Is Passive Investing Going to Kill Us?
A Lemming Reflects on Cliff Dives
I will be the first to admit that I LOVE PASSIVE INVESTING. I switched to it many years ago after I gave up on day and swing trading. Ever since I did that, my 401K and investment accounts started to do better. I’m either very smart or lucky.
The reality is, I’m not smart at all. I’m damn lucky and the reason is I caught a wave that no one saw coming.
The Passive Investing Wave
I still read blogs and there some bloggers still post insightful thoughts and ideas. A few days ago I checked in on Howard Lindzon’s blog. He linked to 361 Capital’s analysis of money flows from active to passive investing.
This chart is staggering and like Howard, my alarm bells are going off. The amount of money that’s been ‘passively’ pumped into DOW, NASDAQ, and S&P500 companies has to be skewing valuations. A lot of money chasing assets is sure to drive the price up.
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This has me wondering, will there be a crash or a correction happening in the future? If so, when? I don’t know but it might be a great opportunity to become an active investor again.
Lemmings off a cliff
If you watched the movie “Margin Call” you’d remember the pivotal late night meeting where CEO John Tuld (played by Jermey Irons) makes an important point. The MBS market is about crash and he tells the partners that there are ‘3 ways’ to make money in the markets. Cheat, be smarter, or be the first. They opted to be the first ones to dump the MBS positions. They sold it all at the open.
I inadvertently grabbed this passive trend around 2010, I certainly didn’t see it. So I wasn’t smart and I certainly didn’t cheat, that puts me squarely in the “be the first” category. There’s nothing wrong with that, it was pure luck, but I do know that the market likes to correct bubbles. Just ask any real estate investor in 2008.
The trick is to be prepared for anything and not marry yourself to one strategy or another. Markets are this amazing organism that grows and contracts based on fear and greed. Fear of missing out. Get rich or die trying. Add in political and cultural shifts and you have a market that’s vastly different than the one in the 1950’s but maybe closer to the one in the 1920's.
I can’t say for certain, I’m just trying to highlight the fact that while the markets are different today they can be eerily reminiscent of past events. Events where there was political and societal upheaval. Events where the 1% were crushing the 99% and booms and busts continue to happen, albeit in longer time intervals now.
So all my Lemmings. Be ready. If and when a correction happens I’ll either buy more at lower prices or I’ll selectively short a bunch of stuff. I don’t know what I’ll do but I certainly don’t want to be the first lemming off the cliff. I just want to be ready. Are you?