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The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs

TedTed
in Fund Discussions
FYI: For an investor whose story was featured in a best-selling book and an Oscar-winning movie, Michael Burry has kept a surprisingly low profile in recent years.

But it turns out the hero of “The Big Short” has plenty to say about everything from central banks fueling distortions in credit markets to opportunities in small-cap value stocks and the “bubble” in passive investing.

One of his most provocative views from a lengthy email interview with Bloomberg News on Tuesday: The recent flood of money into index funds has parallels with the pre-2008 bubble in collateralized debt obligations, the complex securities that almost destroyed the global financial system.
Regards,
Ted
https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos?srnd=etfs

Comments

  • StarchildStarchild
    I'm very curious if there's any comments from this post from the vet investors here. I admit, it's got me thinking. Thanks
  • rforno
    edited September 2019
    Absolutely agree. There's been a huge rush into passive vehicles that are market-capped (eg index funds) because of their low costs. Sadly, 'low costs' have become synonymous for 'index funds' -- so when folks pour into those vehicles, the funds have to buy the underlying shares at higher and higher prices. But when the markets turn south, most undisciplined folks may well panic and sell, thus accelerating movement to the downside in these stocks - and subsequently indices. IMO his comments on price discovery are spot on as well ... but I've been saying that for years as the Fed goosed equity prices during QE, QE2, Twist, etc, etc. anyway.

    Give me an actively-managed fund with allocations/management style that I like and performance that works *for me* with reasonable ERs (such as PRWCX, PRBLX, VMVFX, various American Funds, etc) and I'll happily pay for it until things change.

    I don't like market-cap weightings anyway. Or the herd mentality. :)
  • Old_JoeOld_Joe
    Count me in with @rforno.
  • BenWPBenWP
    Market-cap weighting certainly is hard to justify. Also nutty, IMHO, is the Dow’s weighting of its 30 stocks by market price. Boeing is somewhere around $350, so it is weighted more than Walmart, for example. We have the 737 Max fraud revealed and the Dow craters. If it turned out the Walmart were screwing its workers (perish the thought!), no massive drop on the Dow. Go figure.
  • Old_JoeOld_Joe
    "If it turned out the Walmart were screwing its workers"

    @BenWP- Perhaps you meant to say "If it turned out the Walmart were screwing its workers in ways that we haven't yet heard about"?
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