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Due to the trillions of dollars blindly going into index funds, thereby purchasing these stocks, are these five companies' stock prices way too artificially hig

by tsjq 6y ago

Due to the trillions of dollars blindly going into index funds, thereby purchasing these stocks, are these five companies' stock prices way too artificially high ?

gruez 6y ago
But since most index funds are market cap weighted, wouldn't the other 495 companies (assuming s&p 500 index, if you buy a all-cap index it might be 2000+ companies) go up the same % as well?
1over137 6y ago
"blindly"? People choose index funds very deliberately, because mutual funds are so much more expensive.
- dralley 6y ago
  "Blindly" meaning that your average index fund investor has absolutely no idea what's in their portfolio. They are blind investors.
  - siliconmountain 6y ago
    I buy index. I have a portfolio of 500 large American companies, who are publicly traded, and follow SEC regulations, where gross negligence and gross fraud are mostly avoided, and which maybe a third also have global operations. It’s a basket of restive safe equity, diversified across industry but not much in terms of nationality. Beyond that I don’t know what’s in it and don’t particularly need to care
    - beezle 6y ago
      Wow, no disrespect but that made me laugh. Worldcom? Enron? AIG? Lehman? I could go on but you get the gist. The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings, but that benefit is greatly reduced when the individual components are heavily skewed in weight. The same applies to industry (and probably always did). In an ideal world that diversity protects you from a one off calamity (ch 7/11) as each holding is expected to be relatively small and not likely to affect many other companies or the entire index to any great extent. That too goes out the window with the current concentrations.
      - throw0101a 6y ago
        > The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings "only thing"? "only"? That's huge: > Famed economist and Nobel Prize winner Harry Markowitz called diversification “the only free lunch in finance.” The thought is that by diversifying, an investor gets the benefit of reduced risk while sacrificing little in expected returns over the long run. * https://www.bizjournals.com/milwaukee/news/2018/10/03/investment-diversification-the-only-free-lunch-in.html https://www.bizjournals.com/milwaukee/news/2018/10/03/invest... * https://en.wikipedia.org/wiki/Harry_Markowitz https://en.wikipedia.org/wiki/Harry_Markowitz What's the alternative anyway? Throwing darts at listing of stocks? Asking Orlando the cat? * https://en.wikipedia.org/wiki/Orlando_(cat) https://en.wikipedia.org/wiki/Orlando_(cat)
        beezle 6y ago
        You are missing the point. The S&P 500 and most large mutual funds are not anywhere near as diversified as typical investors believe them to be and have become less so over the past few years. Investors buy them for the perception of great diversification as well as the ease of purchase/sale. Diversity in number of holdings works well if the holdings are not heavily overweight/underweight and are not highly correlated. So RSP (equal weight S&P) would meet the definition of well diversified in respect to weighting. Unfortunately, equities have been trending towards an increasing degree of correlation which can't be adjusted for when an etf is constructed mechanically based on market cap. I always urge friends, family etc. to look at the components of the various funds and etfs they hold as they will be shocked to find that, in aggregate, a significant portion of their position is in 10 or 15 stocks. For some that may be acceptable, especially if they hold other non highly correlated asset classes. For others, they need to take a little more time or consult a professional to research how to better balance that risk. As just one example, VXF attempts to capture the return of the non-S&P 500 equities.
      - siliconmountain 6y ago
        I said "where gross negligence and gross fraud are mostly avoided" I know about Worldcom Enron AIG Lehman... Gross fraud and negligence still isn't condoned. Buying the index is still better than trying to guess which of the 500 aren't performing fraud. Laugh all you want; best of luck to you
  - refurb 6y ago
    Sure they know what’s in their portfolio. The entire index.
  - throw0101a 6y ago
    Better to "blindly" invest in a passive index fund (S&P 500, Russell 3000, etc) than to try to pick an individual stocks. Most people will get positive results/returns on the former and worse results for the latter. Evidence for this has been around for decades: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
- lotsofpulp 6y ago
  I think you mean passively managed mutual fund vs actively managed mutual fund. You can have a passively managed mutual fund that follows an index with extremely low expense ratios like FXAIX or FSKAX. https://money.usnews.com/investing/investing-101/articles/etf-vs-index-fund-the-difference-and-which-to-use https://money.usnews.com/investing/investing-101/articles/et...
lotsofpulp 6y ago
Depends if you have a better alternative that you think will have better growth in profit.
deleted 6y ago
[deleted]
unreal37 6y ago
It may be "high" but it's not "artificial". That's real money being invested in these companies. Index funds buy stock and never sell it. It's real money, buying real shares, that takes the stock out of circulation, that don't get day traded. Anyway, not to be caught in semantics, but I believe stocks can be priced high and very high, but that doesn't mean it has to fall. The index fund system props up the prices forever.
- deleted 6y ago
  [deleted]

by tsjq 6y ago

Due to the trillions of dollars blindly going into index funds, thereby purchasing these stocks, are these five companies' stock prices way too artificially high ?

gruez 6y ago

But since most index funds are market cap weighted, wouldn't the other 495 companies (assuming s&p 500 index, if you buy a all-cap index it might be 2000+ companies) go up the same % as well?

1over137 6y ago

"blindly"? People choose index funds very deliberately, because mutual funds are so much more expensive.

dralley 6y ago
"Blindly" meaning that your average index fund investor has absolutely no idea what's in their portfolio. They are blind investors.
- siliconmountain 6y ago
  I buy index. I have a portfolio of 500 large American companies, who are publicly traded, and follow SEC regulations, where gross negligence and gross fraud are mostly avoided, and which maybe a third also have global operations. It’s a basket of restive safe equity, diversified across industry but not much in terms of nationality. Beyond that I don’t know what’s in it and don’t particularly need to care
  - beezle 6y ago
    Wow, no disrespect but that made me laugh. Worldcom? Enron? AIG? Lehman? I could go on but you get the gist. The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings, but that benefit is greatly reduced when the individual components are heavily skewed in weight. The same applies to industry (and probably always did). In an ideal world that diversity protects you from a one off calamity (ch 7/11) as each holding is expected to be relatively small and not likely to affect many other companies or the entire index to any great extent. That too goes out the window with the current concentrations.
    - throw0101a 6y ago
      > The only thing an index fund (I'll assume SPY for sake of argument) gets you is diversity in number of holdings "only thing"? "only"? That's huge: > Famed economist and Nobel Prize winner Harry Markowitz called diversification “the only free lunch in finance.” The thought is that by diversifying, an investor gets the benefit of reduced risk while sacrificing little in expected returns over the long run. * https://www.bizjournals.com/milwaukee/news/2018/10/03/investment-diversification-the-only-free-lunch-in.html https://www.bizjournals.com/milwaukee/news/2018/10/03/invest... * https://en.wikipedia.org/wiki/Harry_Markowitz https://en.wikipedia.org/wiki/Harry_Markowitz What's the alternative anyway? Throwing darts at listing of stocks? Asking Orlando the cat? * https://en.wikipedia.org/wiki/Orlando_(cat) https://en.wikipedia.org/wiki/Orlando_(cat)
      - beezle 6y ago
        You are missing the point. The S&P 500 and most large mutual funds are not anywhere near as diversified as typical investors believe them to be and have become less so over the past few years. Investors buy them for the perception of great diversification as well as the ease of purchase/sale. Diversity in number of holdings works well if the holdings are not heavily overweight/underweight and are not highly correlated. So RSP (equal weight S&P) would meet the definition of well diversified in respect to weighting. Unfortunately, equities have been trending towards an increasing degree of correlation which can't be adjusted for when an etf is constructed mechanically based on market cap. I always urge friends, family etc. to look at the components of the various funds and etfs they hold as they will be shocked to find that, in aggregate, a significant portion of their position is in 10 or 15 stocks. For some that may be acceptable, especially if they hold other non highly correlated asset classes. For others, they need to take a little more time or consult a professional to research how to better balance that risk. As just one example, VXF attempts to capture the return of the non-S&P 500 equities.
    - siliconmountain 6y ago
      I said "where gross negligence and gross fraud are mostly avoided" I know about Worldcom Enron AIG Lehman... Gross fraud and negligence still isn't condoned. Buying the index is still better than trying to guess which of the 500 aren't performing fraud. Laugh all you want; best of luck to you
- refurb 6y ago
  Sure they know what’s in their portfolio. The entire index.
- throw0101a 6y ago
  Better to "blindly" invest in a passive index fund (S&P 500, Russell 3000, etc) than to try to pick an individual stocks. Most people will get positive results/returns on the former and worse results for the latter. Evidence for this has been around for decades: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
lotsofpulp 6y ago
I think you mean passively managed mutual fund vs actively managed mutual fund. You can have a passively managed mutual fund that follows an index with extremely low expense ratios like FXAIX or FSKAX. https://money.usnews.com/investing/investing-101/articles/etf-vs-index-fund-the-difference-and-which-to-use https://money.usnews.com/investing/investing-101/articles/et...

lotsofpulp 6y ago

Depends if you have a better alternative that you think will have better growth in profit.

deleted 6y ago

[deleted]

unreal37 6y ago

It may be "high" but it's not "artificial". That's real money being invested in these companies. Index funds buy stock and never sell it. It's real money, buying real shares, that takes the stock out of circulation, that don't get day traded. Anyway, not to be caught in semantics, but I believe stocks can be priced high and very high, but that doesn't mean it has to fall. The index fund system props up the prices forever.

deleted 6y ago
[deleted]