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Michael Burry has two main points against index funds: 1) large-scale passive investing has deteriorated the price discovery mechanism for index funds and 2) th

Michael Burry has two main points against index funds: 1) large-scale passive investing has deteriorated the price discovery mechanism for index funds and 2) there's a liquidity risk because trillions of dollars are linked to stocks in index funds that only have hundreds of millions of trade volume. So if there's a cascading failure, as smarter money realizes the price is wrong and begins to exit, there will be no buyers and the majority of index fund holders will be holding the bag.

criddell 5y ago
Does he have advice for what passive investors should do instead?
- JKCalhoun 5y ago
  Also, we're not $Billion USD investors like Burry.
- rootusrootus 5y ago
  A common theme that keeps popping up in this thread. People pointing out that index funds have downsides, then going silent on what's better. Heck, up thread a ways someone even said they just don't invest. Wait, what? That's the better alternative?
  - programmarchy 5y ago
    Suggesting alternate investments is a separate issue than a critique of index funds. Of course people will be reluctant to offer financial advice. But the author of the article is advocating for value stocks.
bombcar 5y ago
A more interesting argument was made by the "inventor" of index funds - Bogle (paraphrased) [1]: Companies are no longer "owned" by people who feel ownership in the company (with some few exceptions) - they are "owned" by funds and therefore by "managers" who do not care about anything but keeping their manager job going. When Ford is majority owned by the Ford family, the company can act the way the family wants it to act - but when it's majority owned by small investors and random funds there's no "main owner" who can make decisions against the common grain. [1] http://johncbogle.com/wordpress/wp-content/uploads/2019/08/niri-6-03.pdf http://johncbogle.com/wordpress/wp-content/uploads/2019/08/n...
throw0101a 5y ago
1. Price discovery happens at the edges. You only need a few folks out there making trades for it to happen. Further, if prices do become out of whack with reality, hot shots (or people who perceive themselves as hot shots) will go in to take advantage of the spread. * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox 2. The last few episodes of market drama have shown few outflows out of index funds, and probably general net inflows. The folks using them are generally doing a set-and-forget strategy and won't be looking at headlines too much. Certainly less than the average gamified Robinhood account.
xorfish 5y ago
1) is only true if the average active investor that switches to index funds is better informed than the average active investor. If a less informed investor switches from active to passive, then price discovery is improved. 2) is only an issue if the underlying assets don't have any value or you need to sell at the worst possible moment. ETFs generally improve the liquidity of in a liquidity crisis.

criddell 5y ago

Does he have advice for what passive investors should do instead?

JKCalhoun 5y ago
Also, we're not $Billion USD investors like Burry.
rootusrootus 5y ago
A common theme that keeps popping up in this thread. People pointing out that index funds have downsides, then going silent on what's better. Heck, up thread a ways someone even said they just don't invest. Wait, what? That's the better alternative?
- programmarchy 5y ago
  Suggesting alternate investments is a separate issue than a critique of index funds. Of course people will be reluctant to offer financial advice. But the author of the article is advocating for value stocks.

bombcar 5y ago

A more interesting argument was made by the "inventor" of index funds - Bogle (paraphrased) [1]: Companies are no longer "owned" by people who feel ownership in the company (with some few exceptions) - they are "owned" by funds and therefore by "managers" who do not care about anything but keeping their manager job going. When Ford is majority owned by the Ford family, the company can act the way the family wants it to act - but when it's majority owned by small investors and random funds there's no "main owner" who can make decisions against the common grain. [1] http://johncbogle.com/wordpress/wp-content/uploads/2019/08/niri-6-03.pdf http://johncbogle.com/wordpress/wp-content/uploads/2019/08/n...

throw0101a 5y ago

1. Price discovery happens at the edges. You only need a few folks out there making trades for it to happen. Further, if prices do become out of whack with reality, hot shots (or people who perceive themselves as hot shots) will go in to take advantage of the spread. * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox 2. The last few episodes of market drama have shown few outflows out of index funds, and probably general net inflows. The folks using them are generally doing a set-and-forget strategy and won't be looking at headlines too much. Certainly less than the average gamified Robinhood account.

xorfish 5y ago

1) is only true if the average active investor that switches to index funds is better informed than the average active investor. If a less informed investor switches from active to passive, then price discovery is improved. 2) is only an issue if the underlying assets don't have any value or you need to sell at the worst possible moment. ETFs generally improve the liquidity of in a liquidity crisis.