Scotsman,
I'm not sure I follow your logic.
You know, these index funds are I think the devils own creation. If anything is going to cause a 30's style crash, it will be those things.
A whole lot of people have their 401K and other money in mutual funds. They buy these index funds which must, by definition, emulate the index by purchasing the same stocks in the same proportions as the index itself.
So, you have a large amount of money chasing a limited amount of stock. The price of the stocks has to climb, regardless of fundementals or technicals. When the stock price climbs, the index fund makes a large return. They mutual funds say " Hey, look at my performance. And more money comes in, and the thing simply spirals upward.
1. For every buyer there's a seller.
2. If a stock within an index becomes overpriced, it may be sold or shorted by individuals (and probably many have been).
3. If we confine our discussion to something tangible like the S&P 500 simply because Vanguard pioneered index funds with that one, does this not, in fact, provide greater diversity than many individuals would otherwise have? Is there not less risk than concentrating ones holdings in CUBE, for example.
4. Or are you suggesting that anyone purchasing mutual funds should be prohibited from holding stocks?
5. Last time I looked at a long term graph of the S&P 500, it had a nice upwards slope. What's wrong with getting the Index performance?
You get to beat 90% of equity funds and probably a larger percentage of individual investors.
Thats how you get Coke trading at 45 times earnings.
I thought that consistently growing earnings during the past century faster than the economy in general grew, contributed to the premium investors are willing to pay for Coke. Having Buffett as a major holder doesn't hurt. Having a globally recognized brand name adds a little value as well. (I don't own KO, but I do have the Dogs of the Dow, and I don't care what their P/E is. For 15 minutes effort once a year, one gets to beat the Dow by about 5% points annually during the past 70 years).
Sooner or later, something will break, and the entire herd will head to the doors at once. Will not be a pretty sight.
Probably true, but what's that got to do with people deciding to own the whole market via the Vanguard 500 fund or AMEX:SPY? IMO, absolutely nothing.
I'm interested in hearing the underlying reasoning against buying the market in favour of picking a couple high tech stocks with no track record, higher P/Es, PSRs, P/Bk, etc than most "overpriced" members of the S&P 500 or the Dow.
Ian. |
