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Weekend reading: Ben buries Burry in this week’s passive battle

Weekend reading logo

What caught my eye this week.

I am sure that with barely a glance at the clicks generated by its last story featuring Michael Burry dissing index funds, Bloomberg has returned to the well to quote him saying more scary-sounding things:

Burry, who made a fortune betting against CDOs before the crisis, said index fund inflows are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages more than a decade ago. The flows will reverse at some point, he said, and “it will be ugly” when they do.

“Like most bubbles, the longer it goes on, the worse the crash will be,” said Burry, who oversees about $340 million at Scion Asset Management in Cupertino, California. One reason he likes small-cap value stocks: they tend to be under-represented in passive funds.

A few readers kindly forwarded the story to us for our views, and I sighed. Can’t we keep the passive indexing is a threat to capitalism bust-ups to a maximum once-a-month rotation?

Look, I’ve got as big a man crush on Burry as any active investor who has seen The Big Short three times. But comparing mainstream index funds to sub-prime CDOs is specious.

It’s true some ‘liquid-alt’ passive funds might hit some choppy air in a sell-off, but that’s hardly a secret – it happened in the flash crash, for example – and even then it probably wouldn’t have any long-term consequences for passive investors, who shouldn’t be holding anything too wacky, let alone be dumping them in a 20-minute moment of market madness.

As for the bigger picture, if markets are pumped up to irrationally exuberant levels then it’s true many people will take a hit if they sell in a subsequent downturn.

But that’s totally normal. Most people invest where most people invest, by definition. Doing so may involve index funds in the 21st century, but fear, greed, boom, and bust are as old as markets.

Luckily I don’t have to write more this week because the ever wonderful Ben Carlson has taken one for the team. His long post on these silly passive scare stories covers everything you can think of.

I particularly liked the emphasis in Ben’s post on the matter of practical choice for investors:

Are index funds perfect? No. They give you all of the upside of the stock market but also all of the downside. And indexes can go nowhere for years on end just like individual stocks. They can become overpriced and underpriced. They own the good stocks and the bad stocks.

But that’s nothing new. That’s the stock market for you.

Someone will occasionally point out an edge case where active managers are able to gain a few bucks at a passive fund’s expense – or they might make the case like Burry that a vanilla index fund doesn’t give you sufficient exposure to what he considers better value stocks.

But these things don’t matter to everyday investors, whose alternatives are expensive active funds with market-lagging track records, or else taking the opportunity to lose to the market picking stocks for themselves.

As Ben notes: “Index funds never lever up your holdings. They never receive a margin call. They don’t put 30% of your holdings in Valeant Pharmaceuticals. And no index fund has ever closed up shop to spend more time with their family.”

Boom!

From Monevator

Our updated guide to help you find the best online broker – Monevator

Should you consolidate your old pension plans? – Monevator

From the archive-ator: Understanding the low interest rate era – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

British investors pulled £1.2bn from UK funds in July on political and Brexit uncertainty – ThisIsMoney

Labour threatens to ban bankers’ bonuses [Search result]FT

House prices are holding steady despite Brexit turmoil, says Halifax – ThisIsMoney

The Long-Term Stock Exchange raises $50m in new funding – Axios

Does capitalism need saving from itself? [Search result]FT

Products and services

Woodford crisis shines spotlight on fund supermarket ‘best buy’ lists [Search result]FT

Small supplier Eversmart Energy stops trading – what you need to know – MoneySavingExpert

Funding Circle lenders face a 100-day wait to sell their unwanted loans – ThisIsMoney

You can still get 1.5% on cash despite Marcus rate cut, but there’s an ill-wind blowing – ThisIsMoney

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Equity funds struggle to survive for more than a decade [Search result]FT

Award-winning homes for sale [Gallery]Guardian

Comment and opinion

The Investment Drama Triangle – My Essential Wealth

Two kinds of 9-to-5 job – Seth’s Blog

The formula for happiness: Wanting what you already have – Brinker Capital

Risk-adjusted returns: What’s the point? – Oblivious Investor

Get busy living, or get busy dying – Tony Isola

The Power of Compounding: Manhattan, Alaska, U.S. Stocks, and Gold – Morningstar

The best and worst of times – The Evidence-based Investor

One woman’s journey to financial independence – Financial Samurai

“It’s in there”The Human Advisor

Beyond ETFs: Direct indexing – ETF.com

Naughty corner: Active antics

Gold is still well below it’s all-time highs in real-terms [Graph]The Big Picture

Selling SSE: A defensive utility with lots of problems – UK Value Investor

Tackling my third financial crisis – IT Investor

Chinese checkers or chess? – Investing Caffeine

The latest trends in marketplaces [VC presentation]Fabrice Grinda [via A/R]

Brexit

Brexit has cut UK company productivity by 2-5%, finds Bank of England study – Reuters

Government could call no confidence in itself – The Day Today The Express

Dazed and confused, Johnson stumbles into the twilight zone with a police escort – Marina Hyde

Gina Miller’s bid to stop UK Parliament suspension rejected – BBC

Fallon: Sacking Tory rebels ‘sends wrong message to Remainers’ […but the correct one]BBC

No-deal could knock at least 6% off house prices in 2020, says KPMG – ThisIsMoney

Jeremy Vine on Boris Johnson [A few weeks old, a must read]Reaction

Kindle book bargains

Liar’s Poker by Michael Lewis [From another era but still great!]£0.99 on Kindle

Elon Musk: How the Billionaire CEO is Shaping our Future by Ashley Vance – £1.99 on Kindle

Period Power: Harness Your Hormones and Get Your Cycle Working For You by Maisie Hill – £3.49 on Kindle

ReWork: Change the Way You Work Forever by Jason Fried and David Hansson – £1.99 on Kindle

Off our beat

Sidewalk rage, or how to plan a terror attack in London – Klement on Investing

Business and productivity gurus stack habits to keep fit – Medium

“Meditation helped me drag myself out of self-loathing and failure”Guardian

And finally…

“Most people fail to realize that in life, it’s not how much money you make, it’s how much money you keep.”
– Robert Kiyosaki, Rich Dad Poor Dad

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{ 35 comments… add one }
  • 1 Mr Blue Shoes September 6, 2019, 8:07 pm

    I’m actually caught up in the funding circle debacle. Luckily only for a few hundred £s. I’ve been trying to sell for around 95 days. There’s a lot of discussion about it on here http://p2pindependentforum.com/thread/14673/selling-loans-frame-updated-daily

    Or if you want a laugh the trustpilot reviews of funding circle are worth a read.

    I can’t see how funding circle can continue from here as all they really have is people’s confidence, which they seem to have well and truly lost.

  • 2 dearieme September 6, 2019, 10:00 pm

    “ETFs will remain the vehicle of choice for millions of investors for decades to come. You’ll even see them as part of the allocations inside direct indexing accounts where they make sense (illiquid markets, alternative asset classes).”

    Does an ETF really make more sense for illiquid markets than an investment trust?

  • 3 Prometheus September 7, 2019, 12:25 am

    There’s always that argument that passive funds don’t actively participate in the holdings. Active funds have been around for decades, not always being active in terms of voting rights. So passive funds are really just a continuation of that without the high fees and manager selection risk.

    True, if they became 100% of the investment universe there’d be an issue but then some clever clog would short or arbitrage the stocks and that would provide market balance.

  • 4 B0b September 7, 2019, 9:39 am

    When you see a film as well made, and as educational, as The Big Short it is hard to remember Michael Burry is not Christian Bale. That’s why the press report what he says.

    What is more pertinent is the MV post a week ago about how passive investing used to be just investing in the days that information was slow. Now that financial information is fast and thus diluted, news outlets seek to make every story urgent. Hence the reporting of Burry’s comment.

  • 5 FIRE v London September 7, 2019, 9:42 am

    P2P loans – I put in large (in % terms) ‘sells’ on both Zopa and Funding Circle 2 weeks ago. Zopa have already sold >90% of my holding (tho not yet all). FC have not reported any progress sofar. I find Zopa’s speed/service reasonable/acceptable, but I am not happy with FC’s lack of visibility at all. I echo Mr Blue Shoes’ sentiments of wondering whether this could prove terminal for FC.

  • 6 Ben September 7, 2019, 11:10 am

    So what’s the problem with funding circle?

    Reading Mr Blue Shoes linked thread it seems that it’s FC rather than the buyer who selects whether and which secondary market loans are bought. Why not make it into a true secondary market? You need some kind of valuation mechanism anyway. Or am I misunderstanding something??

  • 7 The Rhino September 7, 2019, 11:35 am

    I’ve extricated myself almost entirely from P2P now. Mainly because I needed the cash but I don’t think I’ll bother getting back in at a later date.

    Sounds like the timing was just right with FC!

    I never found out from FFB40 just how much he lost on Lendy.

  • 8 The IG September 7, 2019, 11:55 am

    Nice ref to ‘The day today’ there (in perfect context) – made me smile.

  • 9 Ben September 7, 2019, 12:07 pm

    I don’t think you should be putting the “Tackling my third financial crisis” link in the naughty corner.

    Unless you take the view that passive means never revisiting your asset allocations as your life changes.

    And even then I would still argue that passive investing is a tool to manage investor psychology, it doesn’t just magically remove it (investor psychology).

  • 10 Neverland September 7, 2019, 12:08 pm

    P2P was always going to be a car crash in a recession due to the limited reserves and the UK economy has slowed

    I’m more amused by the news about one P2P arranger going bad two lines above another one being promoted for commission

  • 11 gadgetmind September 7, 2019, 4:26 pm

    My only exposure to P2P is via P2P Global Investments (P2P), which seems to be holding up fine so far.

    Oh, and also lending daughter+parents+inlaws money to buy houses, but maybe that doesn’t count!

  • 12 Mr Blue Shoes September 7, 2019, 7:39 pm

    Ben

    FC used to allow you to select your loans and sell individual loans at a premium or discount. They dumbed this down and now you can buy or sell only. Their algorithm decided whether you buy a freshly minted loan or an older one. Same with selling, you have no control over which loans you sell or retain if selling a part of you holding. From what I have read it sounds like new money being invested is being used to form new loans rather than to buy loans from investors who are trying to sell.

  • 13 Rosie September 7, 2019, 9:29 pm

    Delighted to see Maisie Hill’s book recommended. It’s a great read.

  • 14 The Investor September 8, 2019, 12:42 am

    [Cross-posting this from last week’s Weekend Reading thread because the timing is excellent…]

    Last week several readers suggested I was being hyperbolic about the non-normalcy of what is going on with Brexit — and one reader pointed me towards Max Hastings’ writings on Vietnam, for suggested perspective.

    Well here is Mr Hastings today writing in the FT:

    Sir Michael, and fellow historian Sir Richard Evans, have recently suggested — independently of each other — that Britain has entered a “Weimar period”, not in being threatened with a Hitler but instead in suffering the failure not merely of a government, but of governance.

    Sir Richard, the former regius professor of history at Cambridge university, highlights the menace posed by politicians and tabloid newspapers that attack the judiciary as “enemies of the people” — a charge now being made about parliament itself. We should not delude ourselves that what is taking place represents any sort of normality, or acceptable political process.

    Our society has lapsed into a period of madness which we should recognise as such — as do most foreign commentators viewing our affairs — wherein dangerous forces are in play. We shall be fortunate if we prove able to escape from it with only the implosion of one traditional political party, rather than with a collapse of confidence in our entire system of democracy.

    Oops! 😉

    Further evidence (as is the resignation of Rudd this evening) that you hardly have to be a hyper-woke snowflake to be profoundly disturbed by the ultra-Brexiteers’ chicanery.

  • 15 Prometheus September 8, 2019, 1:09 am

    Let’s hope the Weimar analogy goes no further than this if it gets to enabling acts I’m outta here….

  • 16 The Investor September 8, 2019, 1:24 am

    @Prometheus — What complacent, basically decent but not very thoughtful or historically-minded enablers of populism never seem to realize is that history doesn’t repeat, it rhymes. So they’ll say “Brexiteers aren’t smashing Jewish shop windows therefore your charge that this is the start of a dangerous populism is bogus.”

    They don’t appear to recognise (or even to have just read, in the many histories of many previous times and places) that things move by degrees towards what wouldn’t have been conceivable just a few years before.

    Anybody who hasn’t seen that process in play in the last three years should stop commentating on politics and probably forfeit their vote while they’re at it. Observing it in our own historical backyard from an academic perspective has been one of the very few consolations of this national tragedy. (That and Marina Hyde…)

  • 17 Simon September 8, 2019, 7:54 am

    Is it just me or does the Financial Samurai blog post – well the link within it – to how how she got a massive severance package when you wanted to go FI at 34 or so, rather than just leave with nothing, leave a very very nasty taste in your mouth.
    I for one want nothing to do with that sort of thinking, or to be quite honest people.

  • 18 Ben September 8, 2019, 8:39 am
  • 19 The Investor September 8, 2019, 9:37 am

    On the subject of P2P, I’ve withdrawn money from both Ratesetter and Zopa in the past week. Zopa took around a day to move on the loans if I recall correctly. Ratesetter I think took two days, which I only noted because it used to be much quicker. So things are slowing down across the piece, but not too terribly so far at least away from Funding Circle.

    It’s reason enough to be additionally cautious, however, and to check your exposures. Even for those up for the risk, I’ve always advocated only small percentages to peer-to-peer (very low single digit percentages of net worth), in the early days because the business model was so new, and latterly because it was seemingly in flux, overlaid with the tail risks of Brexit. Personally I withdrew almost all my mine when I was pulling together cash to buy my flat, and unfortunately I’ve not yet rebuilt that allocation due to my asset rich/cash poor mix since.

    With all that said, certain commentators have been deriding my link to Ratesetter for 4-5 years now, in which time plenty of readers have picked up their bonus worth a double-digit return when added to the interest received. P2P may end poorly, but even if it does for the two sites I’ve used and written about here (Zopa and Ratesetter) in my view the most likely bad scenario (which is in itself obviously not what I think the most likely outcome!) is your money is locked for a period and you get no interest before your capital is returned, not that you lose all your money. (Just my thoughts, not a rock iron guarantee. Please remember you must always do your own research as you’re responsible for any decisions you make. 🙂 )

    Ratesetter is a sizeable business that has nearly £1bn in assets under management, and has lent well over £3.5bn over more than 700,000 loans in its existence. It is not without risk, but it is hardly a trivial operation. I don’t feel I’m irresponsible in presenting readers with that link, and my own big article on Ratesetter was basically a long explanation of the risks.

    I turn down literally dozens of opportunities to embed links for cash/publish guest posts for money/promote myriad other P2Ps etc every week. I do a pretty lazy and terrible job of monetizing Monevator but certain readers would have had us publish here for 10 years plus entirely for free.

  • 20 Mr Optimistic September 8, 2019, 5:45 pm

    Yep, the Vietnam book is good but MH has a political pov just like the rest of us. I lived through all the news reporting and only now realise how biased and partial it was. Funny that. In the spirit of book reviews, Normandy 44 is staggering. The sheer logistical effort and risk is brought out. Even though I know the outcome it has me worrying about it. Gives a fresh perspective on some of the rivalries too.

  • 21 Mr Optimistic September 8, 2019, 5:47 pm

    Oh meant to say, Godwin’s Law just scored another point.

  • 22 xxd09 September 8, 2019, 6:19 pm

    On a historical point I always thought that the Vietnam war was a battle lost but a strategic victory-it marked the high tide of Cold War communism expansion -Vietnam was the last domino to fall
    The Philippines ,Thailand ,Malaysia etc remained free
    Max Hastings is a good historian but his in built biases(we all have them) hinder his interpretation of the long view.
    xxd09

  • 23 Mr Optimistic September 8, 2019, 7:07 pm

    The main thing I realised ( 60 years too late near enough), was how corrupt and incompetent the S Vietnam government was. The USs big failure was not realising this and either trying to improve it or shrug and walk away. Not that it has made this mistake since……….

  • 24 Prometheus September 8, 2019, 10:36 pm

    I was going to write a response concerning governance but decided there are too many people online adding their ‘opinions’ to the conversation about the current political discourse.

    Maybe we do need experts.?..who knew!

  • 25 Simon September 9, 2019, 8:08 am

    On a happier note, I suggest all of you this Monday morning read the link to the The Human Advisor post above.
    It made me smile.
    “It’s in there”

  • 26 The Rhino September 9, 2019, 10:49 am

    I came to the same conclusion about P2P, i.e. low single figure % allocation tops.. (I say I came to the same conclusion, I probably read your conclusion and then over time couldn’t distinguish it from my conclusion).

    Problem is if you’re trying to run a simple portfolio you don’t want lots of low single figure % allocations. They’re a ball-ache to manage. You need chunky % allocations that you can properly commit to. In that respect P2P is neither one thing nor the other, its not low return but safe, nor high return but volatile. The upside is capped and pretty boring and the downside, as we’ve seen already, can be pretty dramatic loss of capital. And if you were wavering on the issue then the unknown variability in liquidity may be the straw that breaks the camel’s back?

  • 27 The Investor September 9, 2019, 1:46 pm

    @TheRhino — I love having lots of 1-2% positions, so that’s fine with me. I would suggest “ball ache” is a bit strong in terms of assessing the hassle for someone such as yourself who has written over 600 comments on this investing website along and hundreds elsewhere… I think you’re committed to your investing hobby! 😉

  • 28 The Rhino September 9, 2019, 2:49 pm

    @TI – haha touché! Brilliant comment!

    I was thinking as I wrote that last comment just how that would probably be a ‘pro’ rather than a ‘con’ for you.

    I am committed, partially because I’m genuinely interested, and partially because for various other reasons I have to be. To bastardise a phrase, ‘some are born with commitment, and others have commitment thrust upon them..’ (insert ‘some become committed’ in the middle perhaps) 😉

    But at the same time, I continuously aim to simplify my financial affairs. More bastardisation – ‘Ones portfolio should be as simple as possible, but no simpler.’ My thinking is apply Occam’s razor until it starts to become really obvious you have diversification problems, then rewind a bit.

  • 29 Ben September 9, 2019, 3:10 pm

    @Rhino

    I believe the bastardisation you’re looking for is:

    “Simplify, then add passivity”

  • 30 Prometheus September 9, 2019, 5:07 pm

    P2P – better a borrower be perhaps

    (I’ll get my coat)

  • 31 The Rhino September 9, 2019, 5:51 pm

    Is it an omen that today I get an ‘Investor Update’ from ZOPA telling me how proud they are of their progress in the realm of secured car finance? I’ve already picked up my coat and walked out.

  • 32 Mr Optimistic September 10, 2019, 12:38 am

    @TI. Re small holdings. OK if you are testing your abilities against the market and the uncertainties of the future. However, in terms of constructing a portfolio to build wealth or support, say, retirement, I don’t see any merit to a position which represents less than 5% of your holdings. Am I wrong? Hope not, since on citiwire I rail against fussy holdings with 30 plus investments with 1.5% in this and 2% in that.

  • 33 The Investor September 10, 2019, 9:34 am

    @MrOptimistic — I broadly agree, when it comes to traditional portfolio construction. However P2P is an account that just sits there, hopefully earning an income, unless something goes wrong. (Which is all that needs monitoring for, really, since the main platforms have done away with all the DIY loan matching etc). I have enjoyed exploring P2P but personally I wouldn’t have anything like 5% of my wealth on any P2P platform (though I might I had a smaller portfolio where 5% wasn’t such a chunky figure versus annual savings.) My top limit would be more like 2-3%.

    Nobody *needs* to be using P2P to create a passive portfolio. It’s very much an optional extra with its own risk/reward profile.

  • 34 Xenobyte September 14, 2019, 12:27 pm

    “Brexiteers aren’t smashing Jewish shop windows”

    Oh, please…

    I remind you that it is the UK Labour party that is under investigation for anti-semitism which has left many jews with no choice but to leave the party. Labour’s membership is 2/3 Remain and the party is Pro-EU. Similarly, the LibDems have had to suspend candidates and expel members for openly anti-semitic views. The LibDems support Remain.

    Historically, all major parties have had issues with anti-semitism, but today this tends to be more on the ‘progressive’ liberal side where its Pro-EU/Remain cause overlaps with the anti-Israel/semitism fringe.

  • 35 The Investor September 14, 2019, 12:30 pm

    @Xenobyte — Congratulations in entirely missing the point. Or perhaps proving it. It was an illustration of precisely the sort of thing we both agree is NOT happening, a straw man which is refuted to deny what IS happening. (The normalisation of “coming over here, scrounging / taking all the jobs, what about people who were born here who suffer!” populism.

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