Michael Burry’s warning for the index fund bubble
newtraderu.com
newtraderu.com
All of this said, these things do take time. This kind of rhetoric will slowly spread until it reaches a fever pitch, likely sometime in the second half of 2023.
TSLA is Wiley Coyote waaaaaaaaaaaaaaaaaaaaaaay over the ledge. "Investors" also created a rally for GME out of thin air.
I’m sure that Burry, too, still thinks he is right and the market is just being irrational longer than he can stay solvent. But that doesn’t change the outcome, which is that his bet went terribly wrong for him.
But there definitely is something strange with Tesla valuation. It’s above their 5 biggest competitors combined. Plus their multiples are way off compared to the other players in their market. It doesn’t look particularly sustainable to me.
I will bite. What do you think make Tesla special compared to their competitors?
They clearly had a first mover advantage on EV which served them well but now that all manufacturers have good electric cars on offer what justify Tesla valuation?
"If you're right but your timing is wrong. You might as well just be wrong."
The current dividend yield for Tesla as of November 04, 2022 is 0.00%.
Dow PE ratio as of November 04, 2022 is 5.88.
To me, when something consistently does not behave in the way that I predict that it should, then that’s a strong indicator to me that I must be overlooking something. There’s a fine line between saying that, in the short run, the market is just a voting machine rather than a weighing machine (which is true), and arrogance (which will cost you dearly in investing).
And what exactly were they looking at? The revolutionary tech? How well as that met expectations?
> You can say, of course, that these people just got lucky.
Yes, that is what I'm saying. Few people made lots of money off meme stocks.
(Unless, of course, you‘re in it for the sympathy of those who share your viewpoint. Then publicly debating makes a lot of sense. Although then you‘d be following the same mimetic impulse that you rightfully criticize in those who buy stocks based on memes and fashions, wouldn‘t you?)
My feeling was that you already had your conclusion. I.e. that Tesla has not technological advantage, and that the stock's 20x really is just a function of it being a meme stock, fueled by Millenials with FOMO.
I really do not know how much research you have done on Tesla, or whether you are actually participating in the market.
Also, I think you might have an allergic reaction to what one might call the Tesla fanboy crowd, which I can very much understand.
The thing is, dealing with an opposing viewpoint is a computationally expensive operation. One will only do it if one has a really, really strong incentive to be "less wrong" about this particular topic. Otherwise, in areas in which one has no real skin in the game, it really is just easier to stick to one's guns and treat the discussion as as a form of entertainment.
And even when there is an actual incentive to learn, doing such discussions in a public forum is even harder, because there's an audience. On HN, you also have the "paper trail". Nobody likes to see themselves of having been wrong about something. Much less about something that could have made them literally millions. It's already painful if one comes to such a conclusion by oneself. But having it rubbed in your face by someone else - how can that not trigger hostility?
Also, discussing the past has little value, because there's nothing you can change about what has already happened. The only value that there is in discussing the past is if one uses the past to tune one's mental model in a way that, when the next opportunity arises in the future, one's chances of success will be higher.
That, and not Tesla per se, is actually what made me react to this post. People standing there explaining away their failure (literally "apologizing" = "talking something away") - be it about Tesla, be it about women - that just seems so out of the Hacker culture to me. I mean, if my Python program throws an error, I don't argue with the interpreter. Instead, I look for my mistake and find a way to fix it. In fact, I don't even bother to feel bad about having made the mistake in the first place. I just keep on being focused on the goal I want to achieve, and will find whatever workaround or mental shift will give me what I want.
This post is already long enough. You may feel that I'm just pontificating and evading the question. But I think before any data can be exchanged, one needs a proper "handshake" to ensure that one agrees on the premises that make any form of exchange possible in the first place.
I really do not want to go through a list of arguments about the value of Tesla as a company here. These cannot be discussed in bullet form, because it will just lead to endless recursion. I would either bore you to death by being too verbose, or I'd be inviting ridicule by sounding naive. (If anyone is genuinely interested, feel free to email me. There recently was a post here about the benefits of talking to strangers, and I'm very happy to use this topic as a vehicle to talk to people I wouldn't meet otherwise.)
But I will give you one higher level argument that people might be seeing about Tesla that those who focus on P/E are missing:
People are insecure about the future. Few people know whether, ten years from now, their job will still exist. In a such a world of insecurity about the future, people tend to flock to those who seemingly can not only see the future, but actually create it.
What Tesla has done is that they have demonstrated to the world that an electric car can not only be sexy, but be better than a gasoline car in pretty much every respect (noise, user-facing emissions, safety, acceleration, traction, etc.). You just have to watch the GM Superbowl ad to see that other carmakers are basically reacting to Tesla, and trying to catch up.
I am not saying that Tesla is going to succeed because they were first. But I am saying that Tesla has done something that is the very prototype of capitalism. They went Zero To One. Instead of competing on faster horses, they invented the automobile (the thing that "self-drives", if ya catch my drift :-P). They drilled for oil long before the rest of the world even had an idea what to do with this gooey stuff. They proved themselves as those who re-evaluate all values, as Nietzsche would have said.
They not only predicted the future. They created it.
And so, in a world where noone seems to know where we're heading, some people put their trust in Tesla.
And this is closely connected to something else:
What did Paul Graham say about the most important trait in any entrepreneur that will predict his long-term success?
He said that it's determination.
And I believe that many people think that there few people on earth today running a company that are as determined as Elon Musk.
Who else has bet his entire fortune on his company, at a time when most people agreed that it would go under? Who else has been ridiculed and litererally spat at for trying to build a private enterprise rocket company, and succeeded in doing things that, to this day, not even big governments have been able to day (say, landing and re-using rocket boosters)?
If you read Ashley Vance's Musk biography, there's that one scene that has stuck in my mind ever since. It's about how Elon, back in the days of PayPal, agreed to join his colleagues for a bike tour up some very steep hill. I'll leave it up to you to find and read that story. But that, to me, is all you need to know about the level of determination people see in Elon Musk.
There's other stories like that. Like Talulah Riley telling how Elon got up in the middle of the night and walked through the snow clothed just in a T-Shirt to pick her some flowers.
Now, you can think Elon Musk is a showman and an imposter. You can say he is just floating all of these stories because he read too much Napoleon when he was young and is merely trying to create a myth surrounding his personality, in order to amass wealth and power over people.
But the fact that some people out there are going to see in Elon Musk and in Tesla both a vision for the future and the determination to pull through is something that you better take into consideration when you think about betting against this company.
I'll consider what you've said, there is a lot to digest.
The IV was too high when I seriously considered puts late last year. Everyone else was thinking the same thing and enough were acting on it to make the trade unappealing. You can be certain a stock will go from $X to $X/2 and still not find the dynamics of shorting it worthwhile.
Anyway. Nietzsche had a saying. Which is, "Where you cannot love there you shall pass by." Why try to make money by betting against a company when you can just find a different company to bet on instead?
I wouldn't have been betting against Tesla; I would've been betting on a frothy market coming to its senses. Shorting isn't per se a bet against a company, just a prediction that a number will go down. Why it goes down may and often does have nothing much to do with the company. This is also true when the number goes up.
Anyway, that's a saying of Zarathustra's, not Nietzsche's. Author and character are not the same. Deleuze had a saying: "Good destruction requires love."
You're talking contrarian investing when it comes to buying at the time of "peak fear". Yet you don't respect contrarians doing the opposite when there's peak exuberance.
Here's my issue: indexing isn't a single stock or bond - it's compromised of companies who got large because other more active investors already analyzed their fundamentals and found them worth investing in. Passive investing provides inertia to markets, but it isn't totally divorced from them. Companies that have a dramatic fall cough Meta cough will get punted, and the passive investors will only get their feathers singed. It's kinda parasitic I guess of the average indexer like me, but I'm giving up wild gains for a long term commitment to perhaps being a little later to the party than guys like Burry. If the entire index crashes, like, 95%+, we are gonna have MUCH bigger problems globally than people losing their retirement accounts. You're talking about enough companies failing because of the interlocking economy.
All stock prices move based on supply and demand not theories and strategies.
Well, why do people demand a given stock? One word: dividends. This may seem obvious (or not!) But Robert Schiller in a MOOC some years back made this basic truth clear to me: if a company would hypothetically never pay a dividend, no investor would ever want it. Stocks do not need to trade in large volumes to bring people profit and be desirable. They just need to bring dividends, either now or in the future.
There are other ways to make money from stocks - and stock appreciation is likely a bigger driver to the average investor (and most pro investors).
Is it going to consequentially drive valuations higher than they've ever been compared to history? Sure. But isn't that more of a paradigm shift than a "bubble that may one day pop"?
With more and more people having easier access to investing in index funds... why would it ever go backwards? You'd need people to be sick and tired of risking their money and not having anything to show for it (aka no/poor returns).
> it's compromised of companies...
it comprises companies...
From the link above:
Although it has been in use since the late 18th century, sense 2 is still attacked as wrong. Why it has been singled out is not clear, but until comparatively recent times it was found chiefly in scientific or technical writing rather than belles lettres. Our current evidence shows a slight shift in usage: sense 2 is somewhat more frequent in recent literary use than the earlier senses. You should be aware, however, that if you use sense 2 you may be subject to criticism for doing so, and you may want to choose a safer synonym such as compose or make up.
I'll probably avoid using the word altogether in the future if it's so contentious.
You look at that tracking index of VOO: 0.02
https://screener.fidelity.com/ftgw/etf/goto/snapshot/keyStat...
That's very good, but it's not nothing. If liquidity really crunches, that could theoretically skyrocket. Wouldn't be the end of the world likely, but you could see some non-negligible losses as MASSIVE funds have to move 60% of their portfolios, and all the other traders know it. It could basically put passive investors on the wrong side of the GME nonsense.
Not saying it's really plausible, but it could theoretically happen if the markets moved so fast that spreads effectively stopped trading for long periods.
Why would active management have failed to find and exploit these mispricings before?
Not saying these don't exist but it seems like this is a broad statement that is proven "right" if the market continues to dip and "the market remains irrational" if the market rises. Any claim that can't be disproven should be looked at with a lot of suspicion.
It’s very difficult to “make a killing” off overpriced equities.
Even lay analysts who read financial reports know most marketable securities in the US are overpriced. The ones that aren’t simply aren’t attractive investments.
Go peruse a few hundred US companies and read their financials. Tons of unattractive investments available today.
All of these either have a timing component or some sort of a penalty for holding them when the market increases, even if just temporarily.
There is no downside equivalent of blindly DCA buying and holding a broad basket of stocks (like index funds).
Just buy the S&P 500 or a total market (Russell 3000) fund and let The Market™ sort it out.
Putting a little away every month will generally work out over the long-term (at least of retirement goals):
Yes, I know. I've been hearing Burry make rumblings on this since 2019.
But if Burry is wrong and there is no bubble (with no eventual popping), then by sitting on the sidelines waiting for the (never-to-come pop) you're costing yourself returns:
* https://ofdollarsanddata.com/the-cost-of-waiting/
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
And even if there is a bubble, investing and staying invested, will also generally work out fine over the long term:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
The best course is/was to start your own business and sell it, since the investment market has/had deep pockets and is looking for alpha above a relatively low benchmark anywhere it can find it.
Real estate was really good for a while (until 2011-2012 or so), but that is back to not being so good today. Note that PE started getting into residential real estate, so that squeezed out a lot of opportunities in that market that used to be easier to access.
My tack has been:
1. Invest in things into which I have unique insights. These aren’t that common, and they are not always easy to access, but they exist.
2. I am holding a lot of cash and waiting for things to correct.
3. I am also building businesses and funding others to do so.
I am not a financial advisor, I am not your financial advisor, and this is not financial advice.
I am interested in doing so outside of the traditional VC models and tech sector, but the signal to noise ratio of information on building businesses is incredibly low on the web.
It depends on on much money you have and your personal network, with network probably being most important.
Some examples (trying to do largest to smallest, but things can scale up and down depending on the market):
BUY AND REFORM
- This is the model for some PE firms.
- This scales from 7 digits (maybe even smaller) to 9 digits (maybe higher). This is sort of what Elon is doing with Twitter now, but Twitter is large enough that the inertia may limit what he can actually do. The 7-digit to 9-digit range will often give you a lot of flexibility in terms of reform.
- You will need to be able to find businesses as well as staff them with scrappy teams (often folks who are riding your coattails who can bring a team with them).
- Good ways to find businesses are looking for once-good businesses that have run themselves into the ground or privately owned businesses whose owner died (possible to find good deals this way) or wants to retire (tougher to find good deals this way since owner often overvalues their business). Another good way to find businesses in tech is to buy tech startups that tried to hit home runs in a singles or doubles area of business and failed. A simple way to describe this is distressed businesses/assets.
- Scrappy teams basically means that you need to have worked with people before in some capacity, otherwise they won't follow you unless you overpay them. Really good folks will often take reasonable salaries in order to work for a good boss who lets them do cool stuff.
- There is a lot that can be said about this area. It is a huge range. Some of the more profitable areas require elbow grease from the mastermind.
- An example of this is someone I know who bought a company that works on something related to utilities (leaving details out to preserve anonymity) for lowish 8 figures, cleaned up the back office, bought up a lot of struggling competitors (basically small independently run businesses that sucked at back office), came up with a creative USP, let it grow, then sold to a large multinational for lowish 9 figures. This person is an incredible leader and had a finance, tech, and sales person who did all of the rebuilding. All of those folks followed him to his next endeavor after the sale.
FUNDER AND COMMUNITY BUILDER
- Basically TinySeed (https://tinyseed.com/). Note that the founders have an incredible reputation in the SaaS community, and they have a very wide network. I think that this is a long play, and it is tough to pull off without building a robust community in a profitable domain with a unique (and highly desired) selling point.
MATCHMAKER AND FUNDER
- I think that this scales most naturally to single-digit millions, but it can scale higher in the right industry.
- Basically find someone who can add some sort of value but is helpless in other areas like admin and/or marketing, find people who can do the other stuff, match them together and fund them. You're the CEO, and it's your business. If done well, you can be relatively hands off.
- One example: Money guy (this would be you), amazing winemaker with limited business skills, strong business guy who can do back office and marketing. Money guy buys a vineyard, tells winemaker to focus on making amazing wines, business guy takes care of all of the extras like on-site revenue makers like tasting room, events, air bnb stays, etc. This took a lot of upfront money that neither the winemaker nor the business guy had access to. Examples of something like this are Folktale Winery (https://www.folktalewinery.com/) and Venteux Vineyards (https://venteuxvineyards.com/).
BE HALF OF THE BUSINESS
- Sort of the same as above, but you are the everything else that the value add person cannot or will not do.
- Scope is relatively small.
- An example of this is someone I know who basically tells any house painter in the US that he will set up the entire business from back office to to marketing to sales, and all the painter has to do is show up and paint. 50/50 profit share.
I hope this helps.
E.g, early payment of mortgage, purchasing necessities in advance, etc.
There are things like Ibonds also.
You can never prove statements about the future right or wrong. The closest thing we get is putting your money where your mouth is. If someone does that, I may look on their statements with surprise, but not suspicion.
Burry certainly is:
“Michael Burry has exited all his positions which as of March 31st, 2022 had a value of +$200 million. Private jail operator GEO Group was the only stock he held as of the end of the second quarter of 2022. This position brought his portfolio exposure down to only $3.3 million”
…
“He is calling for a huge economic recession and market crash that will bring stocks back down to real intrinsic values in the coming year. He’s not bullish on the stock market or current valuation levels.”
Instead, "short ETFs" are composed of futures and/or options that move "as if" they were short against the stock. In cases of a rising bull market, the short position is "regularly wiped out" (hits $0), and the assets can rebalance to the new value of the underlying.
https://finance.yahoo.com/quote/SARK?p=SARK&.tsrc=fin-srch
SARK is short-ARKK, designed to move equally-and-opposite to Cathie Wood's ARKK etf.
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There's also SQQQ (Short Nasdaq ETF).
But my problem with Burry's logic here, is that there's no "obvious" reason why index funds are unsustainable at 20% of the market. What if the instability point is 40%? 50%? 60%? 80%?
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When only 20% of the market is buying-and-holding with index funds, it means that you're still facing 80% of active investors. (That is to say: 80% of your buys, and/or sells, are "against" an active investor).
Even then, I'm personally largely a passive investor. Still, I've moved my money to cash and bonds more heavily, as interest rates have risen. Its not like I've checked out my brain entirely. I still make decisions, just with index-funds as my instrument.
So not only is there a balancing point, but (in theory) it should also be self balancing as the rewards increase as the balance gets more out of wack.
One problem is: which index fund and which active fund (which changes managers every couple of years anyhow) would you compare?
So, for burry to win, he needs to inform the world of the situation. And when enough people act by stopping contributions to index funds and/or sell their positions, burry is gonna make a killing.
Withdrawing at retirement does create sell pressure though. The market has to continue attracting new investors for cash out all of the people who are withdrawing later at retirement.
It should also be noted that idea of taking advantage of mispricings is not new. From 1980:
Are we talking 2022? If so then yes… PSQ, SH or for a more targeted approach FNGD.
You won’t find them until the market crashes.
The ones who make a killing will simply be the ones who timed the crash correctly. The road is already littered with funds/managers who have timed the crash incorrectly.
> Why would active management have failed to find and exploit these mispricings before?
There is no efficient “buy and hold” way to short the market.
The ways to invest/bet on the market going down are either time-limited or have the potential for margin calls.
Most downside market bets are most efficiently used as balanced hedges rather than pure bets against the market (at least imho).
* https://www.pwlcapital.com/there-is-no-such-thing-as-an-inde...
* https://www.youtube.com/watch?v=Wv0pJh8mFk0
Certainly bubbles may stick around for a while and take a while to pop, but how much time should any particular prediction be given before it is busted?
Edit: Pull quote with the central point:
> I thought it was important to clear up the prevalence of index funds, but it isn’t actually even relevant to this discussion. Assets under management do not set prices. Only trading sets prices. The relevant question is not how much of the market is indexed, but how much of the trading is being done by index funds. Since index funds are not doing the majority of the trading, active managers are still dominating price discovery.
> Are index funds a menace to the market? Are pension funds still a wise way to secure your financial future? In this episode, we discuss index funds, the state-sponsored pension plan in Canada, and much more. First, we unpack the nuances of index funds and take a look at the impact that active and passive investors have on the market. We discuss current index fund trends, when to switch from a passive to an active investor, and the dreaded index fund tipping point. […]
* https://rationalreminder.ca/podcast/225
Audio, video, and transcript available. Excerpt (~20m00s):
> It starts with, of course, a Fama and French paper, "Disagreements, Tastes and Asset Prices", which is a great paper that we've talked about many times, including with Ken French, who is very excited that we asked about it. They have this paper that shows that if misinformed and uninformed active investors who will make prices less efficient by trading, switch to market cap indexing, market efficiency actually improves. That's the comment that you made earlier, Cameron. It gets harder to be an active manager, because there's more competition. That's the relative level of competition as opposed to the absolute level is what matters.
> If informed active investors, so the ones that are doing a good job, setting prices that the skilled active managers, if they switch to indexing, then in that case, prices do become less efficient. This is the concern, I guess. If everybody, including the skilled managers go to indexing, then there is a concern about ongoing marketing efficiency. As long as there are some remaining informed active investors, even if there are a few, a small few, as long as they're skilled, and they command a lot of wealth, which they would, and we'll talk more about the empirical side of that in a second. As long as there's a few left and they're competing with each other, theoretically, prices remain efficient, and arguably, even more efficient than they were in the case where there were still some unskilled managers.
The biggest bubble for the past 20 years has been in bonds. Stocks went along for the ride. When you can't get a reasonable return on debt, you'll be fine paying for a zero coupon stock that has the chance of 10xing (Tesla.)
The script has now normalized and may soon flip. Say the Fed unloads it's QE balance sheet from even as far back as '08. Debt will become extremely attractive and there will be a massive allocation out of relatively low yielding index funds into debt.
Right now yields are eye poppingly good, and we're not even quite to the long term historical average of 4.5%+.
Also, there's a lot of fear of certain forms of debt that are actually safer than they've ever been. Mortgage REITs for example are incredibly attractive especially after the post '08 regulations. The shift back towards debt and classical savings is what will drain the market, not some index fund issue--although I do agree index funds will probably underperform some active managers until they rebalance towards businesses with nearer term cash flows.
For everyone screaming about a depression, go out on a Sunday to a restaurant. Everything is packed. Working people are making a better wage, inflation has slowed, and they get better savings at their bank.
Finally, I know there's this narrative that governments will "inflate their way out of debt" which makes debt more risky. Sure this is a possibility. It's just as possible as a company issuing more stock, but it's not guaranteed. There's a political question that needs to be answered. Maybe we solve the debt issue by taxing those who benefited disproportionately from ZIRP more. Maybe we just slow government spending and let the economy continue to expand on its own. We as a country get to decide whether we inflate it away or we do something else along with who benefits and loses from that process.
How attractive? 10y yield at 5% attractive?
They are an easy way to get diversification in your portfolio and historically have beat out portfolios where people actively picked out their own mix of individual stocks.
A lot of the investors in the world are just investing in index funds which has artificially inflated the value of the stocks in each index fund.
When an investment has an inflated valuation that does not match the fundamentals of the underlying business behind the stock, there is a bubble.
As workers pour money into these non-discriminating investments, hoards of people are blindly investing and skewing away from efficient markets. Everyone (scare quotes everyone) is just buying large swaths of everything all the time without regard to fundamentals.
It's all good as long as this continues, but a shift in enough people no longer believing this, will reduce demand and prices will go back down.
In other words, people just buy everything because there is no alternative. If enough stop doing that, prices will readjust downward because too many stocks are overvalued due to the current wisdom of buy regardless of price.
It's a subset which has essentially been selected for long term performance. There may be a couple Enron's hiding in the set, but on average they are good choices, with much lower risk than the average company not in the top 500.
No the s&p 500 is not "everything", it is one, albeit very popular, index. There are many others, but the underlying concepts are the same. Further, the companies are not selected for long term performance. Ignoring some finer details, the s&p 500 is the largest 500 US companies by market cap. Perhaps you are confusing this with the DJIA which is hand selected, though not selected for long term performance by any means; rather, it is selected in a way to represent the economic landscape - how well it achieves this is a matter of debate for sure.
Isn't Burry in essence saying that if everyone sold all their stocks then the market as a whole is a bubble?
I'm quite confused.
https://www.newtraderu.com/wp-content/uploads/2022/11/Burry-...
He's stating that too many people blindly believe investing in the top 500 companies in the United States is a good plan. This strategy was recommended by Warren Buffet after he won a very unscientific bet.
Michael Burry believes that these people will later want to exit their positions, and won't be able to because the amount of people entering these positions will be lower than those exiting. At which point, the bubble will pop, as the market won't produce buy offers as fast as people attempting to exit their position.
If people are buying index funds automatically in retirement accounts they are not making this judgement and thus all stocks in index funds are selling at a premium because of this automatic buying pressure. If enough people do this there is potential for the stocks in index funds to be overvalued.
He predicts that index funds i.e. ones that track the S&P 500 could continue to decline by 50% or more in the coming year.
Index funds are still regarded the best choice for a long term passive investor because of the amount of diversification.
Maybe with enough blog posts and Bloomberg interviews, we convince everyone to go back to a culture which prefers more complicated, specific investing strategies. But after you completely destroy peoples' wealth by crashing the index fund plane, how exactly are you then going to convince them to buy into your focused strategies (and importantly, with what wealth)?
> Michael Burry has exited all his positions which as of March 31st, 2022 had a value of +$200 million. Private jail operator GEO Group was the only stock he held as of the end of the second quarter of 2022.
Everyone should go and read A Random Walk Down Wall St and Irrational Exuberance. For a retail investor, the first book teaches you that beating the market is a random process, so there is no point in trying. Any advantage you gain from being smart will be paid for in time invested in being smart enough to beat the market.
Irrational Exuberance teaches the retail investor that markets go through long, yet unpredictable, periods of irrational behavior. Even experts struggle to explain the movements of the market, so as a lowly retail investor, you’re unlikely to have any chance at winning the game.
Ultimately, while each book looks at the world in a contrasting way - one assumes investors are collectively rational and the other assumes the opposite - the lesson is the same for a retail investor: just live your life, invest passively, and give up on trying to get rich quick in the market because it’s random whether you’ll succeed.
Remember that investments compound, and it takes as long to go from 10 to 100 as it does from 100 to 1000. Avoiding drawdowns is critical for long-term growth.
You want a significant fraction of your wealth in stuff with tepid and consistent returns. In fact, you want this fraction to be constant over time. That will outperform any one asset class as time goes by.
I would have to see some models to contrast, but I still suspect that given the timeline, the stock heavy portfolio is going to outperform if only because of DCA.
My personal opinion is that what matters is just the Fed. Index bubble, everything bubble, crypto bubble. It all doesn't matter, what matters is just what the Fed is doing. And the Fed is a few mistake prone officials who could forget to turn on interest rate for an entire year, so whatever Jerome Powell had for breakfast might end up being more important than what an experienced economist says.
Missing out on normie appreciation and getting the big drop can still be losing overall, too.
Most likely ever since index funds existed active traders hated them.
Here is an article from 2010: "Index Funds are distorting the markets"
https://www.wealthmanagement.com/news/are-index-funds-distor...
> With money pouring into index funds and ETFs, passive portfolios are distorting markets, harming many investors.
> Index funds are creating disturbing conditions in a variety of asset classes, including emerging markets, small stocks, and commodities.
This differs significantly from real estate or gold, which is backed by a tangible representation. With a virtual currency, there is no floor to the amount of losses. Theres also no dependent economic activity to support it right now and any dependent economic activity could be replaced all the same.
We can all decide that shares of Worthless, Inc. are worth a bunch of money and collect them. But we can't really expect dividends or an acquisition premium in the future.
I'm just making the point that, if stock A trades for $10, and one is concerned because they believe the "true" net present value of its share of the business of $5... that the situation isn't improved by buying asset B that trades for $10 but has a zero underlying net present value.
(Asset B may very well do better, because underlying values are not the only reason we buy assets...)
Take away the speculation and you'll have a zero-sum game which always leverages power costs trough transaction processing. So the store of value is a benchmark of computational energy.
index funds will have better track records than bitcoin, even if all index funds drop 50% tommorrow.
re speculation— I don’t think you can remove it from the equation. Equities are highly speculative. The market can remain irrational longer than you can remain solvent. I can’t count the number of times positive earning reports are expressed in negative movements.
Speculation would be fine if it helped price discovery but it has become clear to me that bitcoin is far too irrational for me to partake in other than keeping the little exposure that I've had so far. I'm sure there is some mathematical hash algorithm/proof of stake/distributed accounting that could serve a better job as a financial tool than relying on government-issued currency with a high risk of inflation as a result of poor debt management. But no crypto can satisfy all factors that investors would like.
* Decrease in transaction costs as the new protocol matures This is historically what happened as technology, computing power, bandwidth improved. Bitcoin would require changes in protocol in order to make this happen, like Ethereum did.
* significantly better balance between early investors and late investors. A million increase in value between early and late investors just destroys the store of value idea as its a pure speculation instrument. A currency with a very stable inflation rate could outperform the dollar if enough markets used it.
* better integration with long-standing agreements like insurance against theft, loss, recalls and other tools everyone expects to be able to use from a functioning society.
If you are buying blindly, pricing doesn’t work anymore. Same with speculation which is tolerated because it brings liquidity and helps prices converge but is very much a by-product.
Does it?
He's not "wrong" to call out the side effect of millions of people "blindly + consistently" pumping their extra cash (savings) into index funds in hopes of return. Sure, this means the market is "crowded" compared to historical times (we're probably at all time high for market participants from a retail/average investor perspective I would guess?)
But... what's the alternative? How are you going to tell millions of people "we'd like you to stop investing in the market/deny you access to the chance for 6-10% index-fund-level returns because you're driving valuations up"?
You don’t need to tell them to stop. If the sole thing pumping these stocks up is excess savings as soon as the economy slows down it’s not going to be sustainable. Some of these stocks will go down as people remove their money from the market and people will lose money. That’s the heart of Burry warning.
Doesn't that assume "as soon as the economy slows down, the same people who invested money into equities will pull that money because they need it?"
I hate being forced to hold doomed companies.
I would be really curious to see a graph of the S&P 500 with and without TSLA (was added to the index in December 2020).
Side note: I wonder if owning a S&P 497 index could be achieved through any currently available Direct Indexing passive investment providers.
https://pebble.finance/p/f7dc6d732363464487ca5a84a00ce24a
Note: I’m one of the founders in the above. Basically built Pebble to for passive index investors (like us!) who want to be safely/easily diversified but in a manner where we can still express individual ideas/needs. New launch coming soon :)
Outside of Pebble - Fidelity Managed FidFolios will get you close. Not the S&P 500 exactly but their own US Large Cap portfolio which you can customize.
now consider that historically, the overwhelming majority of active managers perform worse than SP500 ...
so there, it is always easy to be smart retroactively, if you cashed out last year you would have wanted TSLA in your portfolio
Imagine an investor who owns $100,000 of SPY. Therefore, they own roughly $12,000 of Apple and Microsoft (together, they account for 12% of SPY)
If that same investor thinks Microsoft and Apple are at their long-term peak, the investor is forced to hedge against their own positions in those stocks because they can't exclude them from their SPY holdings.
I held a lot of PUT options and was shorting TSLA stock in 2021/2022... meanwhile I also owned a lot of TSLA through my index fund holdings (I would have much preferred an ETF that excluded TSLA, rather than owning TSLA via SPY and actively shorting the TSLA position simultaneously). This is something I did in the past, and my gains would have been higher had I had a way to remove TSLA from my index fund holdings without spending money on PUTs or shorting.
If the logic you describe works for one company why wouldn't it work for two, or five or ten out of SP500?
Heck if you can indeed pick any winner even by just a 2-3% gain than the passive index, why wouldn't you better off by building a fully custom curated SP500 that contains companies that are more likely to succeed? That 3% adds up to massively more money long term.
The whole point of active trading is exactly that, a thinking logical human being, adding all their intellect ought to be more successful than passively doing nothing.
Yet history says otherwise. Even when faced with decades long evidences active traders still believe they can do better than passives.
I think the same trope applies to the classic thinking of “passive investing is always better than active investing”
Historically, yes. But in the future? Who knows! (This is also exactly what the article we’re commenting on is speculating, that the characteristics of ETFs in the market has changed substantially over the past 10-20 years, which is indeed an argument that past performance isn’t proof of future performance.
But we have to take into account that the active traders have been repeatedly making the same claim. How many times is one allowed to make the a similar claim before losing credibility...
Recall Warren Buffett' bet vs Hedge Funds
https://www.investopedia.com/articles/investing/030916/buffe...
Notably the period included an interval of a stock-market collapse and massive volatility - where smart decisions ought to have mattered more.
So the credibility of the above statement that this time will might be different feels severely weakened.
I removed Tesla because it entered the S&P 500 after a huge run up. I own the car (and love it)... def the future. But I think the stock has been overhyped. There are more diverse ways to invest in EVs being the future vs "just buy Tesla".
On the other side... I removed FB because honestly I just didn't like the company (so a values reason). This was well before the whistleblower, etc. Was not looking at that one through a performance lens. Just wanted nothing to do with the company.
Most of my edits are removing companies that I already have too much direct exposure to.
tens of thousands of active traders try to beat SP500 all the time - how many succeed ...
In this case, the common belief that S&P500 is safe is valid up to a point, if too many people rely on this assumption this can turn into a big problem.
For most humans 99% == 100% but this is not true.
Economy is going to explode. If you cannot see that you need to find a set of glasses.
Shit can't peak forever and it can't follow an upward trend towards growing yoy either.
It has to go down at some point. Of course it has.
Please. Cash out and sell all excess things you don't need. Don't trap yourself by not being able to maneuver.
Buckle up. I truly believe it will be a wicked ride.
Perhaps with complete transparency and a reasoning, logical market they might be closer to that, but that's not what we have. Even in that case you've got more than earnings to concern yourself with, like risk assessments, d/e ratio, dividend rate, and much more.
Happy to be corrected though.