<story><title>Why Index Funds Are Like Subprime CDOs</title><url>https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos</url></story><parent_chain><item><author>ptero</author><text>I will try to interpret, but obviously it is just my interpretation (and personally I mostly agree with many theses Burry gave). First, he does not really talk about being a &amp;quot;good citizen&amp;quot; or not. His points are for &amp;quot;greedy citizens&amp;quot; who, in his view, should be worried (about his pocketbook) if he is heavily invested in passive index funds.&lt;p&gt;This is due to his &amp;quot;bigger and bigger crowds, same exits&amp;quot; analogy: individuals easily move through doors at will; but if a crowd rushes out through the same door, injuries happen.&lt;p&gt;His premise is that many stocks that index funds invest in have low liquidity (small door): half of stocks in SP500 trades less than $150M a day. This is tiny (he quotes total market cap of indices of $150 trillion). What happens if there is a small, but synchronized outflow for any reason? If customers ask for 1% of index funds to be sold, index funds &lt;i&gt;have&lt;/i&gt; to sell 1% of their holdings in the exact ratios defined by the index, including stocks with low trading volumes. Which is a problem, as there may be no one to sell them to, so prices of those stocks may crash and create a big panic causing additional sales of index funds bringing down bigger chunks of the market.&lt;p&gt;That is the gist of it I think.</text></item><item><author>markbnj</author><text>Not knowledgeable on these matters, so my money is in index funds. Obviously a lot of other people are in the same category as myself. The article seems to be saying we&amp;#x27;d all be better financial citizens if we put our money into actively managed funds, or did our own investing. The latter is out of reach for most people, and with respect to the former it&amp;#x27;s somewhat puzzling that managed funds can&amp;#x27;t consistently outperform index funds (&lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;www.cnbc.com&amp;#x2F;2019&amp;#x2F;03&amp;#x2F;15&amp;#x2F;active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;www.cnbc.com&amp;#x2F;2019&amp;#x2F;03&amp;#x2F;15&amp;#x2F;active-fund-managers-trail-t...&lt;/a&gt;), and so the managers of those funds in a strict sense don&amp;#x27;t earn their fees. So what is the average person with a couple bucks to invest supposed to take from this? The market is in peril because not enough money is flowing to people who do a poor job of managing it?</text></item></parent_chain><comment><author>blacksqr</author><text>Burry&amp;#x27;s point is not that a lot of indexed stocks are relatively illiquid and thus index funds would have a hard time getting out of them in a serious downturn.&lt;p&gt;His point is that the index funds don&amp;#x27;t own the stocks at all; they trade derivatives like futures and CDO&amp;#x27;s that mimic the movement of the stocks in leveraged fashion, and the more people who dump their money into index funds without doing their own research, the more leveraged the funds become.&lt;p&gt;He&amp;#x27;s warning that in the next serious downturn, over-leverage may cause cascading collapse of index funds and the economy with them, like it did in the mortgage finance crisis.</text></comment>
<story><title>Why Index Funds Are Like Subprime CDOs</title><url>https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos</url></story><parent_chain><item><author>ptero</author><text>I will try to interpret, but obviously it is just my interpretation (and personally I mostly agree with many theses Burry gave). First, he does not really talk about being a &amp;quot;good citizen&amp;quot; or not. His points are for &amp;quot;greedy citizens&amp;quot; who, in his view, should be worried (about his pocketbook) if he is heavily invested in passive index funds.&lt;p&gt;This is due to his &amp;quot;bigger and bigger crowds, same exits&amp;quot; analogy: individuals easily move through doors at will; but if a crowd rushes out through the same door, injuries happen.&lt;p&gt;His premise is that many stocks that index funds invest in have low liquidity (small door): half of stocks in SP500 trades less than $150M a day. This is tiny (he quotes total market cap of indices of $150 trillion). What happens if there is a small, but synchronized outflow for any reason? If customers ask for 1% of index funds to be sold, index funds &lt;i&gt;have&lt;/i&gt; to sell 1% of their holdings in the exact ratios defined by the index, including stocks with low trading volumes. Which is a problem, as there may be no one to sell them to, so prices of those stocks may crash and create a big panic causing additional sales of index funds bringing down bigger chunks of the market.&lt;p&gt;That is the gist of it I think.</text></item><item><author>markbnj</author><text>Not knowledgeable on these matters, so my money is in index funds. Obviously a lot of other people are in the same category as myself. The article seems to be saying we&amp;#x27;d all be better financial citizens if we put our money into actively managed funds, or did our own investing. The latter is out of reach for most people, and with respect to the former it&amp;#x27;s somewhat puzzling that managed funds can&amp;#x27;t consistently outperform index funds (&lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;www.cnbc.com&amp;#x2F;2019&amp;#x2F;03&amp;#x2F;15&amp;#x2F;active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;www.cnbc.com&amp;#x2F;2019&amp;#x2F;03&amp;#x2F;15&amp;#x2F;active-fund-managers-trail-t...&lt;/a&gt;), and so the managers of those funds in a strict sense don&amp;#x27;t earn their fees. So what is the average person with a couple bucks to invest supposed to take from this? The market is in peril because not enough money is flowing to people who do a poor job of managing it?</text></item></parent_chain><comment><author>OrangeMango</author><text>&amp;gt; What happens if there is a small, but synchronized outflow for any reason? If customers ask for 1% of index funds to be sold, index funds have to sell 1% of their holdings in the exact ratios defined by the index&lt;p&gt;That&amp;#x27;s pretty interesting.&lt;p&gt;In 2019, the average daily trading volume of Berkshire Hathaway (class A) was 0.04% of the total shares outstanding.  If all people that held this stock were forced to sell 1% of the total shares outstanding, look out!&lt;p&gt;On the other hand, Roku has averaged 15.6% this year, with a standard deviation of 10.  1% of total shares isn&amp;#x27;t even going to be noticed.</text></comment>