Carson Block on passive investing

[concerned]

Just finished watching this
Some very interesting comments on passive investing
https://m.youtube.com/watch?v=-qbMHqvKufA

[RetireJapan]

Interesting, but not actionable (for me).

[ChapInTokyo]

A really interesting video. Thanks for uploading it.

I googled for the momentum effects of passive investing and this article from 2021 came up. It goes into some detail on the various studies which have been done on this topic.

Food for thought!

The Consequences of Passive Investing by Chris Yates of Acheron Insights, 7/23/21

[eyeswideshut]

If there is one thing AI is actually good for it is condensing down long videos into short text takeaways. So I asked gemini to summarize the main points:

State of the US Markets: According to Carson Block, the US markets are "broken" due to emergency monetary policy and the warping effects of passive investing [00:17]. He believes that risk is perpetually underpriced, and passive investing has created a situation where stock prices are driven by technicals and fund flows rather than fundamentals [03:52].

Passive Investing: Block explains that passive investing shrinks the floats of public companies, leading to a parabolic impact on stock prices [06:23]. He warns that this increases the fragility of markets, potentially leading to a massive correction when flows reverse [08:24].
Short Selling: Block discusses the role of short sellers in price discovery and highlights the difference between traditional and activist short selling [17:05].

He describes his firm's approach as combining investigative journalism with an investment strategy, focusing on companies with misrepresented financials or those causing harm to society [19:59].

Market Vigilante: Block shares his background and motivations for becoming an activist short seller, citing experiences with management misbehavior and a desire to protect investors [21:38].

Current Market Environment: Block notes that the current market environment is characterized by investors being anesthetized to risk, with normalized misrepresentation and financial manipulation [27:38].

He points out the massive incentives for executives to engage in gray-zone behavior due to monetary and fiscal stimulus [32:12].

Buybacks: Block criticizes stock buybacks as a legal vehicle for executives to enrich themselves, exacerbating the impact of passive investing on stock prices [36:20].

Market Reform: Block suggests capping the amount of shares passive investors can buy, heavier enforcement against corporations, and disallowing the structure that shields auditors from liability [00:40].

Advice for Retail Investors: Block advises retail investors to stay long on the S&P 500 Index Fund, taking advantage of the current momentum play [48:45].

He cautions against short selling for average investors and suggests being patient while ignoring short-term market fluctuations [16:16].

Warning Signs: Block advises investors to watch out for canaries in the coal mine, such as failing businesses or tight funding situations, as potential indicators of a major market dislocation [51:40].

Investment Opportunities: Block mentions his firm's involvement in long opportunities in Vietnam and the mining sector, emphasizing the potential for significant edge in these areas through research-intensive work [55:22].

[eyeswideshut]

My view: if there were any distortions caused by passive investing then active investors (like Block) would be easily able to use arbitrage to beat the market. Since passive has been around for decades and active funds still underperform it suggests that there either are no distortions or the distortions are not actionable by active investors. Thus, low cost passive index funds remain the best bet in the long run for individual investors.

[RetireJapan]

If there is one thing AI is actually good for it is condensing down long videos into short text takeaways. So I asked gemini to summarize the main points:

I appreciate the sentiment (ended up watching the video at 2x speed myself), but AI generated content is not allowed on the forum.

At this point everyone has access to AIs, so if they want to get summaries etc they can. There is no need to post them in full.

I agree with your conclusion though, and also think it might make a case for a global stock index vs the S&p500, for example.

[eyeswideshut]

If there is one thing AI is actually good for it is condensing down long videos into short text takeaways. So I asked gemini to summarize the main points:

I appreciate the sentiment (ended up watching the video at 2x speed myself), but AI generated content is not allowed on the forum.

At this point everyone has access to AIs, so if they want to get summaries etc they can. There is no need to post them in full.

I agree with your conclusion though, and also think it might make a case for a global stock index vs the S&p500, for example.

Ah apologies - I didn't realize it was against the rules.

[captainspoke]

Personally, I very much appreciate the summary.

It should be a law that every maker of such videos should have to post a stickied (AI-generated) comment that summarizes their content.

I mean really, an hour to convey those points? This just confirms how much time might have been wasted.

[adamu]

Personally, I very much appreciate the summary.

It should be a law that every maker of such videos should have to post a stickied (AI-generated) comment that summarizes their content.

It should also be rule that anyone starting a discussion about any content must also provide their own non-AI summary and/or some original thought.

[Deep Blue]

Yeah I never watch YouTube, waste of time but I read the summary and appreciated it.

My view : what he said was utter bollocks and can be safely ignored. Passive investing doesn’t shrink free float of listed companies any more than active investing does.

What shares does he think active investors hold for crying out loud?

Also the stuff about risk being underpriced, well if this was the case then it would soon be arb’ed away by investors buying index options. There is no such thing as a free lunch and in deep liquid markets like the S&P500 any simple mis-pricing like he asserts would get jumped on very quickly.