This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
Is passive investing safe? Will index ETFs save you in the next market crash? Or will both of these things cause the next crash? That’s what we’ll be talking about in this video.
One investment style has dominated the financial landscape for the bull market of the 2010’s. Like it or not passive investing, in the form of buy and hold index funds , (mostly ETFs) has ballooned in terms of attracting capital. But does all this passive “dumb money” add extra risk? Has the zombie apocalypse already begun in the form of blind passive investing!
This is a crucial topic philosophically to many of us because frankly if you’re here you’re more likely to be active and you probably on some level reject the Efficient market Hypothesis. But cheap money as we looked at in our bubble series has been a nice environment for buying… well anything at any time. It’s made bull market geniuses of many, and humiliated some big named Hedge Fund managers like Bill Ackman who runs Pershing Square.
Bill Ackman see’s a risk in such a concentration of stock ownership by passive investors in terms of how stock ownership has been a means of checks and balances on corporate America. As an activist the last thing he wants is equity owners that have no interest in holding corporate boards accountable.
A 2016 study by S&P Dow Jones Indices showed that about 90 percent of active stock managers failed to beat their index targets over the previous one-year, five-year and 10-year periods; fees explain a significant part of that underperformance. In their defense, active managers say that the period since the financial crisis of 2008 has been an abnormal one, with many stocks moving in lockstep, rather than trading on their individual earning prospects.
And as always, stay Fallible out there investors!
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***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.