Passive Investing is a very popular strategy and mostly involves investing in index funds , Cause you just invest in one stock and own the entire market , it can be compared to as the shadow of the active stock Market. It has some very big backers like the Greatest Value Investor Warren Buffett and, the founder of the Field Itself Benjamin Graham and when Warren Buffett said that he recommends Index Funds before his own companies stock and dedicated 15 minutes of his time in the Annual Generals Meeting to praising index funds, it obviously means something.
But Recently Michael Burry , the absolute legendary investor who found out about the Mortgage Backed Security Bubble that lead to the 2008 Financial Crash , and made a huge profits from having a short position in place for it , said that there is a huge bubble in Index Funds it was a definite shock . Cause both of them are extremely reliable sources and hold strong credibility.Now the question arises that is there a bubble in Index Funds , if so why and how to react to this situation.
Burry's case relies on the Concept of Price Discovery and how passive investment has reduced it.. “Price discovery” is a fancy term for “buyers and sellers determining a price where they’re willing to make a deal.”Typically, stock market price discovery involves many buyers and sellers conducting detailed analyses of a company’s holdings and profits and cash flows–all of the fundamental business metrics.
But passive investing doesn’t care about those fundamental metrics. Instead, passive investing simply follows the leader. It assumes that others in the market have already done the fundamental research, and that the current price of a stock is “right”. Since passive investing doesn’t rely on price discovery, Burry argues that prices are now dangerously skewed from what traditional price discovery would suggest. This cannot go on forever, and eventually the prices will snap back to where they fundamentally belong. Or, you could say, the index fund bubble will pop. This, Burry says, is very similar to how housing and Mortgage Backed Securities pricing behavior malfunctioned before the 2008 crisis. It will be a painful, painful snap.
In the past 40 years, passive investing has done nothing but grow. But eventually, that growth will end. Individual investors will retire. Withdrawals will take place. What happens when you take the money out?
At that point, the artificial inflation of index funds will cease, and quickly turn south. As more retail investors sell, prices will drop. When investors see prices dropping, they’ll get scared and sell more. The vicious cycle will continue–sell, drop, sell more, drop more–into a index fund crash. It’ll be an old-fashioned bank run.
To quote, Nicholas Taleb ,
“The market is like a large movie theater with a small door.” If everyone is looking to get out, the only way to do so is to offer the doorman a better price than the other people." Prices will plummet.
Pop goes the index fund bubble.
In Conclusion I'd like to State that there is major difference between Burry's and Buffet's Ideals , Michael deals mainly in close sightseeing , like he saw the Mortgage Backed Security Bubble due this keenness of his and on the flip side Buffett's is a Long term value investor he doesn't care if there might be a crash the next day after you buy an Index Fund , as the market always recovers , after the staggering 2009 crash the estimated value was regained in a matter of 5 years and will just seem as a minor bump in the long term charts. So in a sense both are right and should remember to always do your own research before Investing.
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