“In markets, something works until everyone starts doing it”
The reason why stock markets coined as losers game specifically for fund managers
because they were the ones who were the market, The markets in itself are
nothing, on given day markets, just react the collective agreement between the
So, let’s say 30 years ago if all the money coming in and going out of the markets is
from the institutional investors ( mutual fund, Hedge fund, etc ) then they are the
ones competing with each other, which means when one Fund manager is selling
the buyer on the other side is a Fund Manager and only one of them was going to
be right in the future. Means for one to win the other has to lose and collectively the
the average performance of all the participants is reflected by an Index.
So, the narrative becomes very clear and obvious for indexing, which is as you
never know who is going to do well and who will not do well, it makes sense to
distribute an equal amount of money among all fund managers this way the
average returns are guaranteed. The only problem with this approach is after fee
returns again going to be less than the average and that’s where the birth of the
low-cost index fund happened.
That means you are better off by just betting equally on all the smart fund
managers rather than trying to pick who is going to win, but the question arises
what will happen if you push indexing to other extremes? What if 90% of markets
are owned by ETFs and 5% by institutional managers and 5% by others, in this kind
of market the smart guys aren’t fighting with each other, they don’t represent
average as a whole. In this scenario collectively they can beat the markets? Does it make sense to do indexing?
Indexing made a lot of sense when an average group of people was investing through Institutions.
Indexing makes less sense when an average group of people is doing Indexing.
Because if you are doing what everyone is doing you are doing something wrong because most of the people are doing average.
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