Good reads from around the Web.
The question of how many active investors and financial intermediaries are needed to make the market go around is becoming less theoretical as passive investing’s popularity grows each year.
This week the blog Philosophical Economics made a great – if theory-heavy – stab at answering it.
The article introduces us to the economy of Indexville – a land where everyone is a passive investor (and Monevator is an even more popular site than Buzzfeed).
The first hurdle for successful equity investing in Indexville is company valuation – in our world a free ride enjoyed by passive investors as a consequence of active investors competing for bargains.
The author’s conclusion is that perhaps 20,000 analysts would be sufficient in a passive-only world to value the equivalent of the entire US stock market.
That’s a cheap wage bill, the piece suggests, compared to the total cost of today’s actively managed funds, where the equivalent fees might be 25-100 times higher.
A bigger problem comes with providing liquidity to investors who want to buy or sell their passive funds, instead of just receiving dividends.
I’ll leave you to read the article for that long discussion.
The author concludes that even in the fantasy-land of Indexville, some percentage of investors would need to be active – but maybe as few as 5%.
Those active investors would be playing a zero-sum game in any speculation.
But by providing liquidity to passive investors, they would also in aggregate earn a small additional return over passives – effectively a fee charged for providing liquidity, and for taking on the risks of doing so.
Axe-wielding passive investing maniacs
Like me you probably won’t agree with every assumption made in the piece, but it’s a fascinating discussion – albeit one for finance nerds, really – and it strips back our bloated financial markets to their bare bones.
It will be fascinating to look back in 20-30 years to see whether the financial services industry did get significantly cut down to size.
Or – surely more likely – to see how it managed to avoid that fate.
From the blogs
Making good use of the things that we find…
- Are active investors addicted to gambling? – The Evidence-Based Investor
- On over-confidence [I call this the “ageing engineer effect”] – Josh Brown
- Is the robo-advisor movement already dying? [US but relevant] – Kitces
- Jeremy Grantham on that commodity bubble: “Mea culpa” – GMO
- What it means to be an original investor – Latticework
- 3 things you should know about market valuation, but don’t – Dash of Insight
- A dozen things learned from Bernard Baruch about investing – 25iq
- Does growth justify the share price of Domino’s Pizza? – UK Value Investor
- Margin of safety: Tool for action, or inaction? – Musings on Markets
- Selecting your DIY online broker – DIY Investor (UK)
- Moderate risk-taking wins – The Aleph blog
- Addressing dressing for male retirees – SexHealthMoneyDeath
- Ethical guidelines for escapees – The Escape Artist
- Learning to spend again – Simple Living in Suffolk
- Liberal cosmopolitans – Principles and Interest
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
- Housel: Alternative definitions of risk – Motley Fool (US)
- Can anything stop Vanguard? – Morningstar
- Keep your focus on fees – Morningstar
- The reason new ETFs often look silly or complex – Bloomberg
- How to launch an ETF [US but interesting] – ETF.com
- Why ‘closet benchmarking’ has to end [Search result] – FT
- Crude soothsayers should remember tale of ‘peak oil’ [Search result] – FT
- Investors trade stocks alphabetically – Wall Street Journal
- Beaten-up hedge funds reminisce about the golden age – Bloomberg
- Open-ended property funds are a bad idea [My verdict!] – CityWire
- The highest earning hedge fund managers – Institutional Investor
A word from a broker
- Time in the market, not timing the market – TD Direct
- SuperGroup, SuperPerformance – Hargreaves Lansdown
Other stuff worth reading
- Merryn S-W: Active funds in search of a future [Search result] – FT
- A new way forward for the welfare state – The Guardian
- How to answer the question: Is it worth it? – New York Times
- P2P firm Lending Club is in trouble [US but…] – FT Alphaville & Bloomberg
- Our peer-to-peer is “safe”, insist UK lenders [Search result] – FT
- Pound could dive 20% on Brexit, says NIESR – ThisIsMoney
- Why the £200,000 gap between two annuity quotes? – Telegraph
- It’s millionaires versus billionaires in Hawaii – Bloomberg
- How breakfast became a thing – Pricenomics
Book of the week: Simon Jenkins in The Guardian sounds like a desperate man in claiming that physical books have seen off the challenge of digital books – not just grasping at straws, but onto the ankles of his own straw man. But there’s no doubt some physical books will survive as things of beauty, just like I suppose a few people will always wear old-fashioned analogue watches while the rest of us will be using our wristbands to be beamed up to a Premier Inn orbiting the moon. One of my favourite purchases in the beautiful books category in the past couple of years has been Death & Co: Modern Classic Cocktails, which is now £5 cheaper than when I bought it. The Kindle edition is £2 cheaper still, and I thoroughly do not recommend you save the money.
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- 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”. [↩]