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Accepting that actively managed funds are better than passive index funds is basically acceptance of the classical mentality that there are people who can consi

Accepting that actively managed funds are better than passive index funds is basically acceptance of the classical mentality that there are people who can consistently predict and beat the market and that you can make money by picking the 'right guy'. I assumed most knowledgeable investors abandoned that philosophy in the 80s/90s

KingMachiavelli 7y ago
(This is my understanding of the artical with some help from other comments. I probably use some words incorrectly but I think you can get the jist) TLDR: He is't abandoning the current stance that passive > active but rather is discussing the real value of the underlying assets. And he isn't challenging on that stance either. I don't think the artical is out right advocating people to switch their personal investments from a passive index fund to an active one since he & we both know that passive funds tend to do as well or better than active funds after accounting for fees. However, the article (at least how I understood it) is saying total effect of everyone moving their money into ETFs and index funds means that the underlying stocks have an increasing risk of becoming or being overvalued since no one is checking the underlying stocks/companies anymore. As someone just tangentially interested in this topic I've thought of this before in a more tangable way: since every college graduate or hacker news type person knows that index funds are the best then at some point 'everyone' or enough of the population has a stake in index funds that it's likely to be overvalued. The market should/could correct as expected: undervalued companies go unnoticed longer since everyone is passively investing causing actively managed funds to have higher yields (since they can get 'all' of the undervalued companies passive investors miss) and people adjust their holdings accordingly. However, as a few other users stated there a few issues trying to hedge against a buble: 1. Solvency - The market remains 'irrationally' attatched to passive/index funds which means that index funds continue to beat active funds anyway despite their 'real' value/gains being pure speculation. It's difficult convincing people to let you manage their money when your making 4% and the S&P400 is making 8-11% so remaining solvent is an issue. 2. Systemic Risk - Large markets & financial products are intertwined so if index funds are overvalued then it effects the economy & financial institutitions and if it crashes/pops then it sends a shock wave throughout all of them. Finding a hedge that isn't effected by a bubble in one financial product (CDOs, index funds, etc) can be tricky.

KingMachiavelli 7y ago

(This is my understanding of the artical with some help from other comments. I probably use some words incorrectly but I think you can get the jist) TLDR: He is't abandoning the current stance that passive > active but rather is discussing the real value of the underlying assets. And he isn't challenging on that stance either. I don't think the artical is out right advocating people to switch their personal investments from a passive index fund to an active one since he & we both know that passive funds tend to do as well or better than active funds after accounting for fees. However, the article (at least how I understood it) is saying total effect of everyone moving their money into ETFs and index funds means that the underlying stocks have an increasing risk of becoming or being overvalued since no one is checking the underlying stocks/companies anymore. As someone just tangentially interested in this topic I've thought of this before in a more tangable way: since every college graduate or hacker news type person knows that index funds are the best then at some point 'everyone' or enough of the population has a stake in index funds that it's likely to be overvalued. The market should/could correct as expected: undervalued companies go unnoticed longer since everyone is passively investing causing actively managed funds to have higher yields (since they can get 'all' of the undervalued companies passive investors miss) and people adjust their holdings accordingly. However, as a few other users stated there a few issues trying to hedge against a buble: 1. Solvency - The market remains 'irrationally' attatched to passive/index funds which means that index funds continue to beat active funds anyway despite their 'real' value/gains being pure speculation. It's difficult convincing people to let you manage their money when your making 4% and the S&P400 is making 8-11% so remaining solvent is an issue. 2. Systemic Risk - Large markets & financial products are intertwined so if index funds are overvalued then it effects the economy & financial institutitions and if it crashes/pops then it sends a shock wave throughout all of them. Finding a hedge that isn't effected by a bubble in one financial product (CDOs, index funds, etc) can be tricky.