3 ms·

I hate this kind of smart-ass top-level "ITT" comment that paints an entire discussion happening besides it with broad strokes. If only one person does this I

I hate this kind of smart-ass top-level "ITT" comment that paints an entire discussion happening besides it with broad strokes. If only one person does this I can call him names and downvote him. If there are two camps and both camps do this, people tribalize and everything goes meta. Then no further actual discussion can take place.

hogFeast 7y ago
If you think it is "smart-ass", you don't understand what I am saying (or, more probably, what Burry is saying). There are no "camps" here. The OP is trying to create a tribe (passive investors are cultish, so this is a very odd comment...I will assume an honest mistake) but that makes no sense on this topic (unless you are selling something, which he is). The meta of my point is: people try this discussion over and over, it is always wrong, some things in finance are universal (because they have been happening for literally three hundred years). What you appear to have missed is the part where I said: Burry is not making a "bombastic claim" about what will happen 100% of the time. In my experience, most people think this is what investing is about (the OP is certainly an example). It isn't. I am not making a bombastic claim. The observation is, again, that: you have a lot of unsophisticated buyers and some non-zero amount of these products are about liquidity transformation. You can have a debate about this all you want but it isn't interesting or engaging to anyone but people who are unsophisticated (not 100% true in this case, Asness is a notable exception but he was an academic and it is mostly academics who take an interest). My interest is limited to the fact that: it is astonishing how often this happens, and equally astonishing how fervently people will deny that it is happening again (although they are usually new converts).
- AlanYx 7y ago
  Thanks for this -- your comment above about "transforming something illiquid to something liquid" and dcolkitt's post above explaining the possible consequences when indexed ETFs are substantially more liquid than many of the underlying securities really helped me understand the crux of Burry's argument. Are you aware of any academics that are studying this issue or modeling the risks?
  - laminarflow 7y ago
    See 'Horizon Kinetics' for a library of statistically-rigorous work on this. https://horizonkinetics.com/commentary-type/under-the-hood-index-series/ https://horizonkinetics.com/commentary-type/under-the-hood-i...
  - hogFeast 7y ago
    Well, I suppose the literature around the liquidity premium relates to this topic. But liquidity is fairly simple (and drives the market cycle): liquidity is worthless in booms, and very valuable in busts. But something to note here too: most measures of historical returns do not look at liquidity either. I am in the UK, and I know there is research (I can't find it atm) showing that before 1970s, trading costs were significant. Historical returns rarely reflect that. Nor do they reflect the fact that most people before 1970 probably couldn't own any asset other than govt bonds (or that most banks were forced to own them too). So I would say the issues with indexes are two-fold. First, they will fail if they are built on illiquid securities (recent example here is also Neil Woodford's implosion). Second, they are often predicated on historical returns that are, in any non-academic/practical sense, fictional. Another reply is Horizon Kinetics...apart from GMO, they are the only investment manager whose letters I actually read. And on ETFs, they have written a lot.
- thanatropism 7y ago
  My beef is with your form (starting a meta comment thread to shit on the ongoing discussion rather than engaging with the discussion). I actually agree very closely with your views.
  - hogFeast 7y ago
    Again, I did engage with the discussion. You just seem to think it is irrelevant. I am actively disinterested in all the nonsense around population share of active/passive or whatever the Twitterati are bleating about. I have seen enough of these situations to just not care anymore about anything other than the two things I mentioned.

hogFeast 7y ago

If you think it is "smart-ass", you don't understand what I am saying (or, more probably, what Burry is saying). There are no "camps" here. The OP is trying to create a tribe (passive investors are cultish, so this is a very odd comment...I will assume an honest mistake) but that makes no sense on this topic (unless you are selling something, which he is). The meta of my point is: people try this discussion over and over, it is always wrong, some things in finance are universal (because they have been happening for literally three hundred years). What you appear to have missed is the part where I said: Burry is not making a "bombastic claim" about what will happen 100% of the time. In my experience, most people think this is what investing is about (the OP is certainly an example). It isn't. I am not making a bombastic claim. The observation is, again, that: you have a lot of unsophisticated buyers and some non-zero amount of these products are about liquidity transformation. You can have a debate about this all you want but it isn't interesting or engaging to anyone but people who are unsophisticated (not 100% true in this case, Asness is a notable exception but he was an academic and it is mostly academics who take an interest). My interest is limited to the fact that: it is astonishing how often this happens, and equally astonishing how fervently people will deny that it is happening again (although they are usually new converts).

AlanYx 7y ago
Thanks for this -- your comment above about "transforming something illiquid to something liquid" and dcolkitt's post above explaining the possible consequences when indexed ETFs are substantially more liquid than many of the underlying securities really helped me understand the crux of Burry's argument. Are you aware of any academics that are studying this issue or modeling the risks?
- laminarflow 7y ago
  See 'Horizon Kinetics' for a library of statistically-rigorous work on this. https://horizonkinetics.com/commentary-type/under-the-hood-index-series/ https://horizonkinetics.com/commentary-type/under-the-hood-i...
- hogFeast 7y ago
  Well, I suppose the literature around the liquidity premium relates to this topic. But liquidity is fairly simple (and drives the market cycle): liquidity is worthless in booms, and very valuable in busts. But something to note here too: most measures of historical returns do not look at liquidity either. I am in the UK, and I know there is research (I can't find it atm) showing that before 1970s, trading costs were significant. Historical returns rarely reflect that. Nor do they reflect the fact that most people before 1970 probably couldn't own any asset other than govt bonds (or that most banks were forced to own them too). So I would say the issues with indexes are two-fold. First, they will fail if they are built on illiquid securities (recent example here is also Neil Woodford's implosion). Second, they are often predicated on historical returns that are, in any non-academic/practical sense, fictional. Another reply is Horizon Kinetics...apart from GMO, they are the only investment manager whose letters I actually read. And on ETFs, they have written a lot.
thanatropism 7y ago
My beef is with your form (starting a meta comment thread to shit on the ongoing discussion rather than engaging with the discussion). I actually agree very closely with your views.
- hogFeast 7y ago
  Again, I did engage with the discussion. You just seem to think it is irrelevant. I am actively disinterested in all the nonsense around population share of active/passive or whatever the Twitterati are bleating about. I have seen enough of these situations to just not care anymore about anything other than the two things I mentioned.