Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
BigBear, some of the warnings about index funds I have seen are coming from private equity managers concerned about the changing environment and its impact on strategies
BigBear, some of the warnings about index funds I have seen are coming from private equity managers concerned about the changing environment and its impact on strategies
Private Equity is not a homogeneous group. There are the fund of funds, like Scarramucci ran, which are very public in things they do. There's also a group of private equity managers that welcome any qualified investor. They also need visibility. Then there are the ones that avoid visibility at all costs. Guess which group profits most from market changes?
To me, it doesn't make any sense to lump together venture capital, alternative trading strategies, LBOs (what groups have I forgotten) under the term "private equity", but we do, including myself. We miss a lot of differences, I fear, with such a broad term.
Perhaps the wrong forum but do any of you Bogleheads or semi Bogleheads wonder if the increased market percentage of index funds is compromising the efficient market theory?
Interesting question. One issue is, whether by "index funds" we mean a stampede to the S&P 500, or whether index-investors are embracing the entire global stock market... US and foreign, small-cap and large-cap, etc. If the former, I'd expect to see some distortions. S&P 500 stocks would go up, just because they're in the index (clearly, not all S&P-500 index funds hold every stock in the S&P 500 - not even close - but the point still stands). That would render them overvalued, not unlike the popular dot-come stocks going overvalued in 1999. If however, index-funds overall are embraced, across all categories, I don't see how we'd have distortion.
Perhaps the wrong forum but do any of you Bogleheads or semi Bogleheads wonder if the increased market percentage of index funds is compromising the efficient market theory?
Not a boggle head here, but my thoughts...
As the percentage of $$ going into index funds increases, the likelihood of distortion increases as well.
How should the weighting of each stock in an index be set? By market cap? By float? By average trading volume? What do you think? There is a difference.
Index funds don't create distortions. They do allow for less competition in the finding and exploiting of market anomalies, though. Don't too, that the efforts of those looking for excess returns are what constantly drive the market to equilibrium. In other words, efficient markets don't happen by accident. It's the actions of millions of investors that drive to that equilibrium.
Index funds are by market cap. I suppose you could do it another way. After all, index funds are just a step up from any other buy and hold strategy.
Index funds don't create distortions. They do allow for less competition in the finding and exploiting of market anomalies, though. Don't too, that the efforts of those looking for excess returns are what constantly drive the market to equilibrium. In other words, efficient markets don't happen by accident. It's the actions of millions of investors that drive to that equilibrium.
Index funds are by market cap. I suppose you could do it another way. After all, index funds are just a step up from any other buy and hold strategy.
The S&P 500 is not strictly weighted by market cap. It used to be, but during the dot-com era it became evident that using market capitalization as the weighting factor DID create distortions. It's been changed a bit since then, but of course no methodology can anticipate the future perfectly.
Index funds don't create distortions. They do allow for less competition in the finding and exploiting of market anomalies, though. Don't too, that the efforts of those looking for excess returns are what constantly drive the market to equilibrium. In other words, efficient markets don't happen by accident. It's the actions of millions of investors that drive to that equilibrium.
Index funds are by market cap. I suppose you could do it another way. After all, index funds are just a step up from any other buy and hold strategy.
You are raising another point that is starting to be discussed. Investment profits are not resulting in a corresponding increase in retail sales. The top 20 of earners control the overewhelming of stocks and we aren't spending the profits. Part of that discussion is as you note buy and hold which implies not spending and that is starting to include retirees. Wages aren't going up to increase spending and much of the wealth gain is in accounts and sitting there. Yes equilibrium was the result of millions of decisions being made by evaluating company performance. Is that now becoming more of a formula based on market cap?
Yes equilibrium was the result of millions of decisions being made by evaluating company performance. Is that now becoming more of a formula based on market cap?
There are still those that do fundamental analysis - looking at company performance, but I think most of the opportunity for profits is captured by insiders. Consider that, as corporate finance has become more sophisticated (off balance sheet financing or earnings smoothing for example),and FASB rules more complex, it's harder to get a fair picture of how well or poorly (let us not forget the shorts!) a company is doing.
Now, there seem to be two ways to make money from the markets. 1. Hunt for market anomalies and exploit them. 2. Sell things to other investors (news letters, stock brokers, investment advisers etc.)
Cynical? Of course, but look at the Jobs Act of 2015, whicc allows companies going public to tell investors even less than they used to. The law gives individual investors even more ways to be fleeced. Reminds me of my VC days, when certain "opportunities" were called "doctor and dentist" deals. You can perhaps figure out why.
One last comment: Indexing is popular because it works, and has so consistently for a few decades.
You are raising another point that is starting to be discussed. Investment profits are not resulting in a corresponding increase in retail sales. The top 20 of earners control the overewhelming of stocks and we aren't spending the profits. Part of that discussion is as you note buy and hold which implies not spending and that is starting to include retirees. Wages aren't going up to increase spending and much of the wealth gain is in accounts and sitting there. Yes equilibrium was the result of millions of decisions being made by evaluating company performance. Is that now becoming more of a formula based on market cap?
That's a larger debate - the one about labor vs. capital, and how purportedly the "forces of capital" are accreting to themselves the major part of economic gains of recent years, while "the forces of labor" are struggling, not seeing pay-raises and thus not being able to increase their consumption. While I don't mean to breezily dismiss the plight of workers in the "bottom 80%", the question isn't one of fairness or social justice, but whether corporate profits are sustainable. And one candidate answer to that one is, Yes. Corporate profits are sustainable, if we create more new consumers - perhaps in the 3rd world. If the American worker becomes poorer, but workers elsewhere become richer, then in some sense, equilibrium is maintained.
In sum, if a bunch of affluent-people, who own the preponderance of assets, choose to not spend from their assets, well, I think that we'll still be OK. The bigger problem is what happens if there's insufficient return on capital.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
