Remember, the wisdom of passive investing stems from the belief that the efforts of active investors cause assets to be fairly priced – that’s why there are no bargains to find. But what happens when the majority of equity investment comes to be managed passively?
That’s from Howard Marks and it’s a really inconvenient question for passive investing acolytes.
See, a market that is 100% passively managed isn’t a “market” – in fact, it’s not really clear what would happen if the market were 100% passively managed. Is that the singularity? Would the Earth stop spinning? Dogs and cats, living together?
At times, it seems like Jack Bogle – who is now 876 years old – understands that there can be no such thing as a 100% passively managed market. Like when, earlier this year, he told Yahoo Finance the following:
If everybody indexed, the only word you could use is chaos, catastrophe. There would be no trading, there would be no way to convert a stream of income into a pile of capital or a pile of capital into a stream of income. The markets would fail.
At that point, Jack would be forced to look himself in the mirror: “Now I am become Death, the destroyer of worlds.”
But at other times, it kind of seem like the Godfather of indexing doesn’t fully appreciate what Vanguard hath wrought. Witness what he told an audience at the Ivy League clubhouse for Cornell University a couple of days ago:
There must be some limit somewhere with how much indexing there can be without [reducing] the efficiencies of the market. If I had to guess, I’d put [the limit] in the area of 70 or 80 or 90% — very large — because there will always . . . be people looking for values, price discovery and all that kind of thing.
Yes, “value,” “price discovery”, and “that kind of thing.” As a quick reminder, “that kind of thing” is what makes a market a market, so putting it in “those kind of” terms serves to trivialize what markets are actually supposed to do.
Well in case you were wondering what Jack thinks about the idea of ICE launching FANG futures, here’s what he told CNBC on Wednesday:
If you want to do such a crazy thing, it certainly makes it easy to do. … I have no doubt it’s a liability. I think the odds are very bad. It appeals to the trading instincts in investors. … If you like gambling, if you like casinos, these things are really, really, really good.
Anything that gets investors into trading is a negative. Trading is a loser’s game. Trading is short term speculation.
That’s right. Trading is for losers and gamblers. So if that’s the kind of thing you’re into – i.e. being a fucking loser and a hopeless gambler – well then be Jack’s guest, but here’s what he thinks is a better idea:
Instead he recommended investors focus on the long term with a multidecade time horizon by buying index funds that minimize trading transaction costs.
So in short, just give your money to him and he’ll put it with the other $5 trillion he has over at Vanguard and assuming you live to be 900 years old like Jack, the whole “multidecade” investment horizon thing shouldn’t be an issue.