3 ms·

> Indexing is cheaper, yes, but that's because active management has positive externalities, and if no one will pay for it, those benefits will disappear. Oh y

> Indexing is cheaper, yes, but that's because active management has positive externalities, and if no one will pay for it, those benefits will disappear. Oh yeah? which benefits? When you know that on average, an astonishing 90 percent of actively managed mutual funds underperformed their benchmark indexes over the preceding 15 years. The index superiority was consistent and overwhelming. I recently read the Little Book Of Common Sense Investing, and it was brilliant.

a008t 8y ago
If nobody is actually analyzing the companies to discover their intrinsic value, stock prices will detach from fundamentals and we will see much bigger crashes than we ever saw before.
throwawaymath 8y ago
> Oh yeah? which benefits? Price discovery. Price discovery is directly facilitated by trading. The more frequent the trading, the more efficient the pricing mechanism (all else being equal). Active trading also facilitates higher liquidity. Neither of these things can be properly facilitated by a passive index. Buying and selling (bidding and asking) is a mechanism for expressing optimistic and pessimistic sentiment about an asset's price. The only thing a passive index can convey is neutral sentiment, because it's just holding. For a specific example of why this is important, let's look at something slightly different. Indices are only capable of expressing neutral sentiment in a market. It lacks the buying and selling functions. But private equity - such as venture capital investing, likewise lacks certain price discovery functions that public markets have. Private companies cannot be directly shorted regardless of how large their valuation. Likewise since liquidity is low it's easier to buy more shares than it is to sell shares. This naturally leads to a positive pressure on the pricing mechanism, resulting in inflated valuations that don't take into account pessimism. Regardless of whether or not you feel tech is in a bubble, this is one reason why tech valuations have skyrocketed. There are credible arguments that similar distortions could happen to public markets if passive indices capture the vast majority of investing. But that's by no means a certainty.

a008t 8y ago

If nobody is actually analyzing the companies to discover their intrinsic value, stock prices will detach from fundamentals and we will see much bigger crashes than we ever saw before.

throwawaymath 8y ago

> Oh yeah? which benefits? Price discovery. Price discovery is directly facilitated by trading. The more frequent the trading, the more efficient the pricing mechanism (all else being equal). Active trading also facilitates higher liquidity. Neither of these things can be properly facilitated by a passive index. Buying and selling (bidding and asking) is a mechanism for expressing optimistic and pessimistic sentiment about an asset's price. The only thing a passive index can convey is neutral sentiment, because it's just holding. For a specific example of why this is important, let's look at something slightly different. Indices are only capable of expressing neutral sentiment in a market. It lacks the buying and selling functions. But private equity - such as venture capital investing, likewise lacks certain price discovery functions that public markets have. Private companies cannot be directly shorted regardless of how large their valuation. Likewise since liquidity is low it's easier to buy more shares than it is to sell shares. This naturally leads to a positive pressure on the pricing mechanism, resulting in inflated valuations that don't take into account pessimism. Regardless of whether or not you feel tech is in a bubble, this is one reason why tech valuations have skyrocketed. There are credible arguments that similar distortions could happen to public markets if passive indices capture the vast majority of investing. But that's by no means a certainty.