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

What caught my eye this week.

I am sure that with barely a glance at the clicks generated by its last story [1] featuring Michael Burry dissing index funds, Bloomberg has returned to the well to quote him saying more [2] 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 [3] – 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 [4] 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.”


From Monevator

Our updated guide to help you find the best online broker – Monevator [5]

Should you consolidate your old pension plans? – Monevator [6]

From the archive-ator: Understanding the low interest rate era – Monevator [7]


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 [8]

British investors pulled £1.2bn from UK funds in July on political and Brexit uncertainty – ThisIsMoney [9]

Labour threatens to ban bankers’ bonuses [Search result]FT [10]

House prices are holding steady despite Brexit turmoil, says Halifax – ThisIsMoney [11]

The Long-Term Stock Exchange raises $50m in new funding – Axios [12]


Does capitalism need saving from itself? [Search result]FT [14]

Products and services

Woodford crisis shines spotlight on fund supermarket ‘best buy’ lists [Search result]FT [15]

Small supplier Eversmart Energy stops trading – what you need to know – MoneySavingExpert [16]

Funding Circle lenders face a 100-day wait to sell their unwanted loans – ThisIsMoney [17]

You can still get 1.5% on cash despite Marcus rate cut, but there’s an ill-wind blowing – ThisIsMoney [18]

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter [19]

Equity funds struggle to survive for more than a decade [Search result]FT [20]

Award-winning homes for sale [Gallery]Guardian [21]

Comment and opinion

The Investment Drama Triangle – My Essential Wealth [22]

Two kinds of 9-to-5 job – Seth’s Blog [23]

The formula for happiness: Wanting what you already have – Brinker Capital [24]

Risk-adjusted returns: What’s the point? – Oblivious Investor [25]

Get busy living, or get busy dying – Tony Isola [26]

The Power of Compounding: Manhattan, Alaska, U.S. Stocks, and Gold – Morningstar [27]

The best and worst of times – The Evidence-based Investor [28]

One woman’s journey to financial independence – Financial Samurai [29]

“It’s in there”The Human Advisor [30]

Beyond ETFs: Direct indexing – ETF.com [31]

Naughty corner: Active antics

Gold is still well below it’s all-time highs in real-terms [Graph]The Big Picture [32]

Selling SSE: A defensive utility with lots of problems – UK Value Investor [33]

Tackling my third financial crisis – IT Investor [34]

Chinese checkers or chess? – Investing Caffeine [35]

The latest trends in marketplaces [VC presentation]Fabrice Grinda [36] [via A/R [37]]


Brexit has cut UK company productivity by 2-5%, finds Bank of England study – Reuters [38]

Government could call no confidence in itself – The Day Today The Express [39]

Dazed and confused, Johnson stumbles into the twilight zone with a police escort – Marina Hyde [40]

Gina Miller’s bid to stop UK Parliament suspension rejected – BBC [41]

Fallon: Sacking Tory rebels ‘sends wrong message to Remainers’ […but the correct one]BBC [42]

No-deal could knock at least 6% off house prices in 2020, says KPMG – ThisIsMoney [43]

Jeremy Vine on Boris Johnson [A few weeks old, a must read]Reaction [44]

Kindle book bargains

Liar’s Poker by Michael Lewis [From another era but still great!]£0.99 on Kindle [45]

Elon Musk: How the Billionaire CEO is Shaping our Future by Ashley Vance – £1.99 on Kindle [46]

Period Power: Harness Your Hormones and Get Your Cycle Working For You by Maisie Hill – £3.49 on Kindle [47]

ReWork: Change the Way You Work Forever by Jason Fried and David Hansson – £1.99 on Kindle [48]

Off our beat

Sidewalk rage, or how to plan a terror attack in London – Klement on Investing [49]

Business and productivity gurus stack habits to keep fit – Medium [50]

“Meditation helped me drag myself out of self-loathing and failure”Guardian [51]

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 [52]

Like these links? Subscribe [53] to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [ [56]]