Re:Have the record number of investors in the stock market l...
by klipt on Saturday May 16, 2020 @02:45PM
(#23206039)
> Mainstream investors are often not very good at predicting the winners
Index investors don't care about that part.
Re:Have the record number of investors in the stock market l...
by nostrademons on Saturday May 16, 2020 @07:57PM
(#23208210)
A very likely outcome of inflation is for the indexes to underperform and gains to be concentrated in a few big winners (like, say, FAANG stocks). The big winners from inflation are generally chokepoints in the economy, companies that have monopoly pricing power over their industry, so by definition the majority of companies will be losers. Index fund investors are effectively subsidizing individual investors of the winners: the savvy individual investor gets in (looking at the competitive position of the company), their profits rise, the less-savvy individual investor gets in (looking at the new P/E ratios), the indexes rebalance to include more of stocks with higher market caps, and then the index rebalance forces index fund investors to buy in, raising the prices further for shareholders who already bought.
To some extent, this is already happening: the S&P 500 is down about 15%, but stocks like Amazon, Zoom, and Beyond Meat are skyrocketing.
Re:Have the record number of investors in the stock market l...
by klipt on Saturday May 16, 2020 @11:02PM
(#23209178)
Right, "savvy investors", mostly professionals, compete with each other to be first to set the market prices at their truer values. The index investor just goes along for the ride.
> then the index rebalance forces index fund investors to buy in
That's not really how it works for cap weighted whole market indices. They remain cap weighted as prices change, there's no need to "buy more" of a winning stock, you already had the stock, it won, now you have more of it (in USD terms).
Stocks tend to perform chaotically during major inflationary episodes. Over the long run corporate earnings are inflation-protected. The problem is that inflation hits unevenly, depending on where relative shortages are, and some businesses can raise prices much more than other businesses can. That can make some businesses non-competitive (= insolvent) during an episode of high inflation, while also pooling profits within a small number of survivors. You often see a big consolidation of winners, great companies of the next era born, and then a lot of bankruptcies. Mainstream investors are often not very good at predicting the winners, so you get panic and malaise in the short term.