Re:Why Index Funds Are Like Subprime CDOs
by freewilly1040 on Wednesday September 04, 2019 @08:00PM
(#20882614)
He's saying index funds are invested in companies big enough to be indexed, but too small for the stocks to remain liquid in a market with a lot of sellers.
By this reasoning indexes focussing on small caps would be even worse than the more popular funds.
The evidence shows that most of us suck at investing. Further, I think Burry's critique is more limited:
> One reason he likes small-cap value stocks: they tend to be under-represented in passive funds.
IMHO, the problem he's stating is that people are focusing on large-cap companies. Basically the S&P500. And the S&P500 index funds probably do hold most of the passively invested money. But to solve this (small- vs large-cap focus), the solution is not to throw away passive investing, but to change the focus.
For example, instead of buying Vanguard's S&P500 fund (VOO), to buy their Total Market fund (VTI) which uses the CRSP U.S. Total Market Index:
* https://en.wikipedia.org/wiki/Center_for_Research_in_Securit...
Or perhaps a fund that uses the the Russell 3000 or Wilshire 5000.
* https://en.wikipedia.org/wiki/Russell_3000_Index
* https://en.wikipedia.org/wiki/Wilshire_5000
It's just that the S&P (and DOW) have more name recognition.
But generally speaking, these decisions are micro-optimizations. Just put away a little every month and re-invest and dividends, and over the long-term you'll do well.