
Are Index Funds Communist? - djrobstep
https://www.bloomberg.com/opinion/articles/2016-08-24/are-index-funds-communist
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kbutler
No.

And if passive funds cause poor allocation of capital, that will increase the
returns of smart active investing - a negative feedback on pure passive
investing.

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TylerE
The problem is that the value of the components of the index is heavily tilted
by peoples perception of the value of the index, and not the values of the
components.

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nradov
Not at all. Arbitrageurs will always trade away such market inefficiencies.
Ultimately valuations always converge to DCF, although it can take a while.

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polskibus
That's very interesting, can you point me to some reading material related to
DCF convergence?

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darawk
Index funds are good. They are a way of saying "I don't know how best to
allocate capital, i'll leave it to the professionals who do, and simply
capture the market return for myself". Ideally, most money will be managed by
index funds, and a small pool of extremely efficient money managers (some mix
of quant and discretionary) will manage a comparatively small pool of capital
that actually determines the prices of everything. There is nothing bad about
this. This is the way all economic activities become more efficient.

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Barrin92
That is essentially affirming the authors take on the story though, is it not?
If it is really preferential for investors and society at large to follow the
signal of professional managers, than in the future this might even be further
consolidated by advances in tech, and the result will simply be a rationally
managed system that allocates capital by planning or design, rather than
through numerous 'amateur', active market participants who act on spontaneous
price mechanisms.

I also don't see anything intrinsically wrong with this, but funnily enough it
does seem to imply that the title of the article is correct

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clairity
everyone seems to be reacting to the question in the title, rather than the
point of the article, which is skeptical about perfecting the algorithmic
trading robot (the mythical middle between a marketless communist ideal and
market-dependent capitalist ideal). that is, capital allocation is (NP-)hard
and a decentralized capital market might just be the most optimal (though
imperfect) solution.

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imbriaco
This is an asinine argument that seems to be driven by the belief that there
is such a thing as efficient allocation of capital in the real world. Or
perhaps just sour grapes that some of the unsophisticated investors they like
to take advantage of are instead putting their money index funds.

Maybe both.

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hartator
Nobody forces anyone to buy an index fund. If it stops making sense, we'll
find new ways to invest. No need to forbid anything.

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ajkjk
It's certainly not true that "what makes sense for investors" is any
meaningful indication of what makes a good policy for a society as a whole,
and I rather think it's usually the opposite.

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xvedejas
Okay, but the burden of proof is on those who think that limiting investors is
beneficial in this case. I don't think there's much of an argument for it.

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kazinator
> _Indexing is cheaper, yes, but that 's because active management has
> positive externalities, and if no one will pay for it, those benefits will
> disappear._

Indexing can be active. Particularly when it comes to exchange-traded funds.
There are many to choose from which mix different equities in different
amounts. You can invest by particular sectors, or geographically or whatever.

Choice of investment instruments in the financial market (some of them
automated) is just capitalism at work.

Funny how when a factory is automated, the financiers call that capitalism.
When their own jobs are automated, it's suddenly communism.

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mcv
The author of the article seems to think that their performance on the capital
market is the only thing that determines a company's success. But if companies
lose money on the actual market they serve with the products they produce,
they're still losing money compared to the company that makes a profit, and
they are still at risk of going bankrupt.

The capital market may be important, but it's not what it's really about. It's
not the actual market. It's just a facilitator. At best.

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empath75
> There is no America. There is no democracy. There is only IBM and ITT and
> AT&T and DuPont, Dow, Union Carbide, and Exxon. Those are the nations of the
> world today. What do you think the Russians talk about in their councils of
> state - Karl Marx? They get out their linear programming charts, statistical
> decision theories, minimax solutions, and compute the price-cost
> probabilities of their transactions and investments, just like we do. We no
> longer live in a world of nations and ideologies, Mr. Beale. The world is a
> college of corporations, inexorably determined by the immutable by-laws of
> business. The world is a business, Mr. Beale. It has been since man crawled
> out of the slime. And our children will live, Mr. Beale, to see that perfect
> world in which there's no war or famine, oppression or brutality. One vast
> and ecumenical holding company, for whom all men will work to serve a common
> profit, in which all men will hold a share of stock, all necessities
> provided, all anxieties tranquilized, all boredom amused.

Network, 1976

~~~
decebalus1
For a nice satire of this idea, Jennifer Government [0] is a good read
[https://en.wikipedia.org/wiki/Jennifer_Government](https://en.wikipedia.org/wiki/Jennifer_Government)

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thoughtstheseus
No. No one has shown that passive indexing is creating poor allocation of
capital, there is still lots of smart investors in the market

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jwildeboer
Moderators, this is missing the [2016] thingy.

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elango
stock markets are a joke now, we have to give time for money to work or be
invested by any company and wait a bit to see returns.

With micro-seconds investing by bots and algo, it has become more of gambling
than investing.

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Svoka
No.

Are investment advisors/managers charlatans performing on average worse than
random?

Yes.

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TomMckenny
Capitalism is earning from capital. So Index funds are in fact pure
capitalism.

Potentially they can benefit the less wealthy as much as the wealthy. For
some, alike that feels innately wrong. And any fiscal equalizer always feels
communist even if it results from free markets.

Index funds can also potentially benefit the fiscally naive as well as the
savvy. But if this is the objection then it is cherry picking: the same
parties rarely object to inheritance which benefits unsophisticated investors
on a vastly larger scale.

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elango
and we don’t talk about the enormous fees taken away behind the scenes in
active investing

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ceejayoz
[https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headline...](https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headlines)

> ... an almost entirely serious claim from Sanford C. Bernstein & Co....

Ah. The folks selling high-fee actively managed funds don't want you to buy
from Vanguard.

