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I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&P 500 with a high weighting, like Apple, can’t we en
by chrisstu 7y ago
I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&P 500 with a high weighting, like Apple, can’t we end up in a situation where the individual company performance is irrelevant? Nobody will sell Apple because they just own it through their SP500 fund. As long as they are buying and holding the index fund, Apple remains at a high valuation. The only thing that differentiates individual stocks is active investors. And as they make up a smaller and smaller fraction of over investment, they become less relevant.
- pfortuny 7y agoI guess inflation and interest rates play a non-negligible role there.
- zozbot234 7y agoAnd as active investors become less relevant in the market, their returns will increase bringing the situation back into balance. Dumb money gets fleeced.
- javagram 7y agoAAPL and similar stocks do show their share price changing in response to financial announcements, sales numbers, etc. This concern is valid but I believe it only prevents price movement once a much larger majority of the market is passively managed.
- deleted 7y ago[deleted]
- wutbrodo 7y agoI don't think it'd be much of a concern at a larger scale either. I stopped actively investing a long time ago because it wasn't worth my time, but if the market got to the point where it was responsive to reality, the increased returns would probably draw me back in. And before me would be institutional investors, picking up ~free returns. The system is designed to be self-equilibriating in this respect
- walshemj 7y agoThat is one of the problems if you have to hold share for example Enron because you track the index you have to hold it all the way down. For a personal example from the UK one of my actively managed investment trusts sold out of banks before most of the share price crash happened a few years ago.