Aug 302020

I recently came across a post on the Forum.

Lauretta – why people like online anonymity never ceases to boggle me (sorry!) – referred to an article of mine on MOI Global, resulting from the combination of two posts here and here. She was struck by a line in the initial dialogue between the layman and the professionals, where the layman cuts his conversation with the indexer saying he should be ashamed of himself. She asked the Forum:

How does one respond to this ethical/emotional critique of indexing?

‘Now, shame is a very powerful negative emotion, at least in my culture (I am Italian and so is the author of that article, and I think he uses that word intentionally, to signal that it’s something very bad, something one should feel bad about).
What is the response you would give to his objections, so that you can feel good about indexing (and about people like Bogle who promoted it?)’

Jack Bogle: The Undisputed Champion of the Long Run - WSJ

Wow. Talk about striking. Did you freeze there, Lauretta, or finish the article? I assure you there is a lot more to it than a passing tongue-in-cheek jibe. I also invite you to take a look at this presentation, in particular slide 14.

I must say, however, to Laura’s praise, that at least she wondered – Thaumazein is a powerful force. But what about some of the answers of the Bogleheads that came to her rescue?

Runner 3081: ‘I view and quickly discard what I just read.’

Way to go, Runner. Can’t wait to read your other 3410 pearls of wisdom.

adamthesmythe: ‘Must one respond? (I don’t think so).’

Oh well…

Kenkat: ‘I think it is a passionate attempt to appeal to emotion in order to separate you from your money’.

Nice to meet you too, Kenkat.

MathIsMyWayr: ‘If you take a big spoonful of salty water from a bowl, does the salt concentration of water remaining in the bowl change?’


More to the point:

Steve321: ‘I looked at the blog you refer to; he is managing or co-managing a fund apparently, called Atomo Made in Italy. I looked it up, the ISIN is LU1391064661. Current fees are 4.53% and they are underperforming. So they he (sic) is probably feeling ashamed too.’

Awright Steve. Underperforming what? The Made in Italy Fund has recently had its four-year anniversary. Its return, after all expenses, is 19.2%, versus 1.1% for its most comparable ETF – the Lyxor FTSE Italian Mid Cap. Volatility is 14.8% versus 17.6%. Have a look here – prove me wrong and I’ll buy you another pint.

whereskyle: ‘I would retort and send the shame right back at him (I also have Italian ancestry): Anyone who charges money for advice about individual stock picking should be ashamed of themselves. Virtually all academics subscribe to the idea that the most reliable strategy in picking stocks is to buy the entire market because most market moves are determined by nothing more than a 50/50 coin flip (See Malkiel, A Random Walk Down Wall Street.) The slightest suggestion that one should pay someone to buy their stocks for them according to “a system” that creates market-beating value for the actual investor is highly spurious, almost certainly wrong, and harmful to most investors who might hear it.’

May I ask you: Where-have you been in the last thirty years-skyle? As a refresher, I invite you to read this (or here and here). The presentation mentioned above would also do.

This is the best:

zarci: ‘The fact that the author is an active investment fund manager, and uses a term that is super sensitive in Italian would imply, at least to me, that I would not let this person babysit my children.’

Surprisingly, however, zarci does have something intelligent to say:

First, a market in which the majority of investors are indexers cannot exist in reality. There are too many institutional investors, bankers and other players for that reality to manisfest (sic). The world bank releases figures that show the distribution of investors, might try to find that…
Secondly, there is an incredible overgrowth of different types of ETFs ranging from factors, to small cap, to tech stocks. The list goes on. Even amongst people that invest in a very broadly diversified slice of the market, there is still an incredible amount of bias that provides movement in asset prices.
Just looking at the Bogleheads board topics during the plunge earlier this year would suggest that even the members that subscribe to this board could drive some interesting price action.

Ok, skip the first point. But the second is important. typical.investor nails it:

‘Every single indexer makes active choices that contributes to price discovery when we choose how much to allocate to 1) risky vs. safe assets 2) US vs Dev Intl vs Em 3) and market cap size (large/mid only or also small).
Many indexers go beyond that and make active choices to purse 1) various factors such as value, momentum, quality etc. and 2) certain industries such as REITS, health care, tech, energy etc.
Indexers also make active decisions on whether to rebalance and the timing of it.’

Right. My point is that passive funds are free riders and contribute nothing to price discovery. But this is not the same as saying that investors who allocate among them do not influence asset prices. They do, obviously and evidently. What is as obvious and as evident to me, however, is the inconsistency of saying, on the one hand: There is no point discussing whether Apple, Tesla or any other stocks are over or under valued – just buy their index weight. While, on the other hand, arguing over the relative valuation of US vs. Emerging Markets stocks, or Value vs. Momentum, Large Caps vs. Small Caps, Technology vs. Healthcare etc., and allocate accordingly through passive funds.

Why should market efficiency hold across stocks but not across ‘asset classes’?

This a logical, not an ethical argument. The ethical aspect – if one wants to look at it – is to ignore the inconsistency or quietly brush it aside, thus belittling stock pickers while validating asset allocators.

And, yes, I believe that owning a stock just because it is part of an index is ethically absurd. But you know, Italians…


Print Friendly, PDF & Email

Any comments?

This site uses Akismet to reduce spam. Learn how your comment data is processed.