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But passive investing is just that, passive, theres no market information, no price information that influences the shares and prices. How is passive investing

But passive investing is just that, passive, theres no market information, no price information that influences the shares and prices. How is passive investing sustainable? Doesn't this destroy finance in the long run? Prices being completely detached from a listed company's financial viability and business profitability... thats bad isnt it?

deleted 6y ago
[deleted]
omgwtfbyobbq 6y ago
Why do you think prices are completely detached from a company's financial viability and business profitability? If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.
- paulgb 6y ago
  > If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.
  - omgwtfbyobbq 5y ago
    > If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances. Sure, but that's a big if. We're a long way from 100% anything. Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance. In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market. Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.

deleted 6y ago

[deleted]

omgwtfbyobbq 6y ago

Why do you think prices are completely detached from a company's financial viability and business profitability? If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.

paulgb 6y ago
> If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them. The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.
- omgwtfbyobbq 5y ago
  > If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances. Sure, but that's a big if. We're a long way from 100% anything. Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance. In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market. Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.