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Imagine a society in which all but 10 individuals invest a fixed percentage of their income money in an index fund that in turn buys shares of any publicly list

Imagine a society in which all but 10 individuals invest a fixed percentage of their income money in an index fund that in turn buys shares of any publicly listed firm in proportion to its market capitalization. The remaining 10 trade actively. For simplicity, assume that the necessary purchases and sales are done every day at market opening, based on the data from closing at the previous day. The ten active traders would determine those market capitalizations; everyone else would be along for the ride. If that group of ten colluded, they could extract money from the passive traders conducting straw purchases of a stock to inflate its price (and thus market cap), triggering the index fund to buy it, at which point they can take a profit and divide the spoils among themselves. This is obviously hugely stylized and exaggerated. But clearly, at some point between no passive investment and overwhelming passive investment, there is a strategic tipping point. Politically, we have to ask why the mass of passive investors should allow private traders pursuing short term profit maximization strategies to determine the allocation of investment in our society. Wouldn't every vision of the good life be better served by democratically electing the bodies that make the major investment decisions that determine our economic direction, returns to labor, basic infrastructure, etc? https://www.tandfonline.com/doi/full/10.1080/08935696.2022.2051375 https://www.tandfonline.com/doi/full/10.1080/08935696.2022.2... https://thenextsystem.org/node/204 https://thenextsystem.org/node/204

incrudible 4y ago
No, governing bodies generally do not make better decisions than the people who have an actual stake in their investments. Passive investment is a trend, poor performance would drive people back to active management, and vice versa.
shpx 4y ago
I think if any large player in the market or the entire market acts in any sort of trivially predictable way then you can extract money from it by manipulating it.
ItsMonkk 4y ago
This is not how it works. There is really no such thing as a passive investment. Passive is really the world's simplest active investors. All they do is ask, did you give me money? Then I buy. Did you ask for money? Then I sell. This is important because in your example of only 10 actually active investors remaining, the net flow of the passive investors will dominate the market. If the net flow is positive, stocks will trend to infinity and the firm will continually issue more stock. This is what AMC is doing already. If net flows are negative, stocks will trend to zero, and likely the firm will either have money and go private, or be in debt and go under.
joehx2 4y ago
The more people that do index funds, the more opportunities exist for day traders (or rather, individual stock pickers). The inverse is true - the more people that stock pick, the more opportunities exist for index funds. So, yeah, there's definitely a balancing act between the two.

incrudible 4y ago

No, governing bodies generally do not make better decisions than the people who have an actual stake in their investments. Passive investment is a trend, poor performance would drive people back to active management, and vice versa.

shpx 4y ago

I think if any large player in the market or the entire market acts in any sort of trivially predictable way then you can extract money from it by manipulating it.

ItsMonkk 4y ago

This is not how it works. There is really no such thing as a passive investment. Passive is really the world's simplest active investors. All they do is ask, did you give me money? Then I buy. Did you ask for money? Then I sell. This is important because in your example of only 10 actually active investors remaining, the net flow of the passive investors will dominate the market. If the net flow is positive, stocks will trend to infinity and the firm will continually issue more stock. This is what AMC is doing already. If net flows are negative, stocks will trend to zero, and likely the firm will either have money and go private, or be in debt and go under.

joehx2 4y ago

The more people that do index funds, the more opportunities exist for day traders (or rather, individual stock pickers). The inverse is true - the more people that stock pick, the more opportunities exist for index funds. So, yeah, there's definitely a balancing act between the two.