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This could not be more wrong and it's discouraging to see it on the front page of HN -- index investing exerts a normalizing pressure on the prices of assets, w

This could not be more wrong and it's discouraging to see it on the front page of HN -- index investing exerts a normalizing pressure on the prices of assets, which is rarely supported by the underlying values of the companies. This is unlikely to be a popular opinion amongst passive investors, but day traders and market makers are responsible for making economies for efficient and providing price discovery (if they make profits) by reducing the spread and reducing volatility. Traders who lose money have the opposite effect -- they make assets more volatile by pushing up tops and pushing down bottoms. Active long term value investors also contribute to positive price discovery and reduce volatility (if they make money) for the same reasons, but on a different time scale.

bandrami 9y ago
> day traders and market makers are responsible for making economies for efficient and providing price discovery Price discovery of a price that's only useful to other baseball card collectors^H^H^H^H^H^H sorry, market traders. I'm not surprised everybody is missing the biggest advantage of index investing: it gets you a diverse collection of income-producing assets.
- lend000 9y ago
  > I'm not surprised everybody is missing the biggest advantage of index investing This isn't about whether index investing is a good strategy for many people, especially those with low-moderate risk appetites and no time/expertise for active investing or trading. It's about whether or not index investing makes markets and economies more efficient (which the article erroneously claims). I claim they have the opposite effect, but they create value in and of themselves that counteracts that distortion to the benefit of index fund users (and to the benefit of traders who arbitrage the distortion).
pishpash 9y ago
Passive investors were not going to make the market more efficient anyway since they are not informative. They carry only one piece of information which is that they have some money to invest into the economy and would be okay to take some risk, and they express that well enough through a passive financial product reproducing what the financial industry itself calls the "market returns." They of course do care to make some money; nobody is in it to lose money, so how are they making the market less efficient? It's not that different from saving the money in a bank for the bank to allocate. Now, if the passive investment flow comes to dominate volume on any given day, then the "marginal" trade becomes a passive, uninformative one; then we have a problem.
- lend000 9y ago
  They aren't making the market less efficient, because index funds create value for many people for the reasons you described. The market inefficiency is easily corrected by day traders and market makers. I'm just saying that index funds do not make markets and economies more efficient, as the article claims, so if we had a 99% ownership tied up in index funds scenario, markets would indeed be far less liquid and more volatile.

bandrami 9y ago

> day traders and market makers are responsible for making economies for efficient and providing price discovery Price discovery of a price that's only useful to other baseball card collectors^H^H^H^H^H^H sorry, market traders. I'm not surprised everybody is missing the biggest advantage of index investing: it gets you a diverse collection of income-producing assets.

lend000 9y ago
> I'm not surprised everybody is missing the biggest advantage of index investing This isn't about whether index investing is a good strategy for many people, especially those with low-moderate risk appetites and no time/expertise for active investing or trading. It's about whether or not index investing makes markets and economies more efficient (which the article erroneously claims). I claim they have the opposite effect, but they create value in and of themselves that counteracts that distortion to the benefit of index fund users (and to the benefit of traders who arbitrage the distortion).

pishpash 9y ago

Passive investors were not going to make the market more efficient anyway since they are not informative. They carry only one piece of information which is that they have some money to invest into the economy and would be okay to take some risk, and they express that well enough through a passive financial product reproducing what the financial industry itself calls the "market returns." They of course do care to make some money; nobody is in it to lose money, so how are they making the market less efficient? It's not that different from saving the money in a bank for the bank to allocate. Now, if the passive investment flow comes to dominate volume on any given day, then the "marginal" trade becomes a passive, uninformative one; then we have a problem.

lend000 9y ago
They aren't making the market less efficient, because index funds create value for many people for the reasons you described. The market inefficiency is easily corrected by day traders and market makers. I'm just saying that index funds do not make markets and economies more efficient, as the article claims, so if we had a 99% ownership tied up in index funds scenario, markets would indeed be far less liquid and more volatile.