Trouble in Paradise

Our clients know that our group has viewed the rush to passive investing with skepticism to say the least. You can’t argue numbers, but something about buying into companies that you didn’t really know anything about never seemed quite right.

Recently, a loud voice echoed our concern that this indexing party may be getting a bit out of hand. The real man behind “The Big Short”, Michael Burry, said as much in an interview with Bloomberg.

He is quoted saying the following about index fund investment: “This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

Of course, Mr. Burry became famous by betting against an overblown real estate market that was ballooning because of slick packaging, not solid mortgages. This is the similarity he sees in today’s market where investors are investing in companies that no one is checking up on due to easy access instead of good fundamentals.

Taken with a grain of salt, there are doomsday articles written every day about the markets and what catastrophe will come next. Will any come true? Who knows.

The value we see in thinking about this is just to give ourselves a little reality check. Before index funds became the fad, stock investing was about buying into solid businesses to help the value of our assets at least keep pace with inflation over time. Today, indexes have allowed “investing” to take on many purposes, and equity investing may not suit all of them. This is why the question “Why am I investing?” continues to be important to ask. If you’re not sure, you may want to think twice about joining the herd and putting money in an index fund.