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Once indexing gets to be a certain size, you run into the "markets irrational longer than you can stay solvent" issue at a much higher level. Active management
by whatok 7y ago
Once indexing gets to be a certain size, you run into the "markets irrational longer than you can stay solvent" issue at a much higher level. Active management "correction" doesn't really work if active managers are a much smaller portion of the market or no longer around at all.
- whatshisface 7y agoHolding doesn't change the price: buying moves it up and selling moves it down. An index fund holding 50% of all shares on the market but not trading them would have no influence at all on prices.
- whatok 7y agoDid you mean to reply to my post? I don't see the relevance.
- whatshisface 7y agoAn index passively holding 99% of the market would not interfere with price discovery because the remaining 1% would go about its business as if nothing was different. Indexes can't sustain irrational prices because they have no impact on prices.
- whatok 7y agoA single entity holding 99% of anything will absolutely have an impact on liquidity which absolutely impacts price discovery.
- usefulcat 7y ago> An index passively holding 99% of the market would not interfere with price discovery because the remaining 1% would go about its business as if nothing was different. That may be true at the point in time where it's already at 99%, but consider the impact on prices as funds were poured into it over time on the way to 99%..
- whatshisface 7y agoIf the funds put in to the index were taken out of mutual funds, there might not be any impact on the prices at all.
- FabHK 7y agoIt can lead to pricing inefficiencies with shares inside vs outside the index. And those should be kept in check by non-indexing value investors.
- derivagral 7y agoDoes this exist, though? If you presume some % of America is putting their paycheck into indexes via Vanguard, Betterment, and some other % is selling due to being retired or whatnot, then this isn't an equilibrium. There's maybe some room for redeeming index value and "caching" that demand from within Vanguard, etc, but I tend to doubt this action wouldn't hit the market at all.
- TheCoelacanth 7y agoYou're only taking into account making money via stock trading. There is always the option of buying a company to actually run it for a profit which is not reliant on the market's belief in the company's value.