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"Investing" in publicly traded companies (most volume is just between people with no affiliation to the board and are not buying from company stock offerings) a

"Investing" in publicly traded companies (most volume is just between people with no affiliation to the board and are not buying from company stock offerings) and especially holding an index fund is not really investing, in the sense that it does not allocate any resources intelligently or do anything to seed growing companies. It's simply an attempt to grow personal wealth that doesn't do anything to improve the economy. Many people deride HFT and day traders while failing to understand that just buying the S&P index is actually more economically harmful. For all the faults in the industry, fundamentally, private equity provides a means to invest in private companies that can benefit from loans or funding rounds, while also offering a return on investment to smart private equity investors. There have been plenty of scandals with private equity firms taking advantage of bankruptcy laws in large companies, but the industry as a whole seeds companies of every size, even though you only hear about VC firms in the tech startup bubble.

missedthecue 6y ago
>just buying the S&P index is actually more economically harmful. What
- SpicyLemonZest 6y ago
  Think about what it means to buy into an index fund. When my next paycheck comes in, I'm going to use 20% of it to invest in the stock of some S&P 500 companies, even though I don't know most of their names and have no idea what results can be expected from them. Tossing money blindly at random companies isn't completely unproductive, since capital is valuable, but in terms of the underlying social purposes of investing it doesn't accomplish much.
  - mactrey 6y ago
    Index investors are not really tossing money blindly. They are investing in a diversified portfolio and then constantly re-weighting their investment by market cap. The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effectively research companies when they have a 40hr/wk job, a family, hobbies, etc. So those 401k investments were based mostly on personal hunches, word of mouth, and pump and dump schemes. That was really dumb money, and did even less for the economy. So while I agree with you that index investing isn't doing a ton to push corporate management to do better in the way "smart money" does (in theory), when you consider the world before index investing was a thing you have to admit that money today is on average "smarter."
    - SpicyLemonZest 6y ago
      Yeah, I certainly can't dispute that.
    - lend000 6y ago
      The alternative is to not invest in companies or asset classes you don't understand. Most people are capable of understanding real estate, cash, and bonds, but the latter two have become severely weakened in the post-Bretton Woods economy. This has also coincided with a huge increase in wealth inequality, and index funds haven't changed that. Average people should be able to grow their wealth over time without throwing money into inefficient instruments.
    - ralph84 6y ago
      Before the rise of index investing, mom and pop didn't invest in stocks at all. They had a defined-benefit pension and kept their savings in a portfolio of CDs and government bonds.
- lend000 6y ago
  Buying the index just inflates the prices of all large companies held in the index without any due diligence into which ones have future potential. Not only are you failing to allocate your own capital into the economy productively, but you are counter-acting the investments of those who have made diligent investment decisions (while also providing them with alpha and a means to profit from your inefficiency).
ajzinsbwbs 6y ago
I don’t think this characterization is really fair. The private equity model requires a market to sell into when a bet pays off (so they can make another bet). Investors who just buy the index are helping to fund that. By analogy, house flippers rely on a market for turnkey homes.
- lend000 6y ago
  People who buy IPO's, and to a lesser extent, pick stocks, help fund that, but buying the index simply rewards companies that made it into the index and makes it harder to devalue under-performers. As with any statistically large index, some of the companies in the index will be correctly boosted by your capital, while others will be incorrectly so. My point is not so much to decry index investing as evil as to point out the irony of index investors complaining about more productive forms of market participation.

missedthecue 6y ago

>just buying the S&P index is actually more economically harmful. What

SpicyLemonZest 6y ago
Think about what it means to buy into an index fund. When my next paycheck comes in, I'm going to use 20% of it to invest in the stock of some S&P 500 companies, even though I don't know most of their names and have no idea what results can be expected from them. Tossing money blindly at random companies isn't completely unproductive, since capital is valuable, but in terms of the underlying social purposes of investing it doesn't accomplish much.
- mactrey 6y ago
  Index investors are not really tossing money blindly. They are investing in a diversified portfolio and then constantly re-weighting their investment by market cap. The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effectively research companies when they have a 40hr/wk job, a family, hobbies, etc. So those 401k investments were based mostly on personal hunches, word of mouth, and pump and dump schemes. That was really dumb money, and did even less for the economy. So while I agree with you that index investing isn't doing a ton to push corporate management to do better in the way "smart money" does (in theory), when you consider the world before index investing was a thing you have to admit that money today is on average "smarter."
  - SpicyLemonZest 6y ago
    Yeah, I certainly can't dispute that.
  - lend000 6y ago
    The alternative is to not invest in companies or asset classes you don't understand. Most people are capable of understanding real estate, cash, and bonds, but the latter two have become severely weakened in the post-Bretton Woods economy. This has also coincided with a huge increase in wealth inequality, and index funds haven't changed that. Average people should be able to grow their wealth over time without throwing money into inefficient instruments.
  - ralph84 6y ago
    Before the rise of index investing, mom and pop didn't invest in stocks at all. They had a defined-benefit pension and kept their savings in a portfolio of CDs and government bonds.
lend000 6y ago
Buying the index just inflates the prices of all large companies held in the index without any due diligence into which ones have future potential. Not only are you failing to allocate your own capital into the economy productively, but you are counter-acting the investments of those who have made diligent investment decisions (while also providing them with alpha and a means to profit from your inefficiency).

ajzinsbwbs 6y ago

I don’t think this characterization is really fair. The private equity model requires a market to sell into when a bet pays off (so they can make another bet). Investors who just buy the index are helping to fund that. By analogy, house flippers rely on a market for turnkey homes.

lend000 6y ago
People who buy IPO's, and to a lesser extent, pick stocks, help fund that, but buying the index simply rewards companies that made it into the index and makes it harder to devalue under-performers. As with any statistically large index, some of the companies in the index will be correctly boosted by your capital, while others will be incorrectly so. My point is not so much to decry index investing as evil as to point out the irony of index investors complaining about more productive forms of market participation.