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Challenging Mr. Bogle's Claim Indexing is Investing
Submitted by Scott Cleland on Fri, 2009-06-12 12:34
With all due respect to Mr. John Bogle, legendary founder of Vanguard and de facto leader of the American index fund movement that now manages ~$1.5 trillion, I must respectfully challenge, on the merits, Mr. Bogle's, and others, ongoing mischaracterization of indexing as "investing."
- Indexers are speculators and arbitrageurs, not investors, because they do not care about anything a real investor cares about: price, value, risk, opportunity, supply, demand, solvency, growth, time horizon, management, trustworthiness, track record, externalities, integrity, etc. -- they only care about an algorithm, an algorithm predicated on the unproven notion that pervasive indexing is benign and generates no negative externalities for companies, markets, the economy or the financial system.
- The inappropriate moniker "index investor" has long afforded indexing more credibility, respectability, and mainstream acceptability than is warranted.
- Language can be misleading and I believe calling indexing investing or indexers investors is misleading, because it affords indexers the positive association with investors when they do not share investors' positive attributes, characteristics or methods.
- As I explained in my previous post, "Indexing into the Ditch," indexing is speculation, not investment; and indexing is
- Highly destabilizing to markets and the economy;
- Undermining capital formation and market efficiency; and
- Hyper-stressing the financial system.
What prompted my post today was the "Leaders & Success" profile on Mr. John Bogle in Investors Business Daily yesterday that catalogued his clearly impressive career and many accomplishments.
- While I mean no personal disrespect for Mr. John Bogle, I feel compelled, (by all the havoc of the Financial Crisis and the economic downturn that I believe was in part caused by "mass out-of-control indexing") to challenge Mr. Bogle's implicit core assumption that indexing is investing, when it is not.
At core, the indexing concept was trumpeted, predominantly by Mr. Bogle and Vanguard, as a way to get above-average market returns at the lowest price.
- The indexing concept may have been the ultimate version of "get something for nothing" or of the old adage: "if its too good to be true -- it probably is."
- The indexing promise/pitch was essentially that a person didn't have to do any work, do any thinking, (and neither do the index fund managers), and that that person would be better off financially than all those suckers that actually did the hard work and actually took risk and invested on merit to create value, earn a return and contribute to economic growth.
- Even more destructive than the marketing pitch, was the implicit and unproven core assumption that indexing was benign activity that had no ill-effect on companies, markets, the economy or the financial system. That assumption is far from reality as I explained in "Indexing into the Ditch."
- The blind assumption by Mr. Bogle, his adherents, and regulators that such a pervasive activity such as indexing would have no externalities or side effects -- bogles the mind!
- To be fair to Mr. Bogle, he also believes that ETFs, daily traded index funds that are often traded with leverage, are speculation and not investment.
Index funds may be the first mass market derivative.
- Their purpose was not to invest in individual companies, or aid in capital formation, or grow the economy, their purpose was to fast-forward through the hard work and responsible part, to game the system and get more than one paid for.
- Indexers don't care about the system, they only care about beating the system. Well if enough people are convinced they can beat the system, the system gets beaten down and beaten to a pulp like it is now.
In closing, let me be crystal clear, I am not saying all of the financial system's or economy's problems are caused by indexing.
- What I am saying is that indexing is one of the major root causes of the financial crisis and the economic downturn.
- Anybody willing to look past the conventional wisdom and forthrightly examine the externalities caused by indexing will conclude indexing has significantly contributed to the financial and economic mess we are in now.