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Bogle Says If Everybody Indexed, Markets Would Fail Under Chaos
As regards, "Bogle also said the chances of everybody indexing is "zero." I can confirm (based on a highly reliable source) that that part is 100% accurate.
Everyone moves into all index funds, presumably spread out over the whole market. Funds that hold all of the components of an index would skyrocket with their valuations dependent only on how much money was allocated to that index. But the relative value of each stock to the other would remain the same forever, until the SP500 for example delisted a company. Then it's price would drop to close to zero unless it was immediately added to another index
Indexes that rely on a "random" sample of larger universes would jockey to pick the best sampling process because if their returns were better they would get more money. If were truly random then we would really have a "random walk".
But if a company's value was only determined by what index it was in, then there would be no incentive for mangers to improve the bottom line as the stock price would only be determined by popularity of it's index. Large companies wold have access to almost unlimited amounts of capital small companies almost none. More of the smaller ones would go private further exacerbating the situation.
Pretty much what David Winters said on Consuelo Mack show. Matter of fact he is claiming indexing is already a problem and getting to be bigger one. Market cap weighted indices are effectively nurturing momentum based indexing where more of the stocks that are going up are bought and actually fuels bubbles.
Now, unsure how "value" index funds work. I mean they will also keep buying those stocks that go up, i.e. keep buying less "valuable" stocks every day.
Comments
I can confirm (based on a highly reliable source) that that part is 100% accurate.
Everyone moves into all index funds, presumably spread out over the whole market. Funds that hold all of the components of an index would skyrocket with their valuations dependent only on how much money was allocated to that index. But the relative value of each stock to the other would remain the same forever, until the SP500 for example delisted a company. Then it's price would drop to close to zero unless it was immediately added to another index
Indexes that rely on a "random" sample of larger universes would jockey to pick the best sampling process because if their returns were better they would get more money. If were truly random then we would really have a "random walk".
But if a company's value was only determined by what index it was in, then there would be no incentive for mangers to improve the bottom line as the stock price would only be determined by popularity of it's index. Large companies wold have access to almost unlimited amounts of capital small companies almost none. More of the smaller ones would go private further exacerbating the situation.
MFO would go dark.
Now, unsure how "value" index funds work. I mean they will also keep buying those stocks that go up, i.e. keep buying less "valuable" stocks every day.
Okay, this is giving me a headache now.