> O’Neill fears that the result will be a “bubble machine”—a winner-take-all system that inflates already large companies, blind to whether they’re actually selling more widgets or generating bigger profits.
Part of the problem is that if you look at the stellar long-term performance of indexes, they are largely explained by a small number of stocks in the index that perform extremely well… but you don’t know ahead of time which stocks those are. If you want the performance of the S&P500, you need a similarly diversified portfolio, the theory goes. It is hard to get a portfolio with that kind of diversity unless you buy index funds.
And anyone who thinks they can consistently predict who will be among the 4% is... mistaken. Diversification is how one manages risk when a system has a power law distribution of outcomes.
Trying to beat the market is playing a zero sum game. Someone has to lose for you to win. I understand savvy winners add information, but most winners are just lucky and it still makes me uneasy to play a zero sum game.
When you simply try to match the market, you float on the tide that mostly raises all boats and sometimes lowers them. That sits much better with me.
Yes, my understanding is that the cost of missing out on those companies that are providing the returns is much more costly than investing in a company that is NOT generating those returns.
In other words, the risk is to miss the winners, not that you will invest in a loser.
The problem is that it is very hard to predict the winners, so it is best to invest in all companies to make sure you have the winners
That diversification is a bit of a smoke-screen though. The most popular index funds are cap-weighted. This causes the allocation of capital within the fund to become increasingly dominated by those few winner-take-all companies.
When index funds grow to huge levels of assets under management, their own asset allocations come to make up a significant portion of the market cap of the stocks in the portfolio. Thus the cap-weighted investment strategy becomes a self-fulfilling prophecy.
> Thus the cap-weighted investment strategy becomes a self-fulfilling prophecy.
Either you’re doing the math wrong or you’ve skipped some steps.
Let’s say you have companies X and Y, each with 50% of the market. X is a winner, and the stock price goes from $10 to $45. Y is a loser, and the stock price drops from $10 to $5. The new weight is X=90% and Y=10%.
But this cannot be a self-fulfilling prophecy for index funds, because the index funds do not have to buy or sell any shares of X or Y to keep up (I mean rebalance, specifically). In this scenario, the index funds are just holding. (By “holding” I mean “not rebalancing”.)
This is… an oversimplified scenario. But it illustrates the problem here with the “index funds cause a small number of stocks to be winners” theory. There are alternative theories that make sense, but not this one.
(What makes the scenario more complicated is when you think of buybacks, dividends, delisting, etc.)
Don't index funds trail market changes though? I thought their allocations are reactive. In other words, the Mag 7 are being bid up by people trying to beat the market. I don't see how index funds could move prices.
I do understand how they can stabilize allocations where they are, which I think is the concern. Zombification rather than a positive feedback loop.
This is like travel agents crying that websites like TripAdvisor destroyed tourism. Not exactly an impartial party, so it's hard to take them seriously even if the point makes sense.
"I used to keep this gate, and now it's all ruined!"
Tax breaks for people who already have more money then they can spend fuel bubbles. It makes number go up even when the economic fundamentals are in the toilet.
Active management funds are more than welcome to beat or keep pace with the market consistently for 45 years. Until then, I'll choose the winning option.
The giant rise and fall of Oracle in 2025 would suggest that price discovery is alive and well for megacaps, and there is money to be made by being smart about (if you have sufficient scale for research)
Here’s the thing about stock markets: if you think it’s inflated or there’s a bubble, great, you can pull your money out. But then you look around and try to figure out a better place to put your money long term, and where does that bring you?
What is this supposed to mean? Yes, people are unhappy with the choice of "high risk of losing 1/2 of your savings at an inopportune moment" and "watch it all decay away thanks to our inherently inflationary regime".
> high risk of losing 1/2 of your savings at an inopportune moment
Operative word being moment. The volatility is irrelevant if you wait it out long enough, hence "long term". If you need a shorter term low-risk investment vehicle, that's what treasury bills/notes are for.
> watch it all decay away thanks to our inherently inflationary regime
Any alternative investment strategy is equally affected by inflation.
Not really, but diversification often useful; it reduces variance, which is a common goal. And there have been decades (e.g. 2000-2010) where international stocks outperformed American ones.
Yes but also nobody's absolutely forcing you to keep your money if you feel like stocks are in turbulence
In fact you win even more if you feel like stocks are bubbly and wait in say gold or short term and you buy more stocks when they are cheap
Also US stocks have underperformed compared to EU when you take all factors into account and all US stocks have rather been focused on AI hype which once again is a bubble which will fundamentally break the US economy.
It's like saying 2008 crisis still made you money long term
Sure if you are 20 years deep and even then nobody could've predicted what happened. The sentiments were extremely low
I am one of the biggest index funds advisors usually and that's when I read finance books and wanted to go into finance but genuinely felt like index funds are just so great that the need is very low
In fact I must admit that I dislike saying Gold but its genuinely one of the best assets (although it may be overvalued now not sure), another investment is specifically globalize your index fund portfolio to extreme/exclude US. In fact if possible bet on index funds on the opposite side of AI which most likely feels gold and yes, I am a little sad about this fact but rules of the game changes at points of extremes so gold is valid option right now
I understand this but realize that there are dips of almost 25%
I invest in Index funds for peace of mind as well. That the market remains reasonably happy/sad and I can be for the long run.
People discount this fact but imagine your concerns if you feel like 25% of your savings just evaporated because a guy ten layers detached from you burnt all the money on AI compute and there is no moat (Ahem ahem)
If you don't want peace of mind, people should angel invest or build their own side hustles but then you are getting some savings anyway and its better to invest than keep it in banks (once you have a safe amount saved)
But if you are saving money and still facing 25% crisis. Yeah...
I understand where you are coming from but if you can expect a 50-75% dip in market this time (some companies are 2-5x overvalued just because they slap AI, their P/E ratio's straight up just don't make any sense at all!)
So if you are willing to consider such dip for unforseen amount of time for unforseen returns in future when you can get a pretty safe investment for X amount of years being very liquid and historically in such times there are times when bond prices have been larger than stock prices
If I remember correctly, Intelligent Investors suggests an intelligent approach towards this (in one of the starting chapters of the book)
Just because people have been making money with stocks with crazy P/E historically doesn't mean that its meant to continue
Especially when you realize on aggregate, Companies long term have to reflect profit and less P/E otherwise if your stock index fund has larger P/E ratio, then you are absolutely taking on higher risk
There is no free lunch.
You are also forgetting that the reason the extrapolation of stock markets growth from historical data correlates to future data is that there is a benchmark of productivity underneath it all. Stock markets theoretically grows when productivity of all businesses in an economy improve which can improve due to scientific and economic reasons and the faith in the system that it does improve
Quite frankly, if you can't observe this, do not invest in index funds but rather something else which can reflect some amount of productivity (Short term bonds are needed by govt to improve life of the people so that they can pay more taxes in aggregate and improve conditions thus improving productivity as well)
I recommend the book Intelligent Investing and The little book of common sense investing by the legendary John Bogle (May he rest in peace)
Calling everything a "bubble" without identifying where capital would rationally go instead is lazy analysis. I've been an investor for 15 years and every single year someone screams we're in a bubble. It never ends
I guess the weird thing about being in a bubble is keeps going up, until it pops and you find out you were in a bubble. Us equity P/E ratios are astronomical.
Remember the 2008 subprime mortgage crisis, famously caused by passive investors buying CDOs through their Vanguard funds? Or the dotcom bubble? The great depression? Remember when passive investors were buying tulip ETFs in the 1600s?
You don't, because every single financial bubble in history has been caused by active investors speculating and gambling, in most cases with other people's money. And now that people want to stop giving them money (and the associated fees) they turn around and go "you don't know what you are doing, you'll totally cause a bubble". Give me a break.
"Their indiscriminate buying could therefore pull share prices out of whack with underlying earnings. Pulling in the opposite direction are the arbitrageurs, such as hedge funds, which can take the other side of tracker funds’ trades and profit from bringing prices back into line with fundamentals."
It’s only a matter of time until people start to wake up to the fact that gold’s 5 year return is almost double the US markets and the developed nation index has doubled the US market returns in the last year.
Capital has been FLEEING the US for some time now. Passive investments aren’t inflating a bubble. They’re providing exit liquidity to smart money.
I am a stauch cryptocurrency avoider (most are very scummy) but I once was in part of tournament and got some crypto and so I just converted it into gold stablecoin. (partially because cashing out was/is hard and I am a minor)
I am not kidding but the whole crypto market has bled so much when I have been in like +20% or something. Its crazy.
I highly recommend Paxos gold but I had around 100-200 bucks and hte isuse is of Ethereum 7$ gas fees which I shouldve known (I usually use polygon usdc 0 crypto bs only stablecoins)
I think Paxos,Xaut are some good options and there are probably some neobanking solutions to this as well
Well I am avoider because I feel like people necessiate that interest in tech or tech being cool === profitable or some thing
I have built cryptocurrency related stuff (usually for free) out of just mere curiosity on proving systems and other solutions and that's how I know some things
In fact I was just curious about proving something and then I took tournament just to explain that and got some simple but nice money (25$) which made me get to more tournaments and other things haha
Moral of the story is to be reasonable with your money and if you still wish to invest, invest in your companies/projects.
That being said, stablecoins are still pretty lucrative. I follow only stablecoin news because I find the idea of remittances etc. interesting.
I usually follow https://stablecoininsider.org/ but holy cow they write texts with LLM's and that sucks imo and I am following them less and less.
I just like the idea of stablecoins though because it can genuinely open up new possibilities if done properly
Even then when I was building my first such project, I actively avoided crypto but I just wanted to prove it lol and actively wanted to look for other projects
(The idea is basically using nano zero fees coin with vanity link generators and looped transactions to permanently store very few data (like bytes) free of cost in blocks permanently, useful in proving identity of someone who wrote something while providing a timestamp when it happened, thus nanotimestamps)
Nothing is being built on it even though I think the idea did have potential but eh, I am happy lol. I am a stablecoin fan usually/traditional finance fan of index funds because I wanted to go for finance field for so long and read books about it I guess
Instead of "passive" one could call it "blind" investing. Just dumping money broadly into the marker via 401k contributions. When retirees pulling out exceeds those putting in it will all be over.
Worth noting that articles about how passive investing destroys the market date back to, maybe, 2016 or earlier...
https://www.newyorker.com/business/currency/is-passive-inves...
March 9, 2016
> O’Neill fears that the result will be a “bubble machine”—a winner-take-all system that inflates already large companies, blind to whether they’re actually selling more widgets or generating bigger profits.
Part of the problem is that if you look at the stellar long-term performance of indexes, they are largely explained by a small number of stocks in the index that perform extremely well… but you don’t know ahead of time which stocks those are. If you want the performance of the S&P500, you need a similarly diversified portfolio, the theory goes. It is hard to get a portfolio with that kind of diversity unless you buy index funds.
IIRC a huge chunk of the returns comes from roughly 4% of all stocks while the rest is basically (very simplified) just earning their cost of capital.
And anyone who thinks they can consistently predict who will be among the 4% is... mistaken. Diversification is how one manages risk when a system has a power law distribution of outcomes.
Trying to beat the market is playing a zero sum game. Someone has to lose for you to win. I understand savvy winners add information, but most winners are just lucky and it still makes me uneasy to play a zero sum game.
When you simply try to match the market, you float on the tide that mostly raises all boats and sometimes lowers them. That sits much better with me.
Yes, my understanding is that the cost of missing out on those companies that are providing the returns is much more costly than investing in a company that is NOT generating those returns.
In other words, the risk is to miss the winners, not that you will invest in a loser.
The problem is that it is very hard to predict the winners, so it is best to invest in all companies to make sure you have the winners
That diversification is a bit of a smoke-screen though. The most popular index funds are cap-weighted. This causes the allocation of capital within the fund to become increasingly dominated by those few winner-take-all companies.
When index funds grow to huge levels of assets under management, their own asset allocations come to make up a significant portion of the market cap of the stocks in the portfolio. Thus the cap-weighted investment strategy becomes a self-fulfilling prophecy.
> Thus the cap-weighted investment strategy becomes a self-fulfilling prophecy.
Either you’re doing the math wrong or you’ve skipped some steps.
Let’s say you have companies X and Y, each with 50% of the market. X is a winner, and the stock price goes from $10 to $45. Y is a loser, and the stock price drops from $10 to $5. The new weight is X=90% and Y=10%.
But this cannot be a self-fulfilling prophecy for index funds, because the index funds do not have to buy or sell any shares of X or Y to keep up (I mean rebalance, specifically). In this scenario, the index funds are just holding. (By “holding” I mean “not rebalancing”.)
This is… an oversimplified scenario. But it illustrates the problem here with the “index funds cause a small number of stocks to be winners” theory. There are alternative theories that make sense, but not this one.
(What makes the scenario more complicated is when you think of buybacks, dividends, delisting, etc.)
If new money is then invested into the index fund, it's effectively routed 90% to X and 10% to Y though, no?
Don't index funds trail market changes though? I thought their allocations are reactive. In other words, the Mag 7 are being bid up by people trying to beat the market. I don't see how index funds could move prices.
I do understand how they can stabilize allocations where they are, which I think is the concern. Zombification rather than a positive feedback loop.
I saw the underlying theory discussed years ago, in a series of articles on a very serious economics blog, coming to very different conclusions:
https://www.philosophicaleconomics.com/2016/05/passive/
https://www.philosophicaleconomics.com/2016/05/followup/
https://www.philosophicaleconomics.com/2016/05/indexville/
https://www.philosophicaleconomics.com/2016/05/passiveactive...
Looks like the blog stopped in 2020, unfortunate....
This is like travel agents crying that websites like TripAdvisor destroyed tourism. Not exactly an impartial party, so it's hard to take them seriously even if the point makes sense.
"I used to keep this gate, and now it's all ruined!"
Hasn't Michael Burry been talking about this exact thing for at least 6 years now?
Edit:
The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs (2019)
https://archive.is/7mOuF
Burry has been predicting another bubble every two weeks since the big short.
The problem will always be timing more or less.
You can find structural problems that should inevitably arise and create a dynamic where say a short seller will make a killing.
However it can take years, sometimes over a decade, for things to bubble up.
The collapse of 2008 was decades in the making for instance
Tax breaks for people who already have more money then they can spend fuel bubbles. It makes number go up even when the economic fundamentals are in the toilet.
Active management funds are more than welcome to beat or keep pace with the market consistently for 45 years. Until then, I'll choose the winning option.
The giant rise and fall of Oracle in 2025 would suggest that price discovery is alive and well for megacaps, and there is money to be made by being smart about (if you have sufficient scale for research)
https://www.google.com/finance/beta/quote/ORCL:NYSE?window=1...
Here’s the thing about stock markets: if you think it’s inflated or there’s a bubble, great, you can pull your money out. But then you look around and try to figure out a better place to put your money long term, and where does that bring you?
Back to the stock market.
What is this supposed to mean? Yes, people are unhappy with the choice of "high risk of losing 1/2 of your savings at an inopportune moment" and "watch it all decay away thanks to our inherently inflationary regime".
> high risk of losing 1/2 of your savings at an inopportune moment
Operative word being moment. The volatility is irrelevant if you wait it out long enough, hence "long term". If you need a shorter term low-risk investment vehicle, that's what treasury bills/notes are for.
> watch it all decay away thanks to our inherently inflationary regime
Any alternative investment strategy is equally affected by inflation.
These days canned food often seems like a good investment
> Back to the stock market.
It’s a very different calculus when nominal bonds are paying 5% and TIPS are paying 2.6% above inflation.
The nowhere to go but the stocks holds more water when the ten year was paying 0.55%.
> TIPS are paying 2.6% above inflation.
2.6% above CPI. Investor calculus should include a consideration of how CPI is set vs what their actual personal rate of inflation will be.
If you think it will go down you can short the market.
If you think it will go up just more slowly well that’s hardly all that bad?
Is this the answer for citizens of countries other than America? I don't think it is.
You say that like “stock market” = the US stock market.
It doesn’t. And the smart money recognized this a couple years ago. You’ve been presented with a false dichotomy.
Is there a better stock market than the US stock market?
To augment sibling replies: depends on one's, subjective and highly personal, portfolio and financial strategy. But U.S. has a strong stock market(s).
VXUS is up almost twice the S&P 500 year over year, although some of that is likely the weakening of the dollar.
Compare them over the last 5 or 10 or 15 years. Since VXUS's inception the S&P has outperformed it by over 7x.
Going back how’s many years? I checked recently and VTI easily out perform in the last 5 years.
You should also compare risk, not just returns.
depends what decade you are talking about.
Not really, but diversification often useful; it reduces variance, which is a common goal. And there have been decades (e.g. 2000-2010) where international stocks outperformed American ones.
VEA. Look it up. Europe, Hong Kong, etc have been outperforming the US for over a year now.
Google the ticker and compare to VTI then get back to me. And that’s without even mentioning gold.
My VT shares have risen in bear direct proportion to VTIs relative underperformance. The main difference is the international exposure of VT.
I did, and I see most years it has not beaten VTI… and if you invested 10k in them for the past 10 years VTI is near 2.5x more money.
May be worth it for diversification, but you’d be very lucky if it outperformed the next 10 years.
If we judge it by the lost decade after the 2000 tech bubble definitely not back to stocks.
A portfolio of things like gold, small cap value, long term treasuries did 10% a year while stocks did like 0% a year for a decade.
https://portfoliocharts.com/2021/12/16/three-secret-ingredie...
you cannot cherry pick, you must judge stocks over multiple decade long trends.
Yes but also nobody's absolutely forcing you to keep your money if you feel like stocks are in turbulence
In fact you win even more if you feel like stocks are bubbly and wait in say gold or short term and you buy more stocks when they are cheap
Also US stocks have underperformed compared to EU when you take all factors into account and all US stocks have rather been focused on AI hype which once again is a bubble which will fundamentally break the US economy.
It's like saying 2008 crisis still made you money long term
Sure if you are 20 years deep and even then nobody could've predicted what happened. The sentiments were extremely low
I am one of the biggest index funds advisors usually and that's when I read finance books and wanted to go into finance but genuinely felt like index funds are just so great that the need is very low
In fact I must admit that I dislike saying Gold but its genuinely one of the best assets (although it may be overvalued now not sure), another investment is specifically globalize your index fund portfolio to extreme/exclude US. In fact if possible bet on index funds on the opposite side of AI which most likely feels gold and yes, I am a little sad about this fact but rules of the game changes at points of extremes so gold is valid option right now
> you buy more stocks when they are cheap
but they are unlikely to be cheaper in the future than they are right now (https://www.guggenheiminvestments.com/advisor-resources/inte...).
so if you have the money but defer buying them, you lose out on the time value of money.
I understand this but realize that there are dips of almost 25%
I invest in Index funds for peace of mind as well. That the market remains reasonably happy/sad and I can be for the long run.
People discount this fact but imagine your concerns if you feel like 25% of your savings just evaporated because a guy ten layers detached from you burnt all the money on AI compute and there is no moat (Ahem ahem)
If you don't want peace of mind, people should angel invest or build their own side hustles but then you are getting some savings anyway and its better to invest than keep it in banks (once you have a safe amount saved)
But if you are saving money and still facing 25% crisis. Yeah...
I understand where you are coming from but if you can expect a 50-75% dip in market this time (some companies are 2-5x overvalued just because they slap AI, their P/E ratio's straight up just don't make any sense at all!)
So if you are willing to consider such dip for unforseen amount of time for unforseen returns in future when you can get a pretty safe investment for X amount of years being very liquid and historically in such times there are times when bond prices have been larger than stock prices
If I remember correctly, Intelligent Investors suggests an intelligent approach towards this (in one of the starting chapters of the book)
P/E ratios rarely seem to make sense and yet people have been making money for a long time buying stocks with crazy P/E.
Just because people have been making money with stocks with crazy P/E historically doesn't mean that its meant to continue
Especially when you realize on aggregate, Companies long term have to reflect profit and less P/E otherwise if your stock index fund has larger P/E ratio, then you are absolutely taking on higher risk
There is no free lunch.
You are also forgetting that the reason the extrapolation of stock markets growth from historical data correlates to future data is that there is a benchmark of productivity underneath it all. Stock markets theoretically grows when productivity of all businesses in an economy improve which can improve due to scientific and economic reasons and the faith in the system that it does improve
Quite frankly, if you can't observe this, do not invest in index funds but rather something else which can reflect some amount of productivity (Short term bonds are needed by govt to improve life of the people so that they can pay more taxes in aggregate and improve conditions thus improving productivity as well)
I recommend the book Intelligent Investing and The little book of common sense investing by the legendary John Bogle (May he rest in peace)
What’s no longer outperforming? Gold?
Calling everything a "bubble" without identifying where capital would rationally go instead is lazy analysis. I've been an investor for 15 years and every single year someone screams we're in a bubble. It never ends
I guess the weird thing about being in a bubble is keeps going up, until it pops and you find out you were in a bubble. Us equity P/E ratios are astronomical.
Remember the 2008 subprime mortgage crisis, famously caused by passive investors buying CDOs through their Vanguard funds? Or the dotcom bubble? The great depression? Remember when passive investors were buying tulip ETFs in the 1600s?
You don't, because every single financial bubble in history has been caused by active investors speculating and gambling, in most cases with other people's money. And now that people want to stop giving them money (and the associated fees) they turn around and go "you don't know what you are doing, you'll totally cause a bubble". Give me a break.
https://archive.is/ppHt0
Paper this article is based on (2021): https://www.nber.org/system/files/working_papers/w28967/w289...
"Their indiscriminate buying could therefore pull share prices out of whack with underlying earnings. Pulling in the opposite direction are the arbitrageurs, such as hedge funds, which can take the other side of tracker funds’ trades and profit from bringing prices back into line with fundamentals."
It’s only a matter of time until people start to wake up to the fact that gold’s 5 year return is almost double the US markets and the developed nation index has doubled the US market returns in the last year.
Capital has been FLEEING the US for some time now. Passive investments aren’t inflating a bubble. They’re providing exit liquidity to smart money.
I looked into gold, but couldn’t figure out how to avoid the haircut taken when buying and selling. Any suggestions?
If you just want An investment vehicle, the easiest way is probably a gold ETF like GLDM
I am a stauch cryptocurrency avoider (most are very scummy) but I once was in part of tournament and got some crypto and so I just converted it into gold stablecoin. (partially because cashing out was/is hard and I am a minor)
I am not kidding but the whole crypto market has bled so much when I have been in like +20% or something. Its crazy.
I highly recommend Paxos gold but I had around 100-200 bucks and hte isuse is of Ethereum 7$ gas fees which I shouldve known (I usually use polygon usdc 0 crypto bs only stablecoins)
I think Paxos,Xaut are some good options and there are probably some neobanking solutions to this as well
> stauch cryptocurrency avoider
as a staunch avoider you know and do quite a lot in the space!
Well I am avoider because I feel like people necessiate that interest in tech or tech being cool === profitable or some thing
I have built cryptocurrency related stuff (usually for free) out of just mere curiosity on proving systems and other solutions and that's how I know some things
In fact I was just curious about proving something and then I took tournament just to explain that and got some simple but nice money (25$) which made me get to more tournaments and other things haha
Moral of the story is to be reasonable with your money and if you still wish to invest, invest in your companies/projects.
That being said, stablecoins are still pretty lucrative. I follow only stablecoin news because I find the idea of remittances etc. interesting.
I usually follow https://stablecoininsider.org/ but holy cow they write texts with LLM's and that sucks imo and I am following them less and less.
I just like the idea of stablecoins though because it can genuinely open up new possibilities if done properly
Even then when I was building my first such project, I actively avoided crypto but I just wanted to prove it lol and actively wanted to look for other projects
(The idea is basically using nano zero fees coin with vanity link generators and looped transactions to permanently store very few data (like bytes) free of cost in blocks permanently, useful in proving identity of someone who wrote something while providing a timestamp when it happened, thus nanotimestamps)
Nothing is being built on it even though I think the idea did have potential but eh, I am happy lol. I am a stablecoin fan usually/traditional finance fan of index funds because I wanted to go for finance field for so long and read books about it I guess
GLD etf
CNBC had a guest on the show who revealed that passive investment like index etf is destroying price discovery in the market.
Instead of "passive" one could call it "blind" investing. Just dumping money broadly into the marker via 401k contributions. When retirees pulling out exceeds those putting in it will all be over.