning for the second one. Whether or not the effect is significant or not is a separate question.

But it's just interesting to me that index funds are seen as bad for both minimizing AND exaggerating changes in stock prices.

cool7hand

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #16 on: April 06, 2021, 02:01:07 PM »
The irony of the article's title is that the Atlantic appears to lean Marxist.

My first instinct was to roll my eyes, but I'm actually curious about your view of the world since you made this statement (unless you were just joking). Would you consider any left-leaning media outlet to lean Marxist? That seems odd to me considering the United States is so far right of the rest of the world, and most of what we consider leftist in the United States is considered centrist in Europe. If you look at the Media Bias Chart (URL at the bottom of my post), The Atlantic falls with in the "skews left" category which is just a smidge over from "middle" and nowhere near far left. It's also in the "Mostly Analysis or a Mix of Fact Reporting and Analysis" category which is the side of the chart where you want to look if you want reliable information.

https://www.adfontesmedia.com/static-mbc/#iLightbox[13d22628b594e40c352]/0

It's meant as a half joke.  The sort of joke based on Shakespeare's line, "Jesters do oft prove prophets." (King Lear.) That said, I concede that no publication that includes David Frum on its staff or contributions from John McWhorter, among others, is truly Marxist.

the_gastropod

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #17 on: April 06, 2021, 02:30:27 PM »
The author spends a lot of time cherry picking frightening figures about how much of the market is comprised of index fund investments, and the implication that it'd be bad if 100% the market was passively invested. Then she gives the actual figure: "Index funds now control 20 to 30 percent of the American equities market, if not more." In other words, 70 to 80 percent (OR MORE!—I guess we can just toss that anywhere, eh?) of the American equities market is actively traded. Seems like we're a pretty far way off from the dreaded 100% passive market she's fear mongering about.

maizefolk

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #18 on: April 06, 2021, 03:00:31 PM »
"Index funds now control 20 to 30 percent of the American equities market, if not more." In other words, 70 to 80 percent (OR MORE!—I guess we can just toss that anywhere, eh?) of the American equities market is actively traded. Seems like we're a pretty far way off from the dreaded 100% passive market she's fear mongering about.

It's a side issue but I think the "or more" is actually defensible in this case. We know the total value of US equities. But there is no published statistic of the percentage of equities in index funds (or what qualifies as an index fund). So the way you come up with a number is to add up the total assets held by Vanguard. Then look at the total assets of different black rock ETFs which are index funds. Then fidelity index funds. And so on. But you'll never be entirely sure you found all of the different index funds out there, so your number from adding up all the index funds you could find is confident lower bound, but you don't have a confident upper bound. Hence "or more".

caleb

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #19 on: April 06, 2021, 05:00:42 PM »
The irony of the article's title is that the Atlantic appears to lean Marxist.

My first instinct was to roll my eyes, but I'm actually curious about your view of the world since you made this statement (unless you were just joking). Would you consider any left-leaning media outlet to lean Marxist? That seems odd to me considering the United States is so far right of the rest of the world, and most of what we consider leftist in the United States is considered centrist in Europe. If you look at the Media Bias Chart (URL at the bottom of my post), The Atlantic falls with in the "skews left" category which is just a smidge over from "middle" and nowhere near far left. It's also in the "Mostly Analysis or a Mix of Fact Reporting and Analysis" category which is the side of the chart where you want to look if you want reliable information.

https://www.adfontesmedia.com/static-mbc/#iLightbox[13d22628b594e40c352]/0

It's meant as a half joke.  The sort of joke based on Shakespeare's line, "Jesters do oft prove prophets." (King Lear.) That said, I concede that no publication that includes David Frum on its staff or contributions from John McWhorter, among others, is truly Marxist.

If I were an editor looking at a half@ssed article and a deadline, I'd just add "Marx-" to the title to make sure I hit my click-quota.  "Sun Protective Clothing Market Expands with Eye on Marxism," "Pontoon Industry Gears Up for Summer and Marxist BBQs," "Neighborhood Cleanup Day: A Sign of Cultural Marxism?" The opportunities are endless.

cool7hand

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #20 on: April 09, 2021, 06:50:43 AM »
The irony of the article's title is that the Atlantic appears to lean Marxist.

My first instinct was to roll my eyes, but I'm actually curious about your view of the world since you made this statement (unless you were just joking). Would you consider any left-leaning media outlet to lean Marxist? That seems odd to me considering the United States is so far right of the rest of the world, and most of what we consider leftist in the United States is considered centrist in Europe. If you look at the Media Bias Chart (URL at the bottom of my post), The Atlantic falls with in the "skews left" category which is just a smidge over from "middle" and nowhere near far left. It's also in the "Mostly Analysis or a Mix of Fact Reporting and Analysis" category which is the side of the chart where you want to look if you want reliable information.

https://www.adfontesmedia.com/static-mbc/#iLightbox[13d22628b594e40c352]/0

It's meant as a half joke.  The sort of joke based on Shakespeare's line, "Jesters do oft prove prophets." (King Lear.) That said, I concede that no publication that includes David Frum on its staff or contributions from John McWhorter, among others, is truly Marxist.

If I were an editor looking at a half@ssed article and a deadline, I'd just add "Marx-" to the title to make sure I hit my click-quota.  "Sun Protective Clothing Market Expands with Eye on Marxism," "Pontoon Industry Gears Up for Summer and Marxist BBQs," "Neighborhood Cleanup Day: A Sign of Cultural Marxism?" The opportunities are endless.

To paraphrase another famous quote, the truth is often said in jest.

The_Big_H

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Re: The Atlantic Article: "Could Index Funds be 'Worse than Marxism'?"
« Reply #21 on: May 04, 2021, 01:20:10 AM »
To paraphrase JL Collins this will sort itself out.

There is some equilibrium between 100% passive investment and where we are now (30% passive) where this will stabilize.

Think about it, if the market was 100% passive, it would be arbitrarily easy to make a ton of money actively trading as you would effectively know what every other investor is going to do.
SO 100% will never happen, because humans are humans.  A bunch of other people would

So we end up with some % of passive probably in the 40-50% range which will support a few people making alot of money active investing, but alot of people still trying (watching the success stories).  Above that its too easy to make money so everyone jumps in and via tragedy of the commons the edge is lost.

I mean, we have kids YOLOing into freaking options on meme companies with student loan money.  Id say the market is still dominated by active traders.