The Risks of The Rise of Passive Investing with Mike Green

David Einhorn said in a recent podcast interview that he feels that the market is broken. He has made significant changes to his investment approach as a result. Much of the basis for his assertion is based on the work of Simplify's Mike Green, who has been warning investors about the dangers of passive investing for many years. In this episode, we are fortunate to have Mike back for his third appearance on the podcast. We discuss the impact that the rise of passive investing has had on the market, how that impacts the success of fundamental investing strategies and the risks it poses to the market as a whole. We also get Mike's take on inflation, the economy, Fed policy and a lot more.

00:00 - Intro
02:03 - The history of research on the impact of passive investing
06:42 - The rise of passive's share of the market
13:30 - The vicious cycle of passive for fundamental investors
19:30 - Rational individual decisions creating collective risk
21:25 - What the rise of passive means for fundamental investors
25:35 - Addressing some of the criticisms of Mike's arguments
26:55 - Can a factor be created based on passive flows?
31:00 - The impact of the rise of passive on corporate governance
32:27 - Mike's view of the current macro landscape
36:19 - Is the real level of inflation lower than what is being reported?
41:10 - Is the market underestimating recession risk?
43:09 - Is the Fed too tight?
46:27 - How Mike would position a portfolio for the current environment?
52:47 - Is there still an opportunity in short-term bonds?
54:12 - Mike's biggest reason for worry and optimism over the next 5 years

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[WhyGoThere]

Could be useful to put the papers mentioned in the description.

[brybryBillions]

Loved Mike Green. Lots of gems on how to think about the markets

[mohrless]

Is securities lending a systemic risk to the market? I’d love to hear Mike discuss this. It seems borderline duplicitous.

[jbru]

I would be interested to hear what Mike thinks on ‘passive’ stock buy backs.

[chrisp]

One of your best ever guests.
For me, the biggest factor that the world economy needs to be considering is the potential for America to lose its fundamentals of law and order and primacy of the Constitution. Those are so vital to everything discussed here that we forget that they aren’t a given. Supposedly a near majority of the electorate are prepared to countenance the foundations of everything the U.S. stands for being trashed. Sitting there discussing economics whilst the vandals are tearing down the gates may be the legacy of all this. Happy investing…

[BlauveltBurns]

If we have net inflows, we don’t have a problem ?

[HepCatJack]

The flip side of working from home is that some companies have employees that like to chat about a lot of things that isn't work related so the worker talking to them has to stop working in order to politely listen to them. This is less likely to happen when the mode of communication is Skype or Zoom so people can be more focused on what they have to do. It was reported during COVID that people were able to get their work done so much faster that some got side gigs for added income. I expect that this would have contributed to the GDP.

[stephenklump]

"Everyone's happy, they're finally all the same - 'cause everyone's jumping everybody else's train" - The Cure

[ask_why]

401k contributions cut back to the bear minimum and only to get the match.
Zero additional into "passive flows".

[bleacherz]

What is the total of the required minimum distribution for retirement accounts ? And it’s extrapolation

[ralphsimpson]

If you take the theory to its extreme wont you end up with a market with most money in a few super overvalued stocks. Analogous to freerider effect. Once you have so many freeriders it breaks the process.

[pommemoi]

Brokers and financial advisors have gouged investors with high fees and below market returns for decades. Let’s say Mr. Green is correct in all his criticisms of passive investing. What is his solution? To go back to the good ‘ole days?

[depiction]

I work in the industry, and have been a hedgie for over 15 years. I'm part of the active side of things.
Passive holds about 16-33 percent of the market depending on what your definition of passive is. The market has grown so much that in comparison to the 90s the avg daily volatility is down significantly across major indexes - meaning there's more depth to the market thus much more liquidity. Mike's claims have been debunked many times, and he presents any hard data or deep analysis to backup his claims. Everything he says is very surface level. There's a good reason why Mike has moved around the industry a lot, - he's really good at talking, but no so good at coming up with ideas that make money. His understanding of the markets is a bit better than jr level, which makes sense bc he talks like every CFA I know. Anyway I hope that adds some context.

[IAMFREE]

🌈🌈🌈I just bought Agree Realty stock today.🌈🌈🌈

The stock market is up today while some of my stocks are in the red today.

[someparts]

Boy the YouTube algo worked on this one.

[hooksx]

Interesting theory, but there's about a million traders out there who are acting as individuals or as part of larger institutions.

No real danger in passive markets for now.

[jamesmorris]

I'm not particularly worried about index"sclerosis"..and, neither is Bill Bernstein. As he put it, recently; "As long as there are two dentists having lunch together in Lubbock, Texas; there will always be active stock-picking".

[hatter]

His mention of MicroStrategy seems to reveal how he doesn’t even understand the fundamentals of companies he’s using as an example. I think monetary policy is distorting the market much more than passive investing. If what he said was true, companies that were NOT part of any major passive fund would be tremendously mis-priced to the downside. That does not appear to be true.

[OuagaMick]

Yes but you can have passive strategies like value funds or even something simple as just a PE under 15

[jtunnicliffe]

Shock horror another fund manager who thinks passive investing is not a good idea - whatever next