You are one of the few good traders on ET. My brain is old and especially tired today. Could you possibly explain this in a way an old, tired brain can grasp.
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What Happen to Stock Prices If All Investors Just Index
- Thread starter ironchef
- Start date
There is zero chance of this happening unless coerced perhaps by regulation.
If such a regulation were enacted then are buybacks illegal?
In that case, great faith and responsibility is placed in the person or comity
that decides additions, deletions and connected insiders will find
great opportunity for gaming these decisions
(although technically it should be illegal as per the coercing regulation).
The pricing of the overall index then should fall within the relative valuation
framework when compared to other asset classes like bonds, real estate
commodities etc.
If such a regulation were enacted then are buybacks illegal?
In that case, great faith and responsibility is placed in the person or comity
that decides additions, deletions and connected insiders will find
great opportunity for gaming these decisions
(although technically it should be illegal as per the coercing regulation).
The pricing of the overall index then should fall within the relative valuation
framework when compared to other asset classes like bonds, real estate
commodities etc.
If all believers became Catholic and all investors bought the S&P it would solve a lot of problems. Everybody would buy nobody would sell, the index would just keep going up. And when the old investors started dying off there would be plenty of kids to take their place and go long.Seems like more and more investors are throwing in the towel and just go indexing. I always wonder:
1. What happen and what are the consequences if all investors just index?
2. What is the % when things start to tip over?
That is an interesting but logical answer!The pricing of the overall index then should fall within the relative valuation
framework when compared to other asset classes like bonds, real estate
commodities etc.
Very good thank you.
In theory we are all buyers but at different prices. Remember buyers and sellers have to agree. There's always a seller for every buyer.If all believers became Catholic and all investors bought the S&P it would solve a lot of problems. Everybody would buy nobody would sell, the index would just keep going up. And when the old investors started dying off there would be plenty of kids to take their place and go long.
Not in this case, not me and Warren Buffet, we buy directly from the company and they are not selling anything but ownership, and the price to own goes up everyday. Or was the question, What would happen to traders if all investors just bought the index?In theory we are all buyers but at different prices. Remember buyers and sellers have to agree. There's always a seller for every buyer.
Eventually, the party pooping value police would show and break things up. SPY dividend would have to relate to bonds and p/e's would be standardized and if the index goes up 10% then all stocks in excess of 10 would be investigated and those below 10 would be redistributed to, and then there would always be side bets on who was going to get cut from and who was a candidate for addition to the index. So basically, just like it is now or will be soon.
You are one of the few good traders on ET. My brain is old and especially tired today. Could you possibly explain this in a way an old, tired brain can grasp.
thanks for your kind words piezoe. Unfortunately I mistyped in that post, I meant to write:
"1. It is almost certain that there will not be a time when (literally) "all" investors invest in index funds. However, the more people investing in index funds leads to opportunities to buy the winners and short the losers.
"2. Too hard to tell. There's nothing from stopping people from buying SPY and shorting 1 or 2 losers (in appropriate weights) on Monday, even if "only" 5% people are indexing. The number of people indexing doesn't need to be very high to create opportunities."
.
The best examples of this can probably be found in the 2008-2009 period, when companies like Bear Stearns, Freddie Mac, Fannie Mae, Lehman, AIG and GM were in the S&P 500 shortly before they failed or were bailed out. Investors who recognized this could have bought SPY (or a financials ETF) and shorted the failing stock. This is despite ETF flows being less than 100% of equity fund inflows.