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The thing is even if Burry is right (and that's a big if), it doesn't mean that you as an individual investor with a long time-horizon should do anything differ

The thing is even if Burry is right (and that's a big if), it doesn't mean that you as an individual investor with a long time-horizon should do anything different. Burry's argument is that many of the underlying stocks inside the index have a lot less liquidity than the index funds and securities themselves. E.g. if a lot of capital quickly exits the index funds, then some of the single-name stocks may be overwhelmed by the liquidity. That would result in their prices becoming severely dislocated relative to their true value. But if you're just buying-and-holding that doesn't matter. If the stocks in your portfolio become temporarily dislocated, who cares? Dislocations by definition correct themselves over time. If some stock falls 50% because of panic selling, without anything having to do with the underlying company, it will eventually return to the correct price. And much sooner than the decades long timeline that you're saving for. That doesn't mean that Burry's thesis is irrelevant to everyone. In particular if you're an institution that offers liquidity to your clients it may be very relevant. Or if you're a bank, hedge fund, or insurance company that's subject to mark-to-market capital ratios or margin calls. If stocks become very dislocated, your investors may panic and redeem their money. Or your regulator may say you have insufficient capital and have to liquidate. That's very bad, because you'll be forced to sell at fire-sale prices. However, that's not relevant to individual investors, because nobody can force you to sell out just because your portfolio goes down.

fragsworth 7y ago
> If some stock falls 50% because of panic selling, without anything having to do with the underlying company, it will eventually return to the correct price. And much sooner than the decades long timeline that you're saving for. But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years.
- cbanek 7y ago
  > But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years. The price change of a stock doesn't always depend on how often a stock is bought. For example, when earnings hit, a stock can easily move 10%. That's not because there was a certain amount of people buying at every price between what it was and +10%. This can happen because earnings are better, and many people base price of an earnings multiple. When new knowledge is put into the system, there's a new price. If everyone who is trading a stock agrees on a price, that is the price. If people don't agree, it is generally the highest price someone is willing to sell it for (and find a buyer), or the lowest someone is willing to buy it for (and find a seller). If that disconnects a lot, you get a high bid/ask spread, and possibly no shares trade (lack of liquidity). It might only take a few shares or be a very short time to move a stock a lot.

fragsworth 7y ago

> If some stock falls 50% because of panic selling, without anything having to do with the underlying company, it will eventually return to the correct price. And much sooner than the decades long timeline that you're saving for. But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years.

cbanek 7y ago
> But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years. The price change of a stock doesn't always depend on how often a stock is bought. For example, when earnings hit, a stock can easily move 10%. That's not because there was a certain amount of people buying at every price between what it was and +10%. This can happen because earnings are better, and many people base price of an earnings multiple. When new knowledge is put into the system, there's a new price. If everyone who is trading a stock agrees on a price, that is the price. If people don't agree, it is generally the highest price someone is willing to sell it for (and find a buyer), or the lowest someone is willing to buy it for (and find a seller). If that disconnects a lot, you get a high bid/ask spread, and possibly no shares trade (lack of liquidity). It might only take a few shares or be a very short time to move a stock a lot.