Is Indexing becoming a loser’s game or not yet?

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“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

market participants.

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

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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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Dhruva Pandey

Dhruva Pandey

Dhruva looks for companies with a durable competitive advantage that are run by honest people, and available at a price that makes sense to him. His interests include technology, investing, markets, psychology, and chess.
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