7 ms·

Interesting. The idea is that index funds implicitly favor collusion between companies in the same industry since investors/institutions own the competing compa

by howeyc 11y ago

Interesting. The idea is that index funds implicitly favor collusion between companies in the same industry since investors/institutions own the competing companies (perhaps even at the same weight). That is, an index owning both Coke and Pepsi may not be too keen on one slaying the other, but instead for them both to become bigger together, yet separate. There's also the idea that index investing "should" be considered illegal because of the possible antitrust issues. Also, the rise of index investing puts more favor to stock buybacks/dividends as opposed to reinvestment. The idea being (as an example) that the index would rather take Coke's profits and redirect to a smaller higher-growth-potential company (or even spread it out more evenly among all holdings). However, if no index investing, perhaps investors would be more willing to "ride it out" with Coke reinvesting a lot more profits back into the business (maybe the don't own Pepsi, or other soft-drink companies and want to see them all get demolished).

paganel 11y ago
In other words, there's no "silver bullet", no matter the industry. I also think that we should stop believing in the "wonder" of compound interest and act accordingly, because it will come a time when this "wonder" will prove to be just that: a thing that cannot last forever. The same goes for a guaranteed rate of return on investment.
- maaku 11y ago
  where did you pull that from?
  - paganel 11y ago
    As far as I've read "index tracking" is seen as this wonderful thing that cannot go wrong. Until it does. It's another way of saying "this time is different". The last part of my comment is related to the fact that "index tracking" and all the related "investment strategies" rely on the assumption that, over all, things will only go up, i.e. ROI will always be positive. I questioned that assumption. We cannot guarantee that in 30 years' time (let's say) we will still be able to return 3-5% on our huge piles of pension funds' money, no matter the strategy. What I'm saying is that we should be prepared for a stagnating or even deflationary world, financially and economically speaking
    - kspaans 11y ago
      It's almost entirely about paying less in fund fees and aiming to be 'average'. I.E. get the return of the market rather than trying to beat it. Think of it as 'passive' investing rather than index investing. EDIT: But yes, we don't know whether one can assume "The S&P500 will average 10% per year for EVARRRRR!!!1".
      - gburt 11y ago
        I'm not the OP or the grandparent post, but I wonder what happens if a significant portion of the market starts indexing? My gut is that there are strong incentives against that: as more people start indexing, the gains from not indexing become more diverse.
        debacle 11y ago
        On the same token, more indexing will insulate losses by creating an implicit demand based on market cap.
    - mcguire 11y ago
      You realize that the scenario you describe is equivalent to "the entire collapse of global civilization that will make previous dark ages look like candy and unicorns." I'm serious. If the overall economy is "stagnating or even deflationary" for any significant period of time, all of the wheels are going to come off. (Really want a dark thought? You realize that we've dug up and used all of the easily-available oil, right? When Some Later Generation Gets Its Act Together, they aren't going to have a convenient, cheap source of energy.)
      - JoeAltmaier 11y ago
        Information can no longer die - CDs, DVDs, libraries - a new dark age will be mercifully short. And as for cheap energy - there are plenty more, better sources than oil.
        11y ago
- ryangittins 11y ago
  What are you talking about? No one believes in the "wonder" of compound interest. They believe in the mathematics.
  - damoncali 11y ago
    I think the point the parent is getting at is that nothing about business guarantees constant, compounding growth. It's not just mathematics, it's population growth, productivity, capital distribution, etc. - lots of stuff that we take for granted that results in constant growth rates, but that doesn't necessarily have to.
    - im3w1l 11y ago
      Compounding interest could continue at the upper right part of the S-surve. If the interest decreases every year, and sufficiently fast, it could give rise to a convergent infinite product. So total wealth would never exceed the threshold of the possible.
  - crimsonalucard 11y ago
    While physical laws do not bound mathematics, they bound the reality and context in which we talk about "compounding interest."
- nemo44x 11y ago
  Compound interest accumulation, over a long enough period of time has historically ended in blood & ashes and redistribution.
  - Lawtonfogle 11y ago
    Capital could never be directly translated into power. Capital always had to be used to buy enough people who combined had power. Those people could refuse to be bought and instead join those without capital on moral reasons. Even as technology allowed us to use capital to increase the power of a small group of people, there still had to be a small group of people. But we are soon to hit a point where capital will be used to buy power directly thanks to advances in AI and robotics. We may never again have another cycle like you describe.
    - marcosdumay 11y ago
      To be honest, I fear this, because I consider it likely enough to fear, but I don't think it's the most likely outcome by a big margin. If you want to know the probable outcome of an Intelligent Capital vs. The People fight, just look how a big company defends its computer network against targeted hackers today.
- brc 11y ago
  Seriously. Sometimes I wonder about who actually is visiting this site. The 'wonder' of compounding interest? It's merely the monetary representation of the return on investment in productive activities and assets. The reason money has a cost is because it can be converted into useful, productive activities, so the holder needs to be compensated for that. The 'wonder' is how animal herds and horticulural products increase enough in quantity to feed us all. Building a shelter over your head is compounding interest at work. You sleep better, stay healthier and have more time to do other things. Same goes for a knife or a spear, or a factory or a computer. I find it incredibly odd that we have people running around saying 'we have to stop growth' 'growth is bad'. Yet, on all measurable criteria - every single one of them - things keep getting better. This is because of the compouding effect of investment in knowledge and productive capacity. I'm not sure where the growth-hate comes from, if it is ignorance or just some sort of strange moral fashion to hate on the modern world. Either way, a class of people have convinced themselves that - of the entire trajectory of growth from nomadic paleoithic peoples to now - it's right at this point the wheels are about to fall off. Strikes me as a little narcissistic, really.
  - paganel 11y ago
    > Seriously. Sometimes I wonder about who actually is visiting this site. I'm a programmer who sometimes reads about economics and economics history. I've also worked in some finance-related industry for a couple of years early in my career (in the IT department). > This is because of the compouding effect of investment in knowledge and productive capacity. Yes, I know how compound interest presently works, I was just questioning its long-term (think 50-to-100 years, if not more) viability. To give an example which I stole from people smarter than me, just think that if you had invested your pension money on the Russian stock market in the 1910s or on the Chinese stock market in the 1930s you would most probably be bust (to say nothing of nationalizations and confiscations of private real estate). And these are two pretty big examples which happened in the last 100 years. The idea that the return on the rate on investment on the long term can only go down I've stolen from Jean-Baptiste Say, who wrote it down in the ~1820s. Now, he just happened to write this before the Industrial Revolution started doing its thing and, just as important, before economic colonialism started to positively influence the Western economies of that time (think the Opium Wars). Now, you're saying that we'll be able to somehow reproduce that Industrial Revolution a second time, I question that optimism. > I'm not sure where the growth-hate comes from I'm not at all "hating growth" (even though I believe that we should be well aware of its downsides). I'm just saying that it's no good making only positive economic projections about the future, we're not magicians and crystal balls are just that, pieces of glass.
aetherson 11y ago
An index owning both Coke and Pepsi wants the soft-drink market to grow bigger -- it is presumably indifferent to whether Coke slays Pepsi, Pepsi slays Coke, or both grow bigger together, as long as the total market increases. Which is arguably a good thing. Let's say that Coke has 60% of the market and Pepsi has 40% of the market. If Coke's investors are separate from Pepsi's investors, then it would be in their interests to take a tactic that kills Pepsi and allocates half of its market share to Coke and the other half goes up in smoke to a smaller overall market -- now Coke is half again as big as it was! But the industry is smaller. That said, I'm not sure that realistically, market-decreasing tactics really exist in most cases -- I can't think of a real world example. The collusion argument is certainly interesting.
- makomk 11y ago
  More precisely, an index fund owning both Coke and Pepsi wants profits from the soft-drink market to grow bigger, and the easiest way for that to happen is for both companies to increase their prices at the same time. Note that this is exactly the opposite of how competition in capitalism is meant to work - it's meant to drive down prices towards the cost of production, increasing overall efficiency as it does. Note also that this likely also results in selling less soft drinks than if the companies were actually competing, because increasing prices generally decreases sales.
  - fweespeech 11y ago
    I'm not sure that is an actual problem. Generally, executives get compensated in stock in some way in their company. So the Coke C-Suite is motivated to compete with the Pepsi C-Suite even if the board members are the same for both companies.
    - eitally 11y ago
      I think it is a problem. Unless you've worked in one of these industries where there are a handful of major players and rough parity of capability between them (like consumables, electronics manufacturing, heavy industry, oil & gas), corporations trade execs on a regular basis, and when those execs jump ship for a competitor they often lure away a good number of their key staff, too. So not only do you end up with a bigger overall market if they all do well, you end up with leadership (both executive staff and board members) who knows the ins & outs of everyone. It is in everyone's best interest for everyone to succeed, but if a company falters significantly it becomes either an acquisition target or it slowly fades away as key talent migrate to competitors. Not only this, but if you attend the earnings calls for corporations in the same sector (or even better, if you're lucky enough to attend one of their investor & analyst days), you'll see firsthand how the analysts are wined & dined, and how closely everyone knows everybody else. It's a big game that creates a ton of wealth at the top -- as long as the status quo is roughly maintained and change is incremental.
rhino369 11y ago
Maybe the solution should be that index funds just shouldn't be able to vote their shares.

by howeyc 11y ago

paganel 11y ago

In other words, there's no "silver bullet", no matter the industry. I also think that we should stop believing in the "wonder" of compound interest and act accordingly, because it will come a time when this "wonder" will prove to be just that: a thing that cannot last forever. The same goes for a guaranteed rate of return on investment.

maaku 11y ago
where did you pull that from?
- paganel 11y ago
  As far as I've read "index tracking" is seen as this wonderful thing that cannot go wrong. Until it does. It's another way of saying "this time is different". The last part of my comment is related to the fact that "index tracking" and all the related "investment strategies" rely on the assumption that, over all, things will only go up, i.e. ROI will always be positive. I questioned that assumption. We cannot guarantee that in 30 years' time (let's say) we will still be able to return 3-5% on our huge piles of pension funds' money, no matter the strategy. What I'm saying is that we should be prepared for a stagnating or even deflationary world, financially and economically speaking
  - kspaans 11y ago
    It's almost entirely about paying less in fund fees and aiming to be 'average'. I.E. get the return of the market rather than trying to beat it. Think of it as 'passive' investing rather than index investing. EDIT: But yes, we don't know whether one can assume "The S&P500 will average 10% per year for EVARRRRR!!!1".
    - gburt 11y ago
      I'm not the OP or the grandparent post, but I wonder what happens if a significant portion of the market starts indexing? My gut is that there are strong incentives against that: as more people start indexing, the gains from not indexing become more diverse.
      - debacle 11y ago
        On the same token, more indexing will insulate losses by creating an implicit demand based on market cap.
  - mcguire 11y ago
    You realize that the scenario you describe is equivalent to "the entire collapse of global civilization that will make previous dark ages look like candy and unicorns." I'm serious. If the overall economy is "stagnating or even deflationary" for any significant period of time, all of the wheels are going to come off. (Really want a dark thought? You realize that we've dug up and used all of the easily-available oil, right? When Some Later Generation Gets Its Act Together, they aren't going to have a convenient, cheap source of energy.)
    - JoeAltmaier 11y ago
      Information can no longer die - CDs, DVDs, libraries - a new dark age will be mercifully short. And as for cheap energy - there are plenty more, better sources than oil.
      - 11y ago
ryangittins 11y ago
What are you talking about? No one believes in the "wonder" of compound interest. They believe in the mathematics.
- damoncali 11y ago
  I think the point the parent is getting at is that nothing about business guarantees constant, compounding growth. It's not just mathematics, it's population growth, productivity, capital distribution, etc. - lots of stuff that we take for granted that results in constant growth rates, but that doesn't necessarily have to.
  - im3w1l 11y ago
    Compounding interest could continue at the upper right part of the S-surve. If the interest decreases every year, and sufficiently fast, it could give rise to a convergent infinite product. So total wealth would never exceed the threshold of the possible.
- crimsonalucard 11y ago
  While physical laws do not bound mathematics, they bound the reality and context in which we talk about "compounding interest."
nemo44x 11y ago
Compound interest accumulation, over a long enough period of time has historically ended in blood & ashes and redistribution.
- Lawtonfogle 11y ago
  Capital could never be directly translated into power. Capital always had to be used to buy enough people who combined had power. Those people could refuse to be bought and instead join those without capital on moral reasons. Even as technology allowed us to use capital to increase the power of a small group of people, there still had to be a small group of people. But we are soon to hit a point where capital will be used to buy power directly thanks to advances in AI and robotics. We may never again have another cycle like you describe.
  - marcosdumay 11y ago
    To be honest, I fear this, because I consider it likely enough to fear, but I don't think it's the most likely outcome by a big margin. If you want to know the probable outcome of an Intelligent Capital vs. The People fight, just look how a big company defends its computer network against targeted hackers today.
brc 11y ago
Seriously. Sometimes I wonder about who actually is visiting this site. The 'wonder' of compounding interest? It's merely the monetary representation of the return on investment in productive activities and assets. The reason money has a cost is because it can be converted into useful, productive activities, so the holder needs to be compensated for that. The 'wonder' is how animal herds and horticulural products increase enough in quantity to feed us all. Building a shelter over your head is compounding interest at work. You sleep better, stay healthier and have more time to do other things. Same goes for a knife or a spear, or a factory or a computer. I find it incredibly odd that we have people running around saying 'we have to stop growth' 'growth is bad'. Yet, on all measurable criteria - every single one of them - things keep getting better. This is because of the compouding effect of investment in knowledge and productive capacity. I'm not sure where the growth-hate comes from, if it is ignorance or just some sort of strange moral fashion to hate on the modern world. Either way, a class of people have convinced themselves that - of the entire trajectory of growth from nomadic paleoithic peoples to now - it's right at this point the wheels are about to fall off. Strikes me as a little narcissistic, really.
- paganel 11y ago
  > Seriously. Sometimes I wonder about who actually is visiting this site. I'm a programmer who sometimes reads about economics and economics history. I've also worked in some finance-related industry for a couple of years early in my career (in the IT department). > This is because of the compouding effect of investment in knowledge and productive capacity. Yes, I know how compound interest presently works, I was just questioning its long-term (think 50-to-100 years, if not more) viability. To give an example which I stole from people smarter than me, just think that if you had invested your pension money on the Russian stock market in the 1910s or on the Chinese stock market in the 1930s you would most probably be bust (to say nothing of nationalizations and confiscations of private real estate). And these are two pretty big examples which happened in the last 100 years. The idea that the return on the rate on investment on the long term can only go down I've stolen from Jean-Baptiste Say, who wrote it down in the ~1820s. Now, he just happened to write this before the Industrial Revolution started doing its thing and, just as important, before economic colonialism started to positively influence the Western economies of that time (think the Opium Wars). Now, you're saying that we'll be able to somehow reproduce that Industrial Revolution a second time, I question that optimism. > I'm not sure where the growth-hate comes from I'm not at all "hating growth" (even though I believe that we should be well aware of its downsides). I'm just saying that it's no good making only positive economic projections about the future, we're not magicians and crystal balls are just that, pieces of glass.

aetherson 11y ago

An index owning both Coke and Pepsi wants the soft-drink market to grow bigger -- it is presumably indifferent to whether Coke slays Pepsi, Pepsi slays Coke, or both grow bigger together, as long as the total market increases. Which is arguably a good thing. Let's say that Coke has 60% of the market and Pepsi has 40% of the market. If Coke's investors are separate from Pepsi's investors, then it would be in their interests to take a tactic that kills Pepsi and allocates half of its market share to Coke and the other half goes up in smoke to a smaller overall market -- now Coke is half again as big as it was! But the industry is smaller. That said, I'm not sure that realistically, market-decreasing tactics really exist in most cases -- I can't think of a real world example. The collusion argument is certainly interesting.

makomk 11y ago
More precisely, an index fund owning both Coke and Pepsi wants profits from the soft-drink market to grow bigger, and the easiest way for that to happen is for both companies to increase their prices at the same time. Note that this is exactly the opposite of how competition in capitalism is meant to work - it's meant to drive down prices towards the cost of production, increasing overall efficiency as it does. Note also that this likely also results in selling less soft drinks than if the companies were actually competing, because increasing prices generally decreases sales.
- fweespeech 11y ago
  I'm not sure that is an actual problem. Generally, executives get compensated in stock in some way in their company. So the Coke C-Suite is motivated to compete with the Pepsi C-Suite even if the board members are the same for both companies.
  - eitally 11y ago
    I think it is a problem. Unless you've worked in one of these industries where there are a handful of major players and rough parity of capability between them (like consumables, electronics manufacturing, heavy industry, oil & gas), corporations trade execs on a regular basis, and when those execs jump ship for a competitor they often lure away a good number of their key staff, too. So not only do you end up with a bigger overall market if they all do well, you end up with leadership (both executive staff and board members) who knows the ins & outs of everyone. It is in everyone's best interest for everyone to succeed, but if a company falters significantly it becomes either an acquisition target or it slowly fades away as key talent migrate to competitors. Not only this, but if you attend the earnings calls for corporations in the same sector (or even better, if you're lucky enough to attend one of their investor & analyst days), you'll see firsthand how the analysts are wined & dined, and how closely everyone knows everybody else. It's a big game that creates a ton of wealth at the top -- as long as the status quo is roughly maintained and change is incremental.

rhino369 11y ago

Maybe the solution should be that index funds just shouldn't be able to vote their shares.