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Could index funds be “worse than Marxism”?

• sombremesa 6y ago
  > With index funds, nobody’s behind the scenes, dumping bad investments and selecting good ones. That's not exactly true. There's people and committees decided what's in the index, and therefore, what's in the index fund.
  • fighterpilot 6y ago
    And there's committees of people deciding which index funds to invest in and which to ignore.
• perl4ever 6y ago
  I find it weird that in response to this idea that index funds are like socialism, nobody brings up all the positive things about socialism that might be mentioned in some other context. For instance, an index fund that owns all the companies might not push them to rabidly compete, which looks bad from a traditional antitrust perspective, and as is typical, it's mentioned in this article. But the same type of incentive means that they are under less pressure to do anything harmful to society in order to compete - damaging the environment, attacking workers rights and ignoring social justice, etc. It is a general way of internalizing externalities. But I never see that mentioned, despite how people love to talk about externalities elsewhere.
  • Synaesthesia 6y ago
    Of course none of that enters the discussion anywhere. It's just assumed that seeking short term profit is the natural thing to do.
    • WalterBright 6y ago
      > seeking short term profit is the natural thing to do Successful companies clearly seek the long term profit. Amazon, Apple, Microsoft, Tesla, how many examples are needed?
      • EliRivers 6y ago
        Well yes they do, Mr Bright, but it's still true that seeking the short-term profit seems (for many) the natural thing to do. How often do we even see people carrying the belief that companies have a legal obligation towards "shareholder value" that trumps all other concerns?
        • WalterBright 6y ago
          > (for many) the natural thing to do For bad businessmen, yes. They get rewarded by going out of business. > How often do we even see people carrying the belief that companies have a legal obligation towards "shareholder value" that trumps all other concerns? A focus on short term value destroys shareholder value. There is no legal obligation for a company to sacrifice the long term for the short term. Would you invest your money in a company you believed was focused on short term shareholder value rather than long term? Keep in mind that the stock price reflects the best estimation of the future long term prospects of the company.
          • EliRivers 6y ago
            Keep in mind that the stock price reflects the best estimation of the future long term prospects of the company. I definitely disagree with that. I think we can see many, many counter-examples; so many that they're not weird exceptions but a significant part of the picture. Take the recent fun and games with Gamestop, or Hertz, for example. The best estimation of Hertz at the time was that they were going out of business (or at least going through one of the uniquely American phases of a business in which their debts get cancelled, the bankruptcy exit plan leaves shareholders with nothing, and Hertz gets to carry on); yet the share price kept on climbing (perhaps the most common estimation of people involved in buying Hertz shares was that they had a rosy future).
            • WalterBright 6y ago
              Many many examples? The GME thing was unique, which is why it was in the news. It was a short squeeze. It was in the news for days, meaning it is an aberration. As for the Hertz thing, which I know nothing about, it sounds like the buyers thought the stock had long term upside potential.
    • perl4ever 6y ago
      The article is discussing how seeking short term profit may not be the natural thing to do when most public companies are owned largely by index funds. It's not the first one, either. So I'm not introducing that into "the discussion" nor is this article. I'm not advocating or asserting that it has good consequences either. I'm saying it's weird that when people speculate, they don't speculate about a class of consequences of their new view. It is a fact that the major index funds have been putting a little pressure on companies to be more socially responsible, and regardless of whether this is only performative and insignificant, it demonstrates that they could promote whatever one thinks is good for society at the expense of individual profits. So leaving any reference to it out is an odd oversight. Again, I'm not claiming that common ownership of all the companies is good, or that the funds are doing meaningful good. But a reasonable article would say something about the possibilities to promote the things that people want companies to do that ameliorate competition. Activists are trying to pressure the funds. That's not an opinion, it's a fact. I believe Matt Levine has written about this from time to time, so really I'm asking why other journalists aren't as fair and balanced as he is.
  • Sniffnoy 6y ago
    Why do you say that is a way of internalizing externalities? I see nothing there that would internalize them. It may be a way of reducing negative externalities, but via a method other than internalizing them (namely, reducing competitive pressure). Actually internalizing said externalities would seem to me to be the superior approach, as that would get you less of the negative externalities and more of the positive ones, whereas reducing competitive pressure would probably just get you less of both indiscriminately. Edit: Oh, nevermind, I think I see now where you're coming from -- it internalizes externalities because it's all one big owner. Duh. Somehow didn't notice that at first. That said, I think the problems of lack of competitive pressure are real, and it would better to internalize externalities in a more direct fashion that doesn't cause the problems that turning down competitive pressure would.
  • patrick451 6y ago
    Right. If Amazon just got a little bigger, and acquired a few more companies, magically they would stop their sweat shop exploitation.
    • perl4ever 6y ago
      Is that an anti-capitalist or anti-socialist comment though? I can't tell. Is Amazon equally bad if you view it as one or the other?
  • kvgr 6y ago
    Only people with no family history with real socialism will talk about its benefits. Only countries where some kind of socialism seems to work are nordic countries. But all in all they are really different and from each other and upon closer look really free market with exception of few areas.
    • perl4ever 6y ago
      If competition was always the answer, then companies would all be composed of lots of little warring factions. Like how allegedly Sears under Eddie Lampert was. Or there would be no companies as such, just lots of individual contractors.
• mvindahl 6y ago
  A lot of "mights" in that article. Sure, index funds are freeloading a bit in the sense that they don't allocate any resources to scrutinizing the prospecta of each individual company, they just assume that other market players have done they homework. This would be a problem if every investment was passively managed but that's not the case and it will never be. If we ever came close to that, then actively managed funds would outperform the passively managed ones by large margins.
  • qqii 6y ago
    Exactly, those that are interested in the performance of a specific company will invest and effectively have the same proportion of power as if the passive investors didn't exist.
• Synaesthesia 6y ago
  "Worse than Marxism". For investment fund managers, that's the worst! "You might make marginally less profit on your share trading ... that's worse than Marxism!
• elongatedMusku 6y ago
  How do I take this seriously?
• totalZero 6y ago
  I get a rise out of the "Marxism" boogeyman here. Few thinkers have done more than Marx to define and describe capitalism. People should worry less about market structure and incentives. We have serious issues to repair in the financial markets, but the more pressing concerns should be quality of life, security, and productivity. We needlessly limit our universe of acceptable institutions and practices with a priori reasoning like "Marxism is bad, so this other thing must be bad too because I can describe it similarly." For what it's worth, I think index fund concentration is a symptom of the moral hazard of bailing out losers and failing to help winners improve on critical growth areas. The downside is protected, so equities rally. As they rally together, correlation rises and people diversify using index funds rather than picking stocks. Allow some dispersion and stock picking will come back. Two of this year's major volatility events have involved multi-billion-dollar losses by hedge funds with concentrated margin positions (Melvin and Archegos). It's only a matter of time before a chain reaction occurs, whereby one hedge fund liquidation leads to margin calls for other hedge funds, who in turn liquidate and exacerbate the process. If that happens big enough (or repeatedly enough), it will beat the bubble bullishness out of us.
  • TeeMassive 6y ago
    > Few thinkers have done more than Marx to define and describe capitalism. The emphasis on material determinism which was the poor child of history and philosophy was genius but the near fanatical fixation on dialectical materialism just tainted the rest of his work to the point of irrelevance. While most historians and economist agree that the contributions of Marx made their field more down to earth by extending their studies with the human condition and material limitations, none would say that they based their research on Marxist dogma. While the problems he raised were not invalid, the vast majority of Marx's core predictions never came to be and the solutions to the problems he exposed were based more on messianic prophecies than on meticulous reasoning. Conditions gradually improved as opposed to a "liberating" revolts. Economies didn't collapse enough often to make it impossible to recover, the proletariat never shared any kind of unifying will based on their misery and in fact revolutions were always led by well fed and well educated petits bourgeois including Engels and Marx. > People should worry less about market structure and incentives. We have serious issues to repair in the financial markets What else would you propose and that would act both as a motivation and as a limitation without resorting to micromanagement?
• ramblerman 6y ago
  > American finance right now is not that the public markets are overrun with *failsons* picking up stock tips on Reddit, Had to look up failson: White, middle-class, male, useless people—who have just enough family context to not be crushed by poverty. - https://www.urbandictionary.com/define.php?term=failson https://www.urbandictionary.com/define.php?term=failson Seems a bit of a harsh, and loaded term.
  • dluan 6y ago
    It's a slang pejorative for "professional managerial class" that's been around for many years.
  • systemvoltage 6y ago
    It’s also racist.
    • julianapostate 6y ago
      No It’s just the usual gentrified self contempt.
      • systemvoltage 6y ago
        This used to be ok. These days, comedy with race motifs is playing with fire. I’m not happy about how everyone is on the edge. Pissed off. Ready to be instantly offended. People gung ho about race, class, status what have you. The world sucks right now so badly.
        • aahortwwy 6y ago
          If it upsets you don't perpetuate it.
        • julianapostate 6y ago
          It’s not the real world just the media’s world if you ignore Them their evil actions and effects “mostly” goes away.
• RikNieu 6y ago
  I generally like The Atlantic but this is a prime example of why no-one trusts the media anymore. This is why people turn to fake news. Because all news is now fake news. When I read any content related to the economy it seems that anything that helps the poor and middle class get ahead is immediately branded as "evil, socialist marxist propaganda", but if it benefits the extremely wealthy (and helps exploit those under them) it's "good for the economy and country". Index funds are "worse than marxism"? Please. Even the prime embodiment of capitalism, Warren Buffett, recommends them, and have done so for years.
  • speedplane 6y ago
    Can’t we just have biased media (like we do now), that makes their biased clear?
    • akvadrako 6y ago
      Then there isn't much point in reading it. You can guess the conclusion, all the data provided is suspect and they'll ignore all arguments against their point. If it was setup as a kind of debate, maybe it would work.
  • gremlinsinc 6y ago
    What's worse than marxism is capitalism. So, yeah sure they're right... Or just claiming "marxism" is bad itself is "bad". Authoritarian anything is bad, capitalism or communism. Both have killed millions and billions. So authoritarian marxism is bad, but index funds aren't that..so I don't even get where they're coming from. Non-statist or anarcho-communism has never been implemented much, but would be ideal, or resource-based economy, or some hybrid of anarcho-communism with capitalism... unions/co-ops creating dual power which holds capitalism in check. That's probably the best of all scenarios. It's highly possible with de-centralized companies and unions on blockchain tech, but not until it's more environmentally sound and the technology more advanced. I can't tell are they trying to scare marxists/socialists to invest in index funds or index fund investors who are "afraid" of socialism to divest their investments? Should a news agency really be pushing either of these agendas?
• carbonguy 6y ago
  Who would have guessed - an article that seems to consist mainly of quotes from hedge fund managers reaches the conclusion that passive investment is bad not just for them personally but for the entire economy! I wonder if it's occurred to them that they could perhaps use their knowledge and resources to provide better investment options rather than spending their time being shocked and appalled that investors prefer to pay less and earn more.
  • qqii 6y ago
    I had a similar thought when reading the article. As an example individual or smaller investors simply cannot create lower risk options like an index fund by themselves. We don't have the ability to index specific markets and apply a personal weighting. The broad options are: low risk index funds from a broker, medium risk managed funds or high risk individual investments. Most individuals cannot tolerate the risks so have no option but to choose from a list of index funds.
• julienreszka 6y ago
  Index funds are great, it works on the assumption that while the whole economy grows everybody who owns a share in an index wins. So it incentivizes people to grow the economy. Only a few people can beat the market anyways and it's the people who can correctly assess the risks like insurance companies (that still win even if they lose), some VCs and people who are close enough to the companies that they just know that it's likely to be successful.
• strogonoff 6y ago
  The concept of “passive investment” is puzzling to me. Presumably we buy stock to support good, viable companies in return for some profit on investment. Passive appears to remove the element of scrutiny from investment. It could make sense if there were no bad actors that game the books and generally make their business models seem sound despite reality.
  • qqii 6y ago
    This argument only seems to hold if everyone was a passive investor. Also not all investors can take the same amount of risk, which naturally results in passive investors.
    • deleted 6y ago
      [deleted]
  • nicbou 6y ago
    Active investors don't support good, viable companies. They can be misled, or just join pump and dumps.
  • skybrian 6y ago
    A problem is that you can’t necessarily tell the big winners in advance, and if you don’t diversify enough, you will likely miss their big gains, unless you’re paying very close attention. Avoiding bad companies seems like it would be easier, but if everyone knows they’re bad then they wouldn’t get much weight anyway, and maybe you’re wrong. But I’m just explaining why it may be harder than it seems to beat an index, not saying it’s impossible.
    • qqii 6y ago
      Even if you could tell a big winner in advance, the time volatility in return is still a risk factor.
  • deleted 6y ago
    [deleted]
  • 6y ago
• supercanuck 6y ago
  The whole point of “index funds” is to allow Americans to retire. Maybe provide an alternative where the average American doesn’t need to be an active stock manager or get pilfered by a hedge fund, and maybe we’ll see something more akin to a market that allocates capital efficiently
  • shellfishgene 6y ago
    In Germany most banks now charge "negative interest" on account balances (usually around 0,5% for >100k). This now makes the Germans most popular (non-)investment of keeping money in savings accounts even more nonsensical. The most common investment advice here (and everywhere else) now is to buy index funds/ETFs (apart from buying a house). I know almost nothing about investing, but doing something that essentially everybody else is also doing with their money does not sound like it will necessarily end well. It just makes me suspicious somehow, with nothing to back that up but a nervous feeling.
    • CarelessExpert 6y ago
      > It just makes me suspicious somehow, with nothing to back that up but a nervous feeling. Sounds like a good reason to learn about investing! Picking up there basics of passive/couch potato investing, including the theory behind the strategy, is pretty easy assuming you have some basic financial literacy and math skills. There's nothing magical about passive investing. You're literally just investing in the entire economy by buying a little bit of everything. If that's stops working it's because something deep and fundamental in the economy or stock markets has failed, and if that happens, you'll have much bigger problems.
      • supercanuck 6y ago
        I heard the same argument about Bitcoin. If Bitcoin is skyrocketing, than you have bigger problems to worry about, indicating societal collapse.
• 0-_-0 6y ago
  Reminds me of the $2,222,278 bet Warren Buffett made with a hedge fund, and won [0]: “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” [0]: https://longbets.org/362/ https://longbets.org/362/
  • robocat 6y ago
    What is interesting is that they are both doubling down on existing bets, rather than hedging or diversifying.
• Adrox 6y ago
  This article is a 200% example of a Submarine: http://www.paulgraham.com/submarine.html http://www.paulgraham.com/submarine.html Just looking at the adjectives used gives me a headache: Passive Index-funds are "pushing" (not investing or "betting") money, Nobody's is deciding anything, and people who invest on it are "lucky", and it moved the financial world to a "oligarchy" (as opposed to the Wall Street utopia democracy that was the financial world before Index funds?), and it works but no one knows why. Ah, and it's bad for the country, and even it's inventor (Bogle) is against it... A shame they had to quote a dead man and could not found a contact of anyone at Vanguard to comment this article. There is much more (including the marxism part). but I stopped counting in the middle of the article. Let's look at the adjectives of mutual funds, you hire someone to "pick", they "bet" and have "market beat-returns" ,even if this is false, as someone already mentioned Warren Buffet bet: https://longbets.org/362/ https://longbets.org/362/). They "select" investments, using a "vetted manager" (probably like Madoff?), they have "solid returns" (see Warren Buffet again), and they "direct investment dollares", they "take new information". Just to finish, apparently Index-Funds in XXI century are destroying the economy and companies, and what's the solution, besides giving back the control of the financial world to the good-managed and have everyone-interest in mind Wall Street multiple failed investment companies along the years: Drexel Burnham Lambert, Lehman Brothers, Salomon Brothers, Citigroup, etc.. "The antidote lies not just in fixing passive investment, but in making markets be markets again. Perhaps we could all use a little more of that manic stock-picking energy, not less." Ah, the good old "stock-picking energy" that so much prosperity brought us by letting individual people picking stocks with the advice of Wall Street like the golden-era of investment and America prosperity of the late 1920's and late 1990's? Yes, please... /s
• lend000 6y ago
  There is some undeniable inefficiency to index funds in terms of rewarding underperformers and punishing high performers in the index. This effect makes it easier for the under-performers to attract top talent with stock options and raise money, and vice versa. Whether that adds up to being a big deal over time is anyone's guess. As far as how this will affect markets on a macro scale, I suspect it will reduce short term volatility and increase long term swings. I.e., once the percentage of wealth entering index funds has stabilized and we reach the top of a market cycle, the entire index may fall more than normal. People investing passively will indeed start selling when they see a 40% drawdown on their portfolio and panicking headlines across their feed.
• AnimalMuppet 6y ago
  No. No because of Betteridge's Law of Headlines, and no because my brain is not completely dead. The more interesting thing to me is The Atlantic implying that Marxism is bad. That surprises me a bit.
• dang 6y ago
  There's at least one past discussion on this topic: Is Passive Investment Actively Hurting the Economy? - https://news.ycombinator.com/item?id=11271758 https://news.ycombinator.com/item?id=11271758 - March 2016 (93 comments) ... but I'm sure there have been others. Edit: ah yes - they've been "communist?" and "evil?" for a few years now: Hidden Dangers of the Great Index Fund Takeover - https://news.ycombinator.com/item?id=22085637 https://news.ycombinator.com/item?id=22085637 - Jan 2020 (89 comments) Why Index Funds Are Like Subprime CDOs - https://news.ycombinator.com/item?id=20877700 https://news.ycombinator.com/item?id=20877700 - Sept 2019 (317 comments) Half of US stock fund assets are now invested in index funds - https://news.ycombinator.com/item?id=20020997 https://news.ycombinator.com/item?id=20020997 - May 2019 (206 comments) Are Index Funds Communist? - https://news.ycombinator.com/item?id=18934946 https://news.ycombinator.com/item?id=18934946 - Jan 2019 (31 comments) Bogle Sounds a Warning on Index Funds - https://news.ycombinator.com/item?id=18568088 https://news.ycombinator.com/item?id=18568088 - Nov 2018 (229 comments) The growth in passive funds has caused markets to become more correlated? - https://news.ycombinator.com/item?id=18144394 https://news.ycombinator.com/item?id=18144394 - Oct 2018 (183 comments) The Growing Peril of Index Funds: Too Much Tech - https://news.ycombinator.com/item?id=16021681 https://news.ycombinator.com/item?id=16021681 - Dec 2017 (68 comments) Are Index Funds Evil? - https://news.ycombinator.com/item?id=14993516 https://news.ycombinator.com/item?id=14993516 - Aug 2017 (5 comments) Vanguard Is Growing Faster Than Everybody Else Combined - https://news.ycombinator.com/item?id=14145308 https://news.ycombinator.com/item?id=14145308 - April 2017 (347 comments) A Professor Who Was Right About Index Funds All Along - https://news.ycombinator.com/item?id=12768319 https://news.ycombinator.com/item?id=12768319 - Oct 2016 (213 comments) Are Index Funds Eating the World? - https://news.ycombinator.com/item?id=12368136 https://news.ycombinator.com/item?id=12368136 - Aug 2016 (156 comments) Are Index Funds Communist? - https://news.ycombinator.com/item?id=12354590 https://news.ycombinator.com/item?id=12354590 - Aug 2016 (13 comments) Index Funds May Work Too Well - https://news.ycombinator.com/item?id=10009740 https://news.ycombinator.com/item?id=10009740 - Aug 2015 (198 comments) Can You Really Game Index Funds? - https://news.ycombinator.com/item?id=9847706 https://news.ycombinator.com/item?id=9847706 - July 2015 (48 comments) Index Funds Considered Harmful (Possibly Evil) - https://news.ycombinator.com/item?id=2258270 https://news.ycombinator.com/item?id=2258270 - Feb 2011 (18 comments) Ask HN: Does an index fund count as diversifying? - https://news.ycombinator.com/item?id=1157620 https://news.ycombinator.com/item?id=1157620 - Feb 2010 (20 comments)