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I think this article really misses the point that Burry was making, which is that if the indexs see a sell off they won't find the liquidity in the market to ca

I think this article really misses the point that Burry was making, which is that if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down. This article seems to focus on all of the upsides of indexing, which are all true. However, those upsides don't negate the risk that is being pointed to.

sharkbot 7y ago
Not the author, but I think the article indirectly talks about the liquidity in the markets being far higher than it has been in the past. Further, if there is a stampede for the exits, there still have to be buyers on the other side of the sellers. Those buyers will undoubtably include active managers along with those indexers with different time horizons and/or braver constitutions. Both will likely be rewarded for their patience.
- ptero 7y ago
  > if there is a stampede for the exits, there still have to be buyers on the other side of the sellers That is a key point in the debate. I do not see that above is necessarily true. Say a price of a low volume stock X is driven down below fundamentals just because index funds have to sell 1% of holdings and cannot find enough buyers for X. While price of X might be irrational fund managers might not be able to act on it because there would be a worry that it may go lower still if selling extends. Could next round get X removed from index? delisted? "The market can stay irrational longer than you can stay solvent" is not an empty worry. My 2c.
staticcaucasian 7y ago
Agreed. Burry seems to be getting a lot of responses but almost none of them seem to have actually listened to what he said (or even read the article). There is real risk from the index-matching synthetic techniques that these funds are using.
0xcafecafe 7y ago
What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions?
- secabeen 7y ago
  The index fund is holding the underlying stock, largely. The challenge is that if say 5% of their fund holders sell their shares in the fund, the fund has to sell the underlying stock to generate the cash to pay out. Most funds have a rule in their documents that if you are a large fundholder (holding 1% or more of the fund) and you sell, they can hand you stocks directly rather than selling them and giving you cash, but that doesn't work it it's tens of thousands of small fund holders selling.
  - wbl 7y ago
    So? They sell others buy. If I hear there is a squeeze and have cash I'll throw it in: who wouldn't? It's never the case that x٪ of the market can exit at once regardless of how it is owned.
    - joyjoyjoy 7y ago
      "If I hear there is a squeeze and have cash I'll throw it in:" For how many billions will you buy? And why did you not throw it in in 2008? "who wouldn't?" People who are leveraged? "It's never the case that x٪ of the market can exit at once regardless of how it is owned." You may not have heard it. But this is called a stock market crash. One is expected soon. So enjoy the ride and keep your money dry that you can "throw it in"
  - vkou 7y ago
    So? If 5% of all stockholders sell their stock, that's going to cause a downward price movement, too. What is special about an ETF, that makes this situation any worse?
- C1sc0cat 7y ago
davidw 7y ago
I think that was certainly a more interesting point compared to "who will do price discovery", which seems to be something that would likely find an equilibrium. This article does mention it, but pretty briefly. It'd be interesting to hear from people more familiar with the details of how all this works... perhaps there are some in the initial thread, but I haven't had time to skim it all: https://news.ycombinator.com/item?id=20877700 https://news.ycombinator.com/item?id=20877700
human20190310 7y ago
> ...will drive the market down So what? Let the weak long positions panic and sell at the bottom. Everyone else gets a few years of discount prices to buy. The hardest hit will be those who are leveraged and arguably deserve to get hosed for taking that much risk. If you don’t have to meet a margin call, you can ride out a crisis; if you’ve got cash in reserve, you can profit from it.
- rocqua 7y ago
  Presuming you are saving for later. Besides a margin call, you might want to exit for, buying a house, going into retirement, covering a period between jobs, or to deal with a medical emergency. Doing that during a crisis hurts. This risk diminishes the value of investments as a safety cushion.
  - human20190310 7y ago
    Index funds aren’t a safety cushion. Vanguard rates it’s own S&P 500 index fund as a 4 out of 5 for risk. [0] [0] https://advisors.vanguard.com/iippdf/pdfs/FS540.pdf https://advisors.vanguard.com/iippdf/pdfs/FS540.pdf
  - throw0101a 7y ago
    > Besides a margin call, you might want to exit for, buying a house, going into retirement, covering a period between jobs, or to deal with a medical emergency. In all of those scenarios you should not be in stocks/equities in the first place. If there is a possibility of needing cash with-in the next 5 years, that money should be in either bonds or term deposits. One's downpayment, first/next few retirement years' income, and emergency fund(s) should not be in equities.
- gridlockd 7y ago
  After 1989 it took the Nikkei more than a decade to finds its bottom (and then another bottom in 2009) and it hasn't recovered since. How many years of "discount buying" are you planning in?
- lovecg 7y ago
mrep 7y ago
How would they lose liquidity? Authorized participants [0] are always in the market for ETFs. If an ETF share price is crashing out of line with the index it tracks, they will step in and buy shares, swap them with the ETF issuer for the shares of the underlying stock in the index, and sell those shares for an arbitrage profit. Even if one of the underlying stocks becomes illiquid, a big enough price divergence on all of the other liquid stocks would make it profitable to eat the loss or hold the illiquid ones (risky, but remember, there are many authorized participants competing with each other so if there is some way to make an easy arbitrage profit, they will find a way). You'd basically need the entire market to become illiquid. [0]: https://www.investopedia.com/terms/a/authorizedparticipant.asp https://www.investopedia.com/terms/a/authorizedparticipant.a...
- pjmorris 7y ago
  > basically need the entire market to become illiquid. Which came dramatically close to happening in 2008, see, e.g. [0]. [0] http://pages.stern.nyu.edu/~sternfin/pschnabl/kacperczyk_schnabl.pdf http://pages.stern.nyu.edu/~sternfin/pschnabl/kacperczyk_sch...
- josu 7y ago
  >You'd basically need the entire market to become illiquid. Yes. It has happened before.
  - asdkfjasl 7y ago
    OK, but in that case is there a distinction between index funds and actively managed funds? Is this a risk that index funds are uniquely exposed to? Also, another thing to keep in mind is that this only affects people who are trying to sell at the bottom. Buy and hold investors care little for liquidity issues during a crash.
    - JumpCrisscross 7y ago
      > in that case is there a distinction between index funds and actively managed funds? Yes. Active managers can choose what to sell based on prevailing market conditions. Index funds must sell across the board. That could involve getting hosed on names in a short-term squeeze. > this only affects people who are trying to sell at the bottom There are lots of index funds. For a broad-market fund, you're probably right--a patient investor can ride out the bloodshed. For leveraged or specialized funds, on the other hand, a rout could permanently impair the portfolio. Equity market collapses, furthermore, have a habit of transmitting into the real economy. A sustained downturn could impair funding conditions, which in turn could affect the fundamental characteristics of a portfolio.
ambicapter 7y ago
This was mentioned in the article > Liquidity is not a huge problem for index funds. But, Ben, what if everyone rushes to the exits all at once? Index funds and ETFs are going to cause a massive crash! > When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is literally no market impact.
- FabHK 7y ago
  > > When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is literally no market impact. Yeah, I wanted to highlight that that's not true. Of course there is a market impact, it'll go down. The author might have wanted to say that there is no differential market impact, ie all shares would go down to the same extent (so that there is no impact, say, on capital allocation), but even that is not necessarily true, it clearly depends on the homogeneity (or lack thereof) of the liquidity/elasticity on the other side of those trades.
sambe 7y ago
These sections seem to address the point to me: * "The tail is not wagging the dog" - index funds are a relatively small percentage of total share ownership. * "Benchmark huggers have always been around" - owning ~the index was not started with index funds. * "Active funds literally own the market" - the sum of portfolios of non-index funds ends up having the same profile. * "Price discovery is a cop-out" - relatively small part of the trading volume. * "Liquidity is not a huge problem for index funds" -no market impact to sell (v dubious if you ask me), unlevered. * "Humans matter more than fund structures" - the absence of index funds did not prevent bubbles/crashes. You can disagree with those points (I do with some of them) but that's a large part of the article.
- bwanab 7y ago
  Right, but consider that the sub-prime mortgage market was a tiny portion of the overall mortgage market in 2007. Derivatives written against sub-prime holdings tipped the balance when the fan was hit. There are tons of derivatives written against the indices, thus indirectly against those funds.
  - AnimalMuppet 7y ago
    No, not against those funds. Pass a royal decree that banishes all index funds from the face of the earth. The tons of derivatives written against the indices remain, unchanged. Those derivatives might be "somewhat in the neighborhood of the funds" or something, but it's not analogous to mortgages.
  - navigatesol 7y ago
    >Derivatives written against sub-prime holdings tipped the balance when the fan was hit There's a bit more nuance to it: those derivatives were a problem because a substantial proportion of them were concentrated in a single, widely-connected, entity (AIG). The derivative market as a whole nets to zero; for every loser there is a winner.
  - turk73 7y ago
    There was the little problem of how sub-prime debt got whitewashed and turned into Aaa rated paper by the ratings agencies. All those sub-prime tranches, had they been correctly rated, would not have had such a magnifying effect. It was because of packaged bonds containing multiple tranches that couldn't be priced at anything but $0. Also, the interest bearing portions of loans were split into different bonds, further complicating matters. There wasn't (and still isn't) a mark-to-market in bonds. Many bonds aren't priced until bought/sold, e.g. illiquid.
perspective1 7y ago
Exactly. The article, starting with the title, is pompous and overconfident. Burry made the unanswered point that in a sell-off large index funds will have to dump their smaller holdings at large discounts. We have never had a market crash with passive holdings this large (and consolidated in a small handful of funds)-- we're in unprecedented times. Burry's point is entirely plausible. And although that it wouldn't immediately cause a problem for investors who don't sell (price is not value), the newly discount-price firms may struggle immensely in terms of raising new capital and financing.
- FabHK 7y ago
  > Burry made the unanswered point that in a sell-off large index funds will have to dump their smaller holdings at large discounts. First, I think he didn't made that point very clearly. Second, why would they be sold at a larger discount than larger holdings? It is all in proportion - they own less and sell less of the smaller holdings. (There are issues conceivable where you have a liquidity mismatch (bonds, real estate), but I haven't seen a solid elaboration of that point. It's the good old "people worry about bond market liquidity" meme that Mark Levine pokes fun at in his Bloomberg Column "Money Stuff".)
  - OJFord 7y ago
    > why would they be sold at a larger discount than larger holdings? It is all in proportion - they own less and sell less of the smaller holdings His argument there AIUI was that the daily volume is not in proportion.
    - FabHK 7y ago
      Fair enough, so going back to a liquidity mismatch. Will be interesting to watch the next market crash.
- omgwtfbyobbq 7y ago
  The idea that we've never had a market correction with passive holdings at current levels is accurate. It also was an accurate statement in 2008, and it also applies to foreigners and mutual funds now, both of which have increased their holdings of equities over time and both of which have substantially greater holdings than index funds. https://awealthofcommonsense.com/wp-content/uploads/2019/09/Annotation-2019-09-04-220027.jpg https://awealthofcommonsense.com/wp-content/uploads/2019/09/...
C1sc0cat 7y ago
And ignores the current example of the neil woodford equity income fund. This is a smaller example the liquidity problem that Mr Burry was making - it would much worse if a market crash did this to the realy realy big index funds.
FabHK 7y ago
> if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down When investors sell that amount, it doesn't matter whether they hold the underlying assets directly, or via index funds or ETFs, or via actively managed funds. The market will go down. So, which part of the problem is uniquely due to index funds? Burry hasn't made that point very clear. There might be issues with (liquid) index funds that give exposure to inherently less liquid assets, such as bonds or real estate. There might also be issues with index funds that do not hold the assets themselves, but replicate the exposure synthetically by entering a swap with a third party, giving rise to tracking error, counterparts credit risk, etc. However, as I said, Burry hasn't enunciated these concerns very cogently (at least in the extracts quoted by Bloomberg). This article here does nothing to address those concerns.
- peteradio 7y ago
  Requirement to sell across the board seems to be the unique issue.
  - vkou 7y ago
    They aren't required to sell, unless fund-holders are selling their ETFs. If those fund-holders were owning the stocks directly, instead of ETFs... Those same fund-holders would be... Selling their stocks. Causing the exact same downward price pressures.
    - rocqua 7y ago
      If I sell my ETF, the AP buys it from me, and gets to redeem it for a basket of shares of fixed proportion. Suppose stock X gets 1% in that basket. The issue is if stock X happens to be very illiquid, the APs selling stock X could drive down the price. In a non ETF, managers could decide to relatively slow down the sale of X, to prevent crashing the price. However, in an index fund the mechanism dictates all stocks are sold in the same proportion.
      - 7y ago
adventured 7y ago
Just the fact that the author chose to call Michael Burry's well thought out premise "silly" - tells you most of what you need to know about what is being pitched in the article. I've never seen Burry say anything that qualified as silly, even when a premise of his doesn't play out as dramatically as predicted. Silly is entirely contrary to his personality and analysis, it's attempting to lead the reader and argue via ridicule (where did we see that before?).
mcguire 7y ago
Are you arguing that index investors should not be part of the market at all? A large number of investors leaving the market will see a sell off no matter what vehicle they're in.
ptero 7y ago
This is the way it felt to me, too. The author seems to be cherry picking some incomplete statements from Burry's article and tries to make them sound ridiculous, and sometimes resort to adjectives rather than arguments. I am not a specialist and would love to read an informed analysis and counters to Burry's article. I was hoping that this is what the author tried (as the title suggests), but to me he fell far short of that goal. My 2c.
navigatesol 7y ago
>* if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down.* What is unique about no liquidity during a sell-off driving markets down? It's the definition of a sell-off. The fact there's no liquidity is what drives down the market in every sell-off.
bradshaw1965 7y ago
It's important to distinguish market cap based indexes and other asset class indexes. Small and micro-caps are notoriously hard to trade but mega-caps typically have much higher liquidity. There is a much higher chance of a micro-cap passive fund having a liquidity problem then a market cap index fund.
imtringued 7y ago
That is fundamentally how markets work. If everyone sells and no one buys then prices are going down. Whether you are using an active or passive fund or pick stocks yourself doesn't matter.
solotronics 7y ago
I wonder what the breakdown is within the index ETFs on what money is in 401ks, Roth, institutional investor, etc. If a big portiton of it is retirement accounts those aren't moving much anyways.
- MandieD 7y ago
  Except for all the near-retirees who freak out as they see their balances rapidly shrinking - and sell. Like my parents did in 2008/9, and I didn't think to caution them not to. Ugggg...
vkou 7y ago
Umm, if there's a stock market crash, triggering investors to panic-sell their shares, what difference does it make that I'm selling off my Vanguard ETF, or my personal, non-ETF stock holdings? I'm still driving the price down, causing other holdouts to sell off, driving the price further down. It's the definition of a market crash.
throw0101a 7y ago
Why would they need to cash out their positions? Indexes seem to actually have inflows during bear markets. See Point 2: * https://www.etfstrategy.com/three-reasons-why-indexing-and-etfs-wont-cause-the-next-market-crash-10448/ https://www.etfstrategy.com/three-reasons-why-indexing-and-e... See also Vanguard's (biased) opinion: * https://www.vanguardcanada.ca/individual/articles/education-commentary/markets-and-economy/market-downturns.htm https://www.vanguardcanada.ca/individual/articles/education-... The people using index funds generally don't think about their portfolios—which is the whole point of them. It's probably the cocaine-fueled traders that are causing all the ruckus.

sharkbot 7y ago

Not the author, but I think the article indirectly talks about the liquidity in the markets being far higher than it has been in the past. Further, if there is a stampede for the exits, there still have to be buyers on the other side of the sellers. Those buyers will undoubtably include active managers along with those indexers with different time horizons and/or braver constitutions. Both will likely be rewarded for their patience.

ptero 7y ago
> if there is a stampede for the exits, there still have to be buyers on the other side of the sellers That is a key point in the debate. I do not see that above is necessarily true. Say a price of a low volume stock X is driven down below fundamentals just because index funds have to sell 1% of holdings and cannot find enough buyers for X. While price of X might be irrational fund managers might not be able to act on it because there would be a worry that it may go lower still if selling extends. Could next round get X removed from index? delisted? "The market can stay irrational longer than you can stay solvent" is not an empty worry. My 2c.

staticcaucasian 7y ago

Agreed. Burry seems to be getting a lot of responses but almost none of them seem to have actually listened to what he said (or even read the article). There is real risk from the index-matching synthetic techniques that these funds are using.

0xcafecafe 7y ago

What if my index fund is actually just buying and holding the underlying stock as opposed to just a price tracking entity? In that case not taker for my fund = no taker for the underlying stock right? Will this not have the liquidity risk that Bury mentions?

secabeen 7y ago
The index fund is holding the underlying stock, largely. The challenge is that if say 5% of their fund holders sell their shares in the fund, the fund has to sell the underlying stock to generate the cash to pay out. Most funds have a rule in their documents that if you are a large fundholder (holding 1% or more of the fund) and you sell, they can hand you stocks directly rather than selling them and giving you cash, but that doesn't work it it's tens of thousands of small fund holders selling.
- wbl 7y ago
  So? They sell others buy. If I hear there is a squeeze and have cash I'll throw it in: who wouldn't? It's never the case that x٪ of the market can exit at once regardless of how it is owned.
  - joyjoyjoy 7y ago
    "If I hear there is a squeeze and have cash I'll throw it in:" For how many billions will you buy? And why did you not throw it in in 2008? "who wouldn't?" People who are leveraged? "It's never the case that x٪ of the market can exit at once regardless of how it is owned." You may not have heard it. But this is called a stock market crash. One is expected soon. So enjoy the ride and keep your money dry that you can "throw it in"
- vkou 7y ago
  So? If 5% of all stockholders sell their stock, that's going to cause a downward price movement, too. What is special about an ETF, that makes this situation any worse?
C1sc0cat 7y ago

davidw 7y ago

I think that was certainly a more interesting point compared to "who will do price discovery", which seems to be something that would likely find an equilibrium. This article does mention it, but pretty briefly. It'd be interesting to hear from people more familiar with the details of how all this works... perhaps there are some in the initial thread, but I haven't had time to skim it all: https://news.ycombinator.com/item?id=20877700 https://news.ycombinator.com/item?id=20877700

human20190310 7y ago

> ...will drive the market down So what? Let the weak long positions panic and sell at the bottom. Everyone else gets a few years of discount prices to buy. The hardest hit will be those who are leveraged and arguably deserve to get hosed for taking that much risk. If you don’t have to meet a margin call, you can ride out a crisis; if you’ve got cash in reserve, you can profit from it.

rocqua 7y ago
Presuming you are saving for later. Besides a margin call, you might want to exit for, buying a house, going into retirement, covering a period between jobs, or to deal with a medical emergency. Doing that during a crisis hurts. This risk diminishes the value of investments as a safety cushion.
- human20190310 7y ago
  Index funds aren’t a safety cushion. Vanguard rates it’s own S&P 500 index fund as a 4 out of 5 for risk. [0] [0] https://advisors.vanguard.com/iippdf/pdfs/FS540.pdf https://advisors.vanguard.com/iippdf/pdfs/FS540.pdf
- throw0101a 7y ago
  > Besides a margin call, you might want to exit for, buying a house, going into retirement, covering a period between jobs, or to deal with a medical emergency. In all of those scenarios you should not be in stocks/equities in the first place. If there is a possibility of needing cash with-in the next 5 years, that money should be in either bonds or term deposits. One's downpayment, first/next few retirement years' income, and emergency fund(s) should not be in equities.
gridlockd 7y ago
After 1989 it took the Nikkei more than a decade to finds its bottom (and then another bottom in 2009) and it hasn't recovered since. How many years of "discount buying" are you planning in?
lovecg 7y ago

mrep 7y ago

How would they lose liquidity? Authorized participants [0] are always in the market for ETFs. If an ETF share price is crashing out of line with the index it tracks, they will step in and buy shares, swap them with the ETF issuer for the shares of the underlying stock in the index, and sell those shares for an arbitrage profit. Even if one of the underlying stocks becomes illiquid, a big enough price divergence on all of the other liquid stocks would make it profitable to eat the loss or hold the illiquid ones (risky, but remember, there are many authorized participants competing with each other so if there is some way to make an easy arbitrage profit, they will find a way). You'd basically need the entire market to become illiquid. [0]: https://www.investopedia.com/terms/a/authorizedparticipant.asp https://www.investopedia.com/terms/a/authorizedparticipant.a...

pjmorris 7y ago
> basically need the entire market to become illiquid. Which came dramatically close to happening in 2008, see, e.g. [0]. [0] http://pages.stern.nyu.edu/~sternfin/pschnabl/kacperczyk_schnabl.pdf http://pages.stern.nyu.edu/~sternfin/pschnabl/kacperczyk_sch...
josu 7y ago
>You'd basically need the entire market to become illiquid. Yes. It has happened before.
- asdkfjasl 7y ago
  OK, but in that case is there a distinction between index funds and actively managed funds? Is this a risk that index funds are uniquely exposed to? Also, another thing to keep in mind is that this only affects people who are trying to sell at the bottom. Buy and hold investors care little for liquidity issues during a crash.
  - JumpCrisscross 7y ago
    > in that case is there a distinction between index funds and actively managed funds? Yes. Active managers can choose what to sell based on prevailing market conditions. Index funds must sell across the board. That could involve getting hosed on names in a short-term squeeze. > this only affects people who are trying to sell at the bottom There are lots of index funds. For a broad-market fund, you're probably right--a patient investor can ride out the bloodshed. For leveraged or specialized funds, on the other hand, a rout could permanently impair the portfolio. Equity market collapses, furthermore, have a habit of transmitting into the real economy. A sustained downturn could impair funding conditions, which in turn could affect the fundamental characteristics of a portfolio.

ambicapter 7y ago

This was mentioned in the article > Liquidity is not a huge problem for index funds. But, Ben, what if everyone rushes to the exits all at once? Index funds and ETFs are going to cause a massive crash! > When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is literally no market impact.

FabHK 7y ago
> > When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is literally no market impact. Yeah, I wanted to highlight that that's not true. Of course there is a market impact, it'll go down. The author might have wanted to say that there is no differential market impact, ie all shares would go down to the same extent (so that there is no impact, say, on capital allocation), but even that is not necessarily true, it clearly depends on the homogeneity (or lack thereof) of the liquidity/elasticity on the other side of those trades.

sambe 7y ago

These sections seem to address the point to me: * "The tail is not wagging the dog" - index funds are a relatively small percentage of total share ownership. * "Benchmark huggers have always been around" - owning ~the index was not started with index funds. * "Active funds literally own the market" - the sum of portfolios of non-index funds ends up having the same profile. * "Price discovery is a cop-out" - relatively small part of the trading volume. * "Liquidity is not a huge problem for index funds" -no market impact to sell (v dubious if you ask me), unlevered. * "Humans matter more than fund structures" - the absence of index funds did not prevent bubbles/crashes. You can disagree with those points (I do with some of them) but that's a large part of the article.

bwanab 7y ago
Right, but consider that the sub-prime mortgage market was a tiny portion of the overall mortgage market in 2007. Derivatives written against sub-prime holdings tipped the balance when the fan was hit. There are tons of derivatives written against the indices, thus indirectly against those funds.
- AnimalMuppet 7y ago
  No, not against those funds. Pass a royal decree that banishes all index funds from the face of the earth. The tons of derivatives written against the indices remain, unchanged. Those derivatives might be "somewhat in the neighborhood of the funds" or something, but it's not analogous to mortgages.
- navigatesol 7y ago
  >Derivatives written against sub-prime holdings tipped the balance when the fan was hit There's a bit more nuance to it: those derivatives were a problem because a substantial proportion of them were concentrated in a single, widely-connected, entity (AIG). The derivative market as a whole nets to zero; for every loser there is a winner.
- turk73 7y ago
  There was the little problem of how sub-prime debt got whitewashed and turned into Aaa rated paper by the ratings agencies. All those sub-prime tranches, had they been correctly rated, would not have had such a magnifying effect. It was because of packaged bonds containing multiple tranches that couldn't be priced at anything but $0. Also, the interest bearing portions of loans were split into different bonds, further complicating matters. There wasn't (and still isn't) a mark-to-market in bonds. Many bonds aren't priced until bought/sold, e.g. illiquid.

perspective1 7y ago

Exactly. The article, starting with the title, is pompous and overconfident. Burry made the unanswered point that in a sell-off large index funds will have to dump their smaller holdings at large discounts. We have never had a market crash with passive holdings this large (and consolidated in a small handful of funds)-- we're in unprecedented times. Burry's point is entirely plausible. And although that it wouldn't immediately cause a problem for investors who don't sell (price is not value), the newly discount-price firms may struggle immensely in terms of raising new capital and financing.

FabHK 7y ago
> Burry made the unanswered point that in a sell-off large index funds will have to dump their smaller holdings at large discounts. First, I think he didn't made that point very clearly. Second, why would they be sold at a larger discount than larger holdings? It is all in proportion - they own less and sell less of the smaller holdings. (There are issues conceivable where you have a liquidity mismatch (bonds, real estate), but I haven't seen a solid elaboration of that point. It's the good old "people worry about bond market liquidity" meme that Mark Levine pokes fun at in his Bloomberg Column "Money Stuff".)
- OJFord 7y ago
  > why would they be sold at a larger discount than larger holdings? It is all in proportion - they own less and sell less of the smaller holdings His argument there AIUI was that the daily volume is not in proportion.
  - FabHK 7y ago
    Fair enough, so going back to a liquidity mismatch. Will be interesting to watch the next market crash.
omgwtfbyobbq 7y ago
The idea that we've never had a market correction with passive holdings at current levels is accurate. It also was an accurate statement in 2008, and it also applies to foreigners and mutual funds now, both of which have increased their holdings of equities over time and both of which have substantially greater holdings than index funds. https://awealthofcommonsense.com/wp-content/uploads/2019/09/Annotation-2019-09-04-220027.jpg https://awealthofcommonsense.com/wp-content/uploads/2019/09/...

C1sc0cat 7y ago

And ignores the current example of the neil woodford equity income fund. This is a smaller example the liquidity problem that Mr Burry was making - it would much worse if a market crash did this to the realy realy big index funds.

FabHK 7y ago

> if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down When investors sell that amount, it doesn't matter whether they hold the underlying assets directly, or via index funds or ETFs, or via actively managed funds. The market will go down. So, which part of the problem is uniquely due to index funds? Burry hasn't made that point very clear. There might be issues with (liquid) index funds that give exposure to inherently less liquid assets, such as bonds or real estate. There might also be issues with index funds that do not hold the assets themselves, but replicate the exposure synthetically by entering a swap with a third party, giving rise to tracking error, counterparts credit risk, etc. However, as I said, Burry hasn't enunciated these concerns very cogently (at least in the extracts quoted by Bloomberg). This article here does nothing to address those concerns.

peteradio 7y ago
Requirement to sell across the board seems to be the unique issue.
- vkou 7y ago
  They aren't required to sell, unless fund-holders are selling their ETFs. If those fund-holders were owning the stocks directly, instead of ETFs... Those same fund-holders would be... Selling their stocks. Causing the exact same downward price pressures.
  - rocqua 7y ago
    If I sell my ETF, the AP buys it from me, and gets to redeem it for a basket of shares of fixed proportion. Suppose stock X gets 1% in that basket. The issue is if stock X happens to be very illiquid, the APs selling stock X could drive down the price. In a non ETF, managers could decide to relatively slow down the sale of X, to prevent crashing the price. However, in an index fund the mechanism dictates all stocks are sold in the same proportion.
    - 7y ago

adventured 7y ago

Just the fact that the author chose to call Michael Burry's well thought out premise "silly" - tells you most of what you need to know about what is being pitched in the article. I've never seen Burry say anything that qualified as silly, even when a premise of his doesn't play out as dramatically as predicted. Silly is entirely contrary to his personality and analysis, it's attempting to lead the reader and argue via ridicule (where did we see that before?).

mcguire 7y ago

Are you arguing that index investors should not be part of the market at all? A large number of investors leaving the market will see a sell off no matter what vehicle they're in.

ptero 7y ago

This is the way it felt to me, too. The author seems to be cherry picking some incomplete statements from Burry's article and tries to make them sound ridiculous, and sometimes resort to adjectives rather than arguments. I am not a specialist and would love to read an informed analysis and counters to Burry's article. I was hoping that this is what the author tried (as the title suggests), but to me he fell far short of that goal. My 2c.

navigatesol 7y ago

>* if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down.* What is unique about no liquidity during a sell-off driving markets down? It's the definition of a sell-off. The fact there's no liquidity is what drives down the market in every sell-off.

bradshaw1965 7y ago

It's important to distinguish market cap based indexes and other asset class indexes. Small and micro-caps are notoriously hard to trade but mega-caps typically have much higher liquidity. There is a much higher chance of a micro-cap passive fund having a liquidity problem then a market cap index fund.

imtringued 7y ago

That is fundamentally how markets work. If everyone sells and no one buys then prices are going down. Whether you are using an active or passive fund or pick stocks yourself doesn't matter.

solotronics 7y ago

I wonder what the breakdown is within the index ETFs on what money is in 401ks, Roth, institutional investor, etc. If a big portiton of it is retirement accounts those aren't moving much anyways.

MandieD 7y ago
Except for all the near-retirees who freak out as they see their balances rapidly shrinking - and sell. Like my parents did in 2008/9, and I didn't think to caution them not to. Ugggg...

vkou 7y ago

Umm, if there's a stock market crash, triggering investors to panic-sell their shares, what difference does it make that I'm selling off my Vanguard ETF, or my personal, non-ETF stock holdings? I'm still driving the price down, causing other holdouts to sell off, driving the price further down. It's the definition of a market crash.

throw0101a 7y ago

Why would they need to cash out their positions? Indexes seem to actually have inflows during bear markets. See Point 2: * https://www.etfstrategy.com/three-reasons-why-indexing-and-etfs-wont-cause-the-next-market-crash-10448/ https://www.etfstrategy.com/three-reasons-why-indexing-and-e... See also Vanguard's (biased) opinion: * https://www.vanguardcanada.ca/individual/articles/education-commentary/markets-and-economy/market-downturns.htm https://www.vanguardcanada.ca/individual/articles/education-... The people using index funds generally don't think about their portfolios—which is the whole point of them. It's probably the cocaine-fueled traders that are causing all the ruckus.