Author Topic: Passive Investing is Devouring Capitalism  (Read 7826 times)

Accidental Fire

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Passive Investing is Devouring Capitalism
« on: August 04, 2017, 05:04:16 AM »
Yes, us pesky FIRE folks and our index funds are killing America and opening the door for the commies and socialists. Or is it that this person is just miffed that more folks are wising up and his income from his overpriced and underperforming actively-managed funds has dropped?

https://www.bloomberg.com/news/articles/2017-08-03/singer-s-elliott-hedge-fund-returns-3-5-in-the-first-half


jlcnuke

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Re: Passive Investing is Devouring Capitalism
« Reply #1 on: August 04, 2017, 05:41:53 AM »
Well, to be fair, there are a number of economic problems which would/could occur if all investors (or even a significant majority) shifted to passive investing on major indices only. For one, capital for micro and small-cap ventures would be severely limited. That could hurt growth of the companies most likely to experience significant growth with adequate capital resources. If everyone wants to be in the S&P 500 only, for instance, then there's little to no money for the "small guy" to get going.

Similarly, the voices of shareholders have historically been able to impact changes only when those few with sufficient holdings, or a large number of individuals, all clamor for a specific change in the company. That's one of the responsibilities of being a part owner of a company that many people forget/ignore when that responsibility is doled out to some fund manager on behalf of the thousands of clients they have invested in the fund that owns shares of a company. That fund manager may or may not care to bother with trying to influence the company. For most fund managers, that's unlikely to be a top priority without significant input from investors demanding such a thing (of which I've never heard that happening though I imagine some investors have in the past).

That's all conjecture/speculation, but I can see an argument for how passive investing, with fund managers that need to do little to manage the investments, could result in less shareholder input to companies they are investing in and significantly less capital investment in smaller companies that could potentially benefit the most (and thus help grow the economy as they move from a garage shop to Microsoft for instance).

paddedhat

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Re: Passive Investing is Devouring Capitalism
« Reply #2 on: August 04, 2017, 05:46:13 AM »
Let's review. He has 33 BILLION of other people's money and managed a whopping .4% return in the second quarter, which is probably a loss, if he is charging standard management fees. Then he comes up with this garbage:

On whether the labor market is tight: “Short answer: no,” Singer wrote. Long-term government benefit programs provide strong disincentives for people to work or even seek employment,

Sure.............. here in the socialist paradise of the USA, the government just floods the masses with all manner of entitlements, which totally chills the ole' "incentive to work". Heck, with the free heath care, child care, universal basic income, and free secondary education, I'm shocked that ANYBODY would waste time going to work. Oh, wait, I must of got lost, we Americans actually have none of that............my bad.

IMHO, I wouldn't risk my jar of loose change to this guy's firm. As for his claim that passive investing will destroy the market, just more bullshit from somebody who is trying hard to rationalize performance that falls below savings account interest levels, in a hot market.

« Last Edit: August 04, 2017, 11:54:33 AM by paddedhat »

Fishindude

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Re: Passive Investing is Devouring Capitalism
« Reply #3 on: August 04, 2017, 08:12:03 AM »
Some truth to this.
Investing in the market, mutual funds, etc. is so common and relatively safe anymore that it probably keeps many from trying new business ventures, taking risks, etc.

inline five

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Re: Passive Investing is Devouring Capitalism
« Reply #4 on: August 05, 2017, 01:40:30 PM »
Passive investing means buying stocks just to buy them hoping most will go up. My concern is over time stocks in general just go up because everyone is buying them.

We've had a ton of foreign inflows this year which is most of the reason for these highs. More money in = higher prices.

PE is the cost to buy $1 in earnings. If you were purchasing a business today, how much would you pay for each $1 in net earnings? Maybe 3x-4x? Yet the markets avg PE is closer to 20. Yes over time profits grow an average of ~3% and that should push that down but not a ton.

Last year I bought into a company valued at $5b. This company had $4b in cash and $1b in annual profits and $0 in debt. Stock price was $4.85 USD. Today it's around $7.20 USD. That sort of thing is a no brainer but no values like that exist in the US market, that company was an ADR listed in Japan.

IMO US markets are continuously overpriced compared to their foreign peers, which is why you saw such huge declines in 2008-2009.

But as they say it doesn't really matter. The game is what it is and it will continue forever most likely, with PEs rising over time as values rise more than profits.
« Last Edit: August 05, 2017, 01:43:44 PM by inline five »

jjandjab

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Re: Passive Investing is Devouring Capitalism
« Reply #5 on: August 05, 2017, 03:15:16 PM »
Articles and comments like this just don't make much sense to me. Most of the money going into passive index funds is coming actively managed funds in retirement acocunts because they have better average returns and lower expenses, not because of any socialist leanings. And a larger and larger portion of the population is managing their own money - having to choose their own 401k/403b/IRA investments - so they want the backbone to be a solid, cheap representation of the market as a whole. When I look at my list of choices and see the lowest cost funds have the best long term returns, why wouldn't I choose them?

Maybe when some active funds start consistently doing well (like the old Magellan fund or something), then folks will think active over passive again.

But I'd venture that most investors, even those that love index funds, still have other investments. I'd bet a relatively low proportion of the population has a strict two or three fund portfolio without any other investments. Many folks have some stocks here and there. Or a little real estate investment or some alternative fund they like. I have a few small REITs and a few small company stocks to fill out my portfolio that I like to play with.

Non of the 401k money from a person working at a regular job was ever going to go start a small business or the like. And there is still a huge amount of money out there that the VCs and even large companies like Amazon and Apple have to invest.

Active fund managers and financial advisors are just mad they aren't fleecing as many "small guys" as much as they used to..

lost_in_the_endless_aisle

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Re: Passive Investing is Devouring Capitalism
« Reply #6 on: August 05, 2017, 04:37:40 PM »
Regarding Singer being butthurt over poor returns, here's a fun fact: Elliot Mgmt has significantly outperformed the S&P 500 since the fund's inception in the 70s.

paddedhat

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Re: Passive Investing is Devouring Capitalism
« Reply #7 on: August 06, 2017, 09:09:08 AM »
Regarding Singer being butthurt over poor returns, here's a fun fact: Elliot Mgmt has significantly outperformed the S&P 500 since the fund's inception in the 70s.

If that's true, then he is way past unicorn status.  OTOH, a 1/20 shot of beating the benchmark, and the fact that 2/3rd of active funds are MIA after fifteen years, are pretty compelling reasons to avoid the whole game.

http://www.marketwatch.com/story/why-way-fewer-actively-managed-funds-beat-the-sp-than-we-thought-2017-04-24

lost_in_the_endless_aisle

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Re: Passive Investing is Devouring Capitalism
« Reply #8 on: August 06, 2017, 09:27:30 AM »
Regarding Singer being butthurt over poor returns, here's a fun fact: Elliot Mgmt has significantly outperformed the S&P 500 since the fund's inception in the 70s.

If that's true, then he is way past unicorn status.  OTOH, a 1/20 shot of beating the benchmark, and the fact that 2/3rd of active funds are MIA after fifteen years, are pretty compelling reasons to avoid the whole game.

http://www.marketwatch.com/story/why-way-fewer-actively-managed-funds-beat-the-sp-than-we-thought-2017-04-24
Elliott is more than merely an actively managed fund--the fund is willing to be highly litigious with respect to distressed assets/debt (famously seizing an Argentinian warship in a Ghanaian port in a dispute over government bond revaluation) and agitates for corporate restructuring, asset sales, or M&A activities. Such activities align with Singer's narrative regarding what is wrong with passive funds from a corporate governance perspective: too much complacency and too little critical oversight of the management of the firms. I think he has a point but the counter-argument is lazy shareholders create the ecosystem where Singer's fund can profitably identify and capitalize on inefficiency through activist stockholder measures.

jlcnuke

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Re: Passive Investing is Devouring Capitalism
« Reply #9 on: August 07, 2017, 05:04:23 AM »
Regarding Singer being butthurt over poor returns, here's a fun fact: Elliot Mgmt has significantly outperformed the S&P 500 since the fund's inception in the 70s.

Not with a fund of equivalent investments they haven't.... lots of funds can beat a given benchmark, if they don't have to invest in anything similar to that benchmark and can have much higher risk investments....

The "funds don't beat indices consistently" data isn't comparing apples and oranges, it's looking at funds that are doing similar investments. Not comparing large cap growth index vs small cap emerging market funds.

lost_in_the_endless_aisle

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Re: Passive Investing is Devouring Capitalism
« Reply #10 on: August 07, 2017, 06:43:04 PM »
I'm not saying Singer is a wizard, just that it's disingenuous to look at his returns for just this year as done above and conclude that he's some sort of pissed off loser. Comparing funds and indexes is outside of my wheelhouse but I'm sure a motivated person with a background in the field could uncover a fair measure of his fund's success (the question I ask myself is: would I like to beat the S&P 500 by 3-4% for 40 years? Yes, I would).

concealed stache

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Re: Passive Investing is Devouring Capitalism
« Reply #11 on: August 07, 2017, 08:11:03 PM »
I think Singer has a point. Unfortunately many previous "gatekeepers" to the market (high fee managers making lazy investments etc) proved unworthy of the role, causing people to vote with their money for a different soltuion (passive investing). In that sense, capitalism is alive and well (people make choices about appropriate allocation of capital). But it does lead to the problem he describes - investing in index funds is an abdication of that same capitalist notion of choosing where capital should be allocated - we leave it to active investors to decide which companies deserve capital and which do not.

As for his fund, they are known for using low leverage, and may be heavy in tech now but have not always been - one might say they perform in line for tech, which is currently doing well, but the skill demonstrated is the switching between different investment styles to be overweight in the next "hot" thing - more often than not they have successfully pulled this off and the fund has changed composition many times.

I kind of enjoy the farm analogy although perhaps see it a little differently - on the surface, yes, the modern farm does produce far more year in, year out, but masks large risks until they suddenly become apparent. When you place all your hopes in one or two crops, drought or disease can destroy your harvest, and the necessity for population clustering that farming requires (relative to a forager/hunter setup) makes it easy for disease to rip through your human population as well. Foraging has a history of many millions of years (going back before homo sapiens) and relies on diversified food sources. Farming is the new kid on the block and it's far too early to say that it will forever prove to be the best solution - it might even be the activity that ends up endinng the species. I realise that I've gone off course a little from the original analogy, but anyway, as such a young idea, widespread passive investing's status as a uniform solution for the majority of the population is far from proven.

Having said that, I too am a passive investor ;-)

2lazy2retire

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Re: Passive Investing is Devouring Capitalism
« Reply #12 on: August 09, 2017, 09:06:48 AM »
Even Bogle agrees that active investors are required to keep efficiency in the market


“The issue is at what point is indexing making the market less efficient,” said Bogle, 87, in an interview Friday on Bloomberg Television. Indexing, which now controls about 30 percent of the market, “could get to 50 or 60 percent before anything would be noticed.”

Play Video
Jack Bogle Calls Indexing Critics 'Idiotic'

concealed stache

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Re: Passive Investing is Devouring Capitalism
« Reply #13 on: August 09, 2017, 06:52:08 PM »
This logic is faulty reasoning.   I wish people would stop saying he has a point, especially after admitting (previous to this post) that they have no understanding of the topic.  It is a completely false premise that active trading has any impact at all on capital allocation and corporte governance. 

Companies have Boards of Directors.  They also need ready access to capital faster than via issuance of stock, via bankers.  Even when they raise capital via stock, it is done through investment bankers, not the market directly.  These ibankers dive deep into the company fundamentals and need to market the new shares to investors with facts.

What a strange argument. Who are these investors that they are marketing to again? It's... active investors. Stock issuance price setting (which directly affects the capital that can be raised) is set by active investors in the primary market as well.

I think you are confusing activist and active. I don't disagree there are vultures out there, and certainly some HFs cross that line, but I am looking at the whole universe of active investors, including mutual funds, directors and management, pension and endowment funds, yes even HFs.