Australian (ASX) Stock Market Forum

Index funds are Communist

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SirRumpole said:
Should index funds be banned in that case ?
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The concept that index funds are a relatively safe investment relies on two things:

1. Index funds account for a small minority of the market both in terms of absolute stock ownership and trading volume. As such the actions of funds have no measurable influence on the underlying market itself.

2. The underlying market has a large number of participants, none of which individually have significant influence, in terms of both ownership wnd trading volume. Investing in an index fund thus captures the collective wisdom of these numerous participants.

Point 1 is no longer true now that index investing has become mainstream. Even “active” managers are often simply index funds at their core with just a few stocks added or omitted.

Point 2 would not apply today if, hypothetically, the non-human traders are mostly programmed so as to produce the same or similar response to given circumstances. There is a lack of proof in the context of market indices but various anecdotal evidence, and occurrences with individual stocks, does suggest a high degree of correlation in the way these algorithms operate.

If the situation is as I suspect it is then algorithmic trading and index tracking will be somewhere near the epicentre of the next major financial crisis. Whether or not it is the trigger event, it will still produce an extremely rapid decline with unknown levels financial contagion for those using leverage and unable to exit rapidly.

All thoughts are my own, there’s nothing to link etc although most likely someone somewhere has done some analysis of similar things.

As for the communists, I’m not into those but if everyone invests in index funds then, so long as the funds are all tracking the same or highly correlated indexes, everyone gets the same outcome regardless of which fund they chose. That could be considered a form of collectivism I suppose, albeit one based around something at the heart of capitalism.
 
Smurf1976 said:
If the situation is as I suspect it is then algorithmic trading and index tracking will be somewhere near the epicentre of the next major financial crisis. Whether or not it is the trigger event, it will still produce an extremely rapid decline with unknown levels financial contagion for those using leverage and unable to exit rapidly.
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I guess it stands to reason that if index funds are a large part of the market and they are all using similar algorithms then they have a large capacity to hyper inflate or hyper deflate the market quite quickly.

Don't know what the solution is. Regulatory ?

Trying to regulate them without banning them altogether would seem very difficult.
 
With index funds like VAS...Vanguards ASX300 new funds just get allocated based on market cap as that is essentially what an index is.

Assuming a net inflow this would just push the markets along with no regard to value. Value investors may find the investing world a lot different.

If everyone just invested in index funds....I guess it would be kinda like a ponzi scheme...as long as new inflow continued markets would go up regardless of underlying value/profitability. If there was more outflow than inflow they would go down regardless.

Lets hope that funds allocated to indexing don't get out of whack and cause this.
 
“My advice to the trustee [of my will] could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

- Warren Buffet

warren-buffet.png
 
My interpretation of it is that socialism, which is not the same as communism but is commonly associated with it, results in everyone receiving the same outcome regardless of effort.

So to an index fund results in everyone who invests in it, or any other fund tracking the same index, receiving the same outcome.

That’s the only link I can see.
 
Communism you get no choice.

Socialism you can vote for.

People choose to put their money in index funds so it's not communism, but IF's may be mutually agreed socialism.

But are we going to ban them on that basis ?
 
Smurf1976 said:
When the tide turns, the algorithms start selling and we see money flowing out of index funds then who, exactly, are they going to sell those stocks to?

Who do you sell to in that situation?

Who?

And what exactly does occur when the index funds must sell, due to net redemptions, and the only buyers are offering token prices? Will the trade even go through?
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The market maker will un-bundle the share, thus VAS - ASX300 ETF the market maker will sell the 300 stocks at market, the greater the volume of VAS sell (at market) orders not covered by at market buy orders the greater the un-bundling.
 
So_Cynical said:
The market maker will un-bundle the share, thus VAS - ASX300 ETF the market maker will sell the 300 stocks at market, the greater the volume of VAS sell (at market) orders not covered by at market buy orders the greater the un-bundling.
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What I’m concerned about though is that according to the reports I’ve heard (seemed credible but I’ve no way to prove or disprove) the index funds and algorithmic traders combined account for ~90% of trading volume of stocks (referring specifically to the US S&P500 stocks).

So if they collectively sell then the buyers for these stocks are ???

The underlying assumption there is that holders of any fund tracking a particular index would, as a group, act the same way. Eg if investors are exitjngVanguard S&P500 funds then as a whole investors would also be exiting other S&P500 index funds at the same time.

Time will tell.
 
Smurf1976 said:
What I’m concerned about though is that according to the reports I’ve heard (seemed credible but I’ve no way to prove or disprove) the index funds and algorithmic traders combined account for ~90% of trading volume of stocks (referring specifically to the US S&P500 stocks).

So if they collectively sell then the buyers for these stocks are ???

The underlying assumption there is that holders of any fund tracking a particular index would, as a group, act the same way. Eg if investors are exitjngVanguard S&P500 funds then as a whole investors would also be exiting other S&P500 index funds at the same time.

Time will tell.
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The biggest problem with ETF's is everyone will want to sell out, when it turns to $hite. Therefore it could become a domino effect, every one sells, computer say's sell.
That's why I chose to lean towards LIC's.
Probably won't help, but it made more sense to my brain, and the outcome I wanted.:xyxthumbs
Having said that, I still carry enough cash, for a few years of nothing.

Hopefully then I will get a pension, but I doubt it, by then only those on a pension will get one.
So who is the dick.:(
 
Smurf1976 said:
So if they collectively sell then the buyers for these stocks are ???
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There has been some commentary over the last couple of years about this and the consensus is that with the weight of money in index ETF's and the marker makers basically dumping shares into the buy side, its gona be ugly, the down days should be sharply down, someones always on the buy side..right.
 
willy1111 said:
With index funds like VAS...Vanguards ASX300 new funds just get allocated based on market cap as that is essentially what an index is.

Assuming a net inflow this would just push the markets along with no regard to value. Value investors may find the investing world a lot different.

If everyone just invested in index funds....I guess it would be kinda like a ponzi scheme...as long as new inflow continued markets would go up regardless of underlying value/profitability. If there was more outflow than inflow they would go down regardless.

Lets hope that funds allocated to indexing don't get out of whack and cause this.
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I think these kind of development is the best thing a value investor could hope for.

When most eveyone is playing follow the (market cap) leader, and you don't... there'll be plenty of basement bargains every now and then.

Just get the know quality businesses very well, sit and wait for some (minor) disappointment and you can have it for half price or less.

Yea, it is somewhat of a ponzi scheme. Particularly now, and more so in the future, as (read on Reuters recently) more mergers and acquisitions are permitted - what anti-trust? Monopoly is good, isn't it?

With that the amount of available companies out there will be reduced; more stocks buy back then ever; lots of chunk being floated; more cash then capitalist know what to do with... all chasing smaller and smaller number of listed quality businesses available.
 
I think us Index Fund investors have been driving Mo's stock prices higher. We're to blame.
Looks like I'm moving away from Indexes to avoid this potential bubble.
 
"
Without Googling, try to guess who said the following quote: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”

Give up?
The speaker, believe it or not, is John Bogle, founder of Vanguard, which has been at the forefront of indexing. Bogle made the comment last year at the Berkshire Hathaway shareholder meeting, basically admitting that there’s a limit to the amount of passive investing the market can handle and still function efficiently."

https://www.forbes.com/sites/greats...ed-for-a-passive-index-meltdown/#1153e3b4413e
 
Darc Knight said:
"
Without Googling, try to guess who said the following quote: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”

Give up?
The speaker, believe it or not, is John Bogle, founder of Vanguard, which has been at the forefront of indexing. Bogle made the comment last year at the Berkshire Hathaway shareholder meeting, basically admitting that there’s a limit to the amount of passive investing the market can handle and still function efficiently."

https://www.forbes.com/sites/greats...ed-for-a-passive-index-meltdown/#1153e3b4413e
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Well... it's a bit like saying that the market is efficient so just flog (other people's) hard earned cash down in the hope that the other guys are the ones keeping it efficient.

If everyone act like that, the market is as accurate as long as there are money and fees to be "earned".
 
Logic says index funds will stay true to their intent only so long as they do not influence the price of shares in the index they track.

Once they become a substantial portion of the market, well then they cease tapping into the collective wisdom of investors because the funds themselves have become what they seek to follow.

Considering that it’s not just index funds as such but also active fund managers who hug the index, plus individual investors who won’t buy anything not in an index, and it all looks like a self-fulfilling prophecy to me. Great on the way up, keep clear on the way down.

I’ll go as far as saying that index investing is where the bubble is. Ask any random individual how to invest and the vast majority will give you an answer that, whilst perhaps not clearly expressed in the correct terminology, says index funds in practice.

Just my thoughts as someone who avoids following the herd.
 
Smurf1976 said:
Logic says index funds will stay true to their intent only so long as they do not influence the price of shares in the index they track.

Once they become a substantial portion of the market, well then they cease tapping into the collective wisdom of investors because the funds themselves have become what they seek to follow.

Considering that it’s not just index funds as such but also active fund managers who hug the index, plus individual investors who won’t buy anything not in an index, and it all looks like a self-fulfilling prophecy to me. Great on the way up, keep clear on the way down.

I’ll go as far as saying that index investing is where the bubble is. Ask any random individual how to invest and the vast majority will give you an answer that, whilst perhaps not clearly expressed in the correct terminology, says index funds in practice.

Just my thoughts as someone who avoids following the herd.
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Yep thats what I'm doing, avoiding them on the way down.
Valuers are factoring in a margin for how much Index Funds are inflating values. The larger the Company is in the Index, the larger the Index Fund effect inflates its value apparently.

I guess that's some of the reason Apple, Amazon etc are over valued?
 
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