Index Funds

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pls reread the interview with the Burry, he doesn’t need customers

"And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies – these do not require the security-level analysis that is required for true price discovery.

“This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

“The dirty secret of passive index funds – whether open-end, closed-end, or ETF – is the distribution of daily dollar value traded among the securities within the indexes they mimic.

“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those – 456 stocks – traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different – the index contains the world’s largest stocks, but still, 266 stocks – over half – traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”

It Won’t End Well

“This structured asset play is the same story again and again – so easy to sell, such a self-fulfilling prophecy as the technical machinery kicks in. All those money managers market lower fees for indexed, passive products, but they are not fools – they make up for it in scale.”

“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.”


I don’t think it really does counter that standpoint. Index ETFs have a self reinforcing mechanism built in. More inflows produce price gains which then generate more inflows. The terrifying thing is that there is not enough liquidity in over half of the S&P 500 to absorb even a fraction of the potential trading volume which is now possible in a severe downturn. We have not seen how Index ETFs impact the stock market during a recession yet but my bet would be huge price crashes in the most valuable companies (as they comprise more of the ETF than other companies).

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When Michael Burry speaks I just shut up and listen.

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I thought this Albert Bridge Capital post was a good and careful discussion of the Burry position and the commentary that followed.

Though having read it and all the rest of the articles, I find myself with no conclusion about “what is best to do”. And therefore I do nothing, which means staying invested mostly in index funds.


I wish I had slapped a £1,000 in an S&P 500 index tracker on 1st January 2009.

I wonder if we will ever see such a rapid rise again.

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Wow didn’t actually realise in concrete figures how much it actually grew. 4x+ passive investing, thats an amazing return. As an investor with a high risk tolerance I try always compare stuff with the rule of 72(google if know one knows it). Thanks for posting that Richard

You know what we should be doing then when the market crashes Richard…history doesn’t repeat itself but it usually rhymes :ok_hand:t3:

Absolutely. I wasn’t investing in 2008 and when I heard about the Market on the TV I honestly did not a have a clue what it was or even any interest back then. It sticks in my mind people on the news saying they’d lost half the money they had invested and asking where had it gone. Of course the reality was they only lost half their invested money if they sold at that time.
It will be interesting to see how I feel during a major crash. At the moment it looks like 2008/2009 was the buying opportunity of a lifetime.
This Forum will be a great place for us all to chew the fat during the next crash.


Fret not, more stimulus incoming…

Which only puts more pressure on the Fed… to remain independent…

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