Michael Burry Trashes Index Funds – Are We Screwed?

As a general rule, Mr. Money Mustache avoids reading the daily news and ignores the fluctuations of the stock market. And he advises you to do the same thing.

The negative factors of wasting your time, diluting your precious brainpower, and creating undue stress by worrying about things outside of your circle of control far outweigh any slight advantages you might get from the tiny slice of news stories that are actually useful and relevant to your daily life.

But on very rare occasions, something will squeeze its way through the News Sphincter that is worth addressing, and last week I learned of one of them. The basic idea was this:

Image source: Bloomberg
If you’re not a finance nerd, the phrase “Like Subprime CDOs”, just means “really bad”.

Michael Burry, who in my opinion is a relatively brilliant and well-known financial figure, voiced his concerns that we may be inflating a big bubble by concentrating too much of our money in passively managed index funds.

And because I have been telling you since the beginning that index funds are the best way to invest, my email inbox and Twitter feeds started filling with concerned questions and links to his interview on Bloomberg, asking if we should be taking this seriously.

So is it a big deal? Should we be worried?

The quick answer is No. And we’ll get into the full explanation below, but first let’s do a quick review of Index Funds in general.

Why Index Funds are Great

Index fund investing is both the simplest and the highest performing way to invest your money. It’s as simple as getting any brokerage account and buying the Vanguard Exchange traded fund called VTI, or getting a Betterment account and setting your allocation to at least 90% stocks.

It’s the ultimate win/win because you just set it and forget it. Both the math behind it, and the historical performance for the past 40 years (since the invention of index funds) has proven this out.

Yes, a small percentage of actively managed funds have beaten the market, and a larger percentage have trailed the market. But this over and underperformance itself tends to be random, and today’s winners often become tomorrow’s losers.

A bowl of actively managed funds. Can you pick the winner?

And here’s the real problem: you can’t predict in advance which of these horses you are betting on. So your best bet is to ride directly in the middle of the pack, while minimizing the fees you pay for the privilege.

But suddenly, Michael Burry says we are reaching the point where this model may soon stop working. So who is right? Mr. Money Mustache or Michael Burry? Have I been naively misleading you?

And what about the reassuring words of Jim Collins in his book The Simple Path to Wealth or rather amusing Guided Stock Market Meditation he put up on YouTube? Is Jim full of it too, in light of these new comments from a financial expert?

Now, we are already treading onto thin ice here, because similar stuff is in the news every day, and most of it is junk. Financial ‘experts’ are a dime a dozen, and just because somebody got something right once (in this case predicting the 2008 financial meltdown), doesn’t mean they will be right in the future.

Because the financial news industry is powered by profits which come from clicks and traffic, their job is to shock and worry and distract you as much as possible so you will click your way through more of their bait. Within the context of that single Burry interview, for example, I saw the following bits of “Breaking News”:

Big gain! (never mind that aside from meaningless fluctuations, the market has gone exactly nowhere in the past nineteen months since January 2018)
Down Six Percent! (Oops it was back up to those highs by the time I checked)
Triple digits! (oh, wait, that is less than a third of one percent because the index is about 27,000)
Volatility! Impact! (oh wait, that is all just the random fluctuation it always does and it means absolutely NOTHING to you as an investor)

NONE of these things are the least bit newsworthy, and they shouldn’t even be mentioned in a footnote, let alone labeled “Breaking News.”

So, stock market reporting is silly, and predictions of doom should be viewed even more skeptically. Because the nature of our economic system assures that virtually 100% of predictions of financial doom will always be wrong, because we are not really all doomed – the future is very bright.

However, I’ve read a lot of Mr. Burry’s writing and have more respect for his analysis than that of permanent fearmongers like Peter Schiff or Dmitri Orlov. So I pay attention to his opinions, even when they differ from my favorite permanent realist-optimists Warren Buffett and Bill Gates.

So the summary of his argument is this:

  1. Passive investing tends to distort the prices of individual stocks, because we buy everything in a fixed ratio without considering the value of each company.
  2. The “exit door” is small – there is a lot of money invested in fairly small companies whose shares are not frequently traded. So if we all tried to sell at once, we’d have way too many sellers and very few buyers. This would cause a massive price crash in the stock prices of these small companies.
  3. There are some complex bits under the hood of index funds – things like options and derivatives that can break under stress and cause money losses or more volatility.

Now at this point, the stock traders and active fund managers are probably cheering and jeering at us:

“YAY! Told you all along – come back to us where you belong.

We are well worth our much higher fees because we are gonna beat the market! Just look at this cherry-picked data from the current ten year bull market!”

But instead of picking a fight, let’s just address these points one by one:

  1. Yeah, but active traders have been making this argument against passive investing forever. The theory is correct, but in practice it would only be a problem if too many of us became passive and there were no active traders left. Thus the real question is: Are we close to this tipping point? And the easy answer is “Not even close”. Index funds own about 18 percent of global shares, and 45 percent here in the US. And active trading still outweighs index fund trades by 22-to-1.
  2. A small exit door only matters if everyone is running for the exits at once. And even then, as index fund investors (as opposed to active stock traders), we don’t do that. And even in the event of liquidity problems in a big sell-off, the only downside would be some bigger temporary price swings. We don’t care about those either.
  3. To better answer this question, I interviewed some of the people deep inside the machine – Betterment’s investing team and their director Dan Egan. A summary of their thoughts – This is actually more of a problem for “Synthetic” or leveraged index funds, not the true funds we invest in. For the most part, in the index funds you and I use, our money simply purchases real shares of businesses.

Point #1 above deserves a bit more of an answer. Because the real question here is “how many active investors does it take to balance out a market?” And like everything in life, this is not a black-and-white question. Instead we can look at this as being on spectrum. For reference, this is where we are now:

The great increase in Index fund investment after MMM and Jim Collins started advocating for it :-)
Image source – Morningstar / CNBC

A Purely Active Market

If everybody was an active investor or speculator, you would just have a sea of squabbling bullshit. Even today, people are trading back and forth for no reason just based on what they think the price will be later this afternoon. Even worse, you have “technical” traders, who place bets on the immediate future of a stock based not on fundamentals, but on obscure (and proven to be useless) mathematical patterns of what the stock price has done in the recent past. I may be unfairly lumping thoughtful value-based investors in here with day traders, but stock price prediction is a slippery slope and most of the trading volume on today’s exchanges is very slippery. And don’t even get me started on the nonsense of “high frequency trading” and the “flash crash” of 2010. No shortage of overly active trading.

If Everybody Was Passive

At the other extreme of this would be an “All Index Fund” world, where giant zombie-like index funds would just buy all the companies in proportion to their current market value, even when those companies have stopped making money or are on the verge of bankruptcy.

Nobody would be even looking at the earnings, so stock prices would never drop, even when the underlying companies go extinct. And on the flip side of that, companies who became vastly more profitable would never be rewarded with higher share prices.

In this case, a gigantic market opportunity would open up. Apple shares would still be at their 1980 IPO price of 39 cents per share (after accounting for splits), and each share would pay an annual dividend of $3.08, which is like getting a 792% annual interest rate on your investment. Individual investors (even me!) would come back to the market and they would flood in and buy Apple shares, until the share price rose up to a level where supply and demand balanced out. And today, that price happens to be about $216 per share.

There are plenty of people out there, finding and exploiting these little opportunities. People like outspoken tech investor and futurist Catherine Wood speak authoritatively about them – but only time will tell if her $2.3 billion ARK capital fund proves to outperform the market over the long run.

And that is the real answer to question #1: If Actively managed funds start consistently outperforming index funds on average across the entire industry, then we have reached the point of “Peak Indexing”, and you should switch to a good low-fee active fund.

This is far from happening, but I’ll let you know if it ever does.

And for every successful niche-finder, there are a hundred wannabe players, spouting buzzwords and predictions, getting ever-louder when they are right but going mysteriously off the radar when proven wrong. This survivorship bias ensures that if we read the news, we get the mistaken impression that most stock predictors know what they are talking about. They don’t.

So really, that’s all there really should be to stock investing. A small group of dedicated experts seek out the best values, and in a big enough market a larger amount of index fund money can tag along.

Never Forget What Stock Investing Really IS

The value of one share of a company is equal to the “net present value” of all of its future lifetime dividends payable to you the shareholder. Higher expected profits mean higher eventual dividends and thus higher stock prices. Lower profits mean lower prices. And a company that never makes a profit over its lifetime should not even be listed on the stock exchange.

Lower expected interest rates also mean those future dividend payments are worth more of in today’s dollars, which means today’s stocks are worth more. Which is why drops in the interest rate often trigger simultaneous boosts in all share prices.

Some companies don’t currently pay dividends, but that is only because we the shareholders have given the management permission to temporarily reinvest profits into growth – in hopes of larger future dividends.

If we knew (theoretically) in advance that a company would never pay any of its future earnings to shareholders, those shares should be worth zero. A company which never produces and returns value to shareholders is worthless from a financial perspective – unless you could get someone to buy your proven-worthless slips of paper purely on pure speculation, in hopes of selling it to someone at a higher price in the future – like gold and bitcoin. Speculation of this type is a less-than-zero-sum game, a tax on overall human prosperity, which is why you shouldn’t waste your time on it.

So the stock market really is built upon the fundamentals of earnings and dividends. Not on news snippets and soundbites and rapid trading. And since publicly traded companies are big, slow entities with hundreds of employees and thousands of customers, their fates simply don’t change very quickly. “Analysts” who try to predict these future earnings with any certainty rarely outperform a coin toss.

So We Can All Just Stay the Course and Relax

Just as with other bits of news in the financial media, you do not need to take any action. Keep investing and stay the course. If you are so inclined, study up on profitable real estate investments as a side hustle, and if you want a bit of a safety margin in exchange for slightly lower returns in the long run, consider paying off your mortgage as you approach early retirement.

Once you arrive, you will probably find that money and investments are the last thing on your mind. After all, that’s what Financial Independence is all about – becoming free from the need to worry about money.

It’s a nice place to be, and I’ll see you when you get here!

  • The Vigilante September 12, 2019, 8:56 am

    “In this case, a gigantic market opportunity would open up. Apple shares would still be at their 1980 IPO price of 39 cents per share (after accounting for splits), and each share would pay an annual dividend of $3.08, which is like getting a 792% annual interest rate on your investment. Individual investors (even me!) would come back to the market and they would flood in and buy Apple shares, until the share price rose up to a level where supply and demand balanced out. And today, that price happens to be about $216 per share.”

    This is really the only response necessary to concern for passive investing being a deal-knell for markets. Just as there’s an equilibrium for stock prices based on earnings/dividends/speculation of those pesky (and sometimes helpful!) day traders, and there’s an equilibrium for passive vs. active investing. Too much passive investing makes it easier to make a quick buck on active investing, as in this example, and people will flock to it. Then, we swing back toward the present-day situation where a lot more active trading occurs, and passive investing becomes the better bet. And back and forth we’d go. There’s no “bubble” to pop here, just a constantly shifting trend to ignore since we’re all going to act according to our own risk tolerance, anyway!

    • JL Collins September 12, 2019, 1:18 pm


    • Fit DIY Dad September 13, 2019, 8:10 pm

      When looking at how big passive investing in don’t forget to add in the massive amount of “closet index” funds pretending to be actively managed mutual funds that own very similar stocks to indexes with very low turnover. The main difference with the returns here are due to higher expenses for this supposed “active management”, which when factored in is mainly why they’ll lag the returns of the indexes.

      Basically you need to adjust how big the universe of passive investing is beyond what’s labeled a passive index fund to understand how massive the dumb money investing like an index actually is.

      • TomTX October 13, 2019, 7:22 am

        Really, you don’t need to do all that.

        Is passive investing returning equal or better than an “average” active fund?

        If yes: Prefer passive index investing
        If no: Prefer active investing

  • Daniel Welsch September 12, 2019, 9:01 am

    Hey Mr Money Mustache, I love the blog! Just one question about your opinion on dividends, though.

    You wrote, “If we knew (theoretically) in advance that a company would never pay any of its future earnings to shareholders, those shares should be worth zero.”

    But that sounds exactly like Berkshire Hathaway to me. And Buffet’s got a good explanation of what investors can do about the (non-existent) dividend in one of his shareholder letters.

    What do you think?

    Humbly yours,
    Mr Chorizo.

    • Mr. Money Mustache September 12, 2019, 2:42 pm

      Yes! I was thinking about Berkshire as I wrote that. And for full disclosure, Berkshire shares are the only thing I hold outside of pure index funds (across Vanguard and Betterment).

      So, Berkshire has so far kept the dividend payments and reinvested them for decades. But so far, it has worked out as each share became a larger and larger slice of the underlying businesses (which is why the A shares are now $317,000 each!)

      Two things can happen – this growth can continue and if we trust Berkshire we can continue to hold the shares. Or eventually, if they run out of stuff to invest in, they could start issuing massive dividends (likely $15,000 per share per year or more).

      It can’t possibly continue to grow faster than GDP FOREVER, because this implies that Berkshire would eventually exceed the entire world’s GDP. So my prediction is that eventually, dividends will start flowing.

      • Nolan Hergert September 13, 2019, 12:05 am

        The other unmentioned thing here manipulating the share price is share buybacks, which Buffett advocates for shareholder tax reasons. By buying back shares from investors, the number of total shares decreases and increases the value of each share as a percent of future company dividends/buybacks. As a shareholder I like it, because I’m not forced to pay taxes on earnings when dividends are paid, but rather when I choose to sell the stock (via capital gains). This can lower your taxes too by selling when in a lower income bracket, do a larger one-time non-profit or Donor-Advised-Fund gift, etc.

        Ultimately though it gets confused with companies trying to pull the wool over investors’ eyes though, as MMM warns against.

        ERN has some practical implementation thoughts here: https://earlyretirementnow.com/2018/05/30/idea-for-a-new-etf/

      • Mike September 16, 2019, 2:23 pm

        Great article! I too saw the headline…. and then kept all of my investing strategies the exact same…

        The Dividend Irrelevance Theory explains why you might want to tweak your article from saying “net present value of all of its future lifetime dividends” to “future lifetime cash flows”. Some companies have said they will never give out dividends because as an investor you can sell your shares equal to what you want your own dividend to be. So instead of a $100 dividend each year, you can sell $100 of your shares.

      • Chris Jungmann October 21, 2019, 8:02 pm

        Great point about forever growth, they can’t … and will start paying dividends. With that said I would not speculate on when (not that Mr MMM did), because Warren thinks and invests with a time-horizon well beyond the average human lifetime. It might be a very long time before BRKA or B start paying dividends. I’d prefer something like a railroad paying increasing dividends now, that’s likely to continue providing a necessary service for the next 200 years. Of course Berkshire already owns a railroad, so I guess I’m making a circular observation LOL.

      • Connor Gilliland June 24, 2022, 9:31 am

        Mr. Money Mustache, I’ve read through a lot of your articles over the past few weeks as I am trying to get an early start on investing and saving, and I really appreciate all the advice you give!
        I’ve started learning to hypermile when I can’t avoid driving, but I usually bike or walk wherever I need to go, along with cutting out lots of unnecessary spending. But when it comes to investing, I’m still trying to get started. I recently opened a Fidelity Brokerage Account with the intention of putting my money into index funds and letting it sit and work for me, but every mention you have of Index funds is with Vanguard.
        I was hoping you could explain, or point me to an article in which you do, why you choose Vanguard over Fidelity? I’ve heard from others that Vanguard has lower expense ratios and fees, but I’ve also seen Fidelity has a low fees on a lot, even some with 0% Expense Ratios (FZROX, FNILX, and 2-3 others).
        Again I’m very new to index funds and investing, so any advice on things I need to consider, how to compare funds, and any other advice you have to give are greatly appreciated!!

  • Bob September 12, 2019, 9:05 am

    Maybe there’s too much money in US equities and you should buy some undervalued non-US equities for a change.
    Passive could generate a bubble, if too much money is in the asset class of VTI :)

    • Mike November 21, 2019, 2:32 am

      This is correct, except for one thing. Passive has already created a bubble. Nobody considers the value they are receiving for the price they are paying when investing in VTI. Unlike, for example, when they buy a house. Currently the expected return over the next decade or so is around 0% per year, but probably not in a straight line. There will likely be some interesting downdrafts (opportunities?) and updrafts in the process. If you are 20-30 years old and not expecting to retire for 40 years this may not be a problem. However, anyone over 50 might be dead or too old to spend the money when the market eventually recovers back to these levels.

      If a person does not know how to estimate the future expected return of VTI then they should either learn how to do it, or invest in something else that they do know how to value.

  • B.C. Kowalski September 12, 2019, 9:12 am

    I’ve decided I need to get Jim Collins’ book for my nephew – I’m super proud of him that he opened his first Roth IRA at age 18, but my sister set him up with this shady primerica guy she knows and I’m sure he got ripped off. He couldn’t even tell me what it was being invested in, and I’m sure he’s paying terrible fees. I’m hoping to have a sit down with him to lay out some of this stuff, but I think Jim Collins’ book would help bring a “not from a relative” perspective.

    That being said, I’m super proud of him. I was racking up credit card debt and writing bad checks at his age. He already sees the pointlessness of silly consumer spending and he and my niece are both savings minded (she saves like half the money she earns doing odd jobs around her neighborhood). They’ll probably both be FIRE’d by the time they’re my age, if not sooner…

  • That Frugal Pharmacist September 12, 2019, 9:46 am

    I agree that a bubble could be developing.

    And I think you’re spot on on analysis.

    Currently, we’re seeing index funds gains such popularity because they almost always outperform active. It’s not just because it’s easier.

    Though ease is a MAJOR perk for someone like me… there are plenty of people who understand things much better than I do who are choosing to index. It’s not because of ease to them.

    And of those, many still dabble in active stock picks. Can’t resist the possibility to beat the system a bit.

    So I’m quite positive if the trend seems to turn that passive indexing begins to flatline completely and active management looks up again, there will be people smarter than I making the jump back.

    And I’m completely content to keep riding their coattails!

    • David September 12, 2019, 5:48 pm

      I definitely agree that there will be a swing back towards active investing when it reaches a critical point. But even then I think for the average Joe we will still be better off ass a passive investor for a couple of reasons;

      1) People always overestimate their ability ( think how the majority of drivers surveyed say they are above average.) and Investors are often especially prone to this , making them become active before its time.

      2) The managers who actually do pick well will charge big fees, negating any value.

      So on balance I think we will never actually quite reaching the tipping point, people will just think we have and become active.

  • Pedro Delgado September 12, 2019, 10:13 am

    I’m more alarmed about “synthetic” ETFs. I was using a euro equicy of Betterment and they had index funds from one of the blue chip firms. I read the 200 page prospectus and they don’t actually hold the funds. Synthetic instruments and derivatives. Could you address this issue too?

    • Mr. Money Mustache September 12, 2019, 2:37 pm

      The details of how synthetic ETFs are managed is not something I know much about yet.

      But from my understand the actual Betterment (US) does not use them, and their investment teem seems to agree that they are a) potentially more risky and b) more common in Europe.

  • Bastiat September 12, 2019, 10:31 am

    Great article as usual but I really don’t get your gratuitous jab at gold. You can’t compare gold to a share of a company that will never pay any dividend. Shares of such a company are clearly worthless but people value gold for itself just like they value a nice suit. You may not but most people do. It has nothing to do with future expected cashflows and everything to do with subjective utility.

    • Mr. Money Mustache September 12, 2019, 2:35 pm

      Hi Bastiat, I would agree with you on the portion of gold that people buy because they actually want to own and look at it (like a nice suit). While that’s not my idea of a good use of money, I agree that people are preceiving value.

      But I was talking about gold price speculation on the stock market – physically this (rather large) portion of the world’s gold is just stored in bricks in guarded vaults, and people buy and sell ownership rights through financial instruments. It only delivers a profit if you sell it to someone else at a higher price.

      • Harold Dawson September 13, 2019, 11:27 pm

        Gold wouldn’t be an issue today if Central Banks did their job. Gold tells us that they have failed. The Central Banks do not care about you, and they do not care about protecting the value of your money.

        Look at gold for the past 15 years. It has outperformed even the S&P, which is still in a decade long rally. We live in a world of massive asset price inflation. Looking at the Money Supply charts from the Federal Reserve, it’s not hard to see why. The money supply has doubled since 2008. Gold has also nearly doubled. House prices have more than doubled in many areas. The newly created money has also found its way into the stock market, helping create an absolutely epic run.

        Gold shines a light on the failure of Central Banks, and the failure of the government to maintain anything resembling budgetary restraint. Those who believe in “the system” as it is (Buffett, MMM) tend to dislike gold and prefer the fiat system. And why not? Indeed, the fiat system has helped make them very rich. Part of this wealth has been acquired via the constant debasement of the money supply. It certainly contributes to wealth inequality by making the rich even richer. All the while, the average person’s wages aren’t keeping up with inflation. And they are falling further and further behind.

        There is currently a growing lack of trust in “the system,” and for good reason. Simply put, people can’t be trusted to do the right thing. Gold, a simple inanimate object, can be trusted. That is also the primary reason that Bitcoin exists. It is yet another shining light, exposing the long-standing failures of fiat money. And like gold, it is hated by those in power for doing so.

        • Mr. Money Mustache September 18, 2019, 12:03 pm

          How strange it is, to hear these claims that the central bankers are “failing” me, when this US financial system they have been running has helped me live so well.

          It has enabled me to start with nothing and yet earn millions of dollars and easily take care of all the material needs of me and everyone I care about – AND give hundreds of thousands of it away to help thousands of other people get medical care and education and other genuinely useful stuff. And this will continue for the rest of my life – all without playing around with a single bar of gold or spoonful of silver.

          YES – the US financial system is messy and like anything run by humans, it is unpredictable and imperfect. But it is still by any objective measurement a remarkable success – a spectacular medium for enabling human productivity and trade.

          If we focus on electing more honest politicians, we will get even better results with all of the services we depend on our government to provide.

          • Harold Dawson September 18, 2019, 10:27 pm

            I grant that they haven’t failed “you,” in particular. You are, quite frankly, far from the average. You’ve been, IIRC, around the top 5% earners while working, and close to the top 1% now. You would be successful in virtually any capitalist society. Realize that the typical American (the median wage earner) has a bit different story to tell.

            I say this as someone who is also doing just fine, and planning to FIRE in my late 30s, but I see the current system for what it is. My family has actually done extremely well due to massive inflation of the last 20 years. Holding productive assets that have risen 300-400% or more in price certainly helps with that. In reality, the dramatic decline in dollar purchasing power is responsible for a huge amount of these wealth gains.

            It’s become an inherently unfair system. It could be more fair if Central Banks weren’t in charge of setting the interest rate. In capitalism, we reject central planning by the elite, oh, except for this one case? QE also shouldn’t be allowed. If the market doesn’t want to lend you money at a certain interest rate, there is a good reason for it. Free markets work, but you have to stand back and let them.

            It’s equally odd to hear you claim that Central Banking has essentially enabled your success. Your own productivity, hard work, technological ability, frugal nature, and indeed investment prowess has enabled your success. You seem to conflate Central Banks and fiat money with any modern advancements of society. I assure you they are not mutually exclusive.

            “If we focus on electing more honest politicians…” If it were only that easy. As James Grant says, the Congress is plenty bipartisan when it comes to ignoring the National Debt. Human nature never changes, no matter which way you vote. People will borrow from tomorrow to pay today’s bill. A convertible currency places immediate restraint a government’s ability to overspend and overborrow. This lesson was important enough to be written into the US Constitution. We’ve since forgotten it. I expect that we will be reminded.

          • Abu Iskander September 19, 2019, 7:55 am

            It makes me think of a turkey saying the day before Thanksgiving “Why should I worry about anything? Humans have been nothing but great for us for years! They feed us AND scoop out the poop AND if anyone gets sick they bring a doctor to cure them. Life is great and this will continue for the rest of our life!”
            Seriously though, I don’t think the central bank will eat us with some gravy and a side of mashed potatoes, but the fact that debt based economy worked well for the past few decades does not mean it will work great in the future.You can see the cracks in the foundation just looking at all the negative yielding bonds (which are complete nonsense, but there is 14 trillions worth of it).
            Running an economy on negative yielding debt is not sustainable. And we will probably have to figure out how to live within an economy with very limited growth. Not that I think gold would help with that…

        • Sean September 25, 2019, 1:44 pm

          Harold, I believe that gold has only outperformed the SP500 if you don’t include dividends. If you include dividends it appears to paint a very different picture. 10yr and 30yr charts show 3x outperformance of SP500 vs gold and even greater return if you use an index that includes more companies (this author uses the Dow, SP500 and wilshire large cap which is 750 companies)


          This website has excellent data and source citations, with data available for download.

        • TomTX October 13, 2019, 7:38 am

          Sure, cherry picking dates, ignoring dividends for the stocks and ignoring carrying costs & much larger bid/ask spread for gold – can show better return for gold.

          Just consider the dividends from the stocks, and gold (barely) loses in the 15 year timeframe as well.

          …without even adjusting for the “drag” of fees charged to store your gold (-0.75% per year on average) or looking at a comparison across a wider spread of dates (doesn’t look good for gold), or the wider bid/ask and higher trading fees on gold (Hm, ~1% cost on buy, 1% cost on sell….)

      • elbow September 17, 2019, 1:29 pm

        Gold and silver are the only forms of “money” that exist. The rest is just government currency, which continues to loose its value daily. Just like all fiat currency, eventually it will fail. I hope it will not happen in my life time, but if it does at least I’ll have a bit of a hedge against it.

        • GrahamMoresby September 24, 2019, 5:59 pm

          You aren’t wrong with your remark. However I want to point out the best investment in my impression — I tend to invest all my money in land acquisition, because I can put seeds on the land I own or fell trees when it gets cold or keep bees or cattle and make use of the land. My land investment gives me a true return and this concept has been around far longer than the modern fiat money system. I cannot eat gold or silver, but I might accept it in exchange for my fire wood or honey one day ;)

  • Norm September 12, 2019, 11:20 am

    This is what I’ve always assumed as well. As long as there are any active investors at all, the price will be “correct” or whatever you want to call it. And there is money to be made, so there will always be active investors, so there is nothing to worry about. Aside from contributions, I don’t do any buying or selling except a bi-annual re-balancing between stocks/bonds and domestic/international. I only know Michael Burry from the book and movie The Big Short, but he seems like a smart guy, so I wonder why he would publish something like that?

    • lurker September 12, 2019, 12:03 pm

      It is called talking your book.

    • Matías Alonso September 12, 2019, 12:17 pm

      Actually in the article he also recommended GameStop. If you check , since Burry recommended GameStop, it has being going down really quickly.
      To predict is really hard, and it is really harder to predict the future.

    • G.T September 12, 2019, 2:36 pm

      He didn’t publish it. He provided a length email interview, for which a Bloomberg journalist summarized into an article. The other news outlets then pumped the story like he was making a prophecy.

      I am only guessing here but I think the question asked was “what risks do you see in the market?” He then gave his response of which parts of it were quoted in the article.

      Reading between the lines of what he is quoted as saying, I think he was trying to say interest rates are being manipulated resulting in the improper pricing of risk. The improper pricing of risk has resulted in exaggerated asset pricing and the investing in riskier assets in the search for yield. The increase in the amount of passive investing has supported this and resulted in a lot of assets priced where they are not supported by fundamentals. In the event of a crisis (some) passive investors will panic and try to liquidate on mass, something that is potentially more difficult in passive investing formats.

      He doesn’t say passive investing is bad but that he thinks it, combined with other factors, will turn out to be a large contributing factor in the next market crisis.

      Personally, I agree with him, this is a big risk that has the potential to hurt a lot of people. If people strictly follow the teachings of MMM and JLCollins then they should be fine in the long run as it is unlikely that the world is going to end.

      • Mr. Money Mustache September 12, 2019, 2:53 pm

        Yeah, that is a good interpretation GT, and I think you are right – I missed the “artificially low interest rates” factor in this article, and that is probably the biggest reason stocks are so expensive right now. I still can’t take any guesses at future interest rates, though.

        Secondly, I hope Mr. Burry doesn’t see this and feel pissed off because he was misquoted and misunderstood so badly. Because you are right – his ORIGINAL responses were probably more thorough and accurate – but the newspaper admitted they edited them down.

        I have never seen anyone edit down my own interview answers without significantly changing the meaning, so I bet the same thing has happened here.

  • Matt V September 12, 2019, 12:04 pm

    There’s some extensive, very thought provoking writing on this subject from 3 years ago by one of my favorite financial authors (who writes pseudonymously and is himself an active trader):


    Basically, active investors can add value to a market, but we have a very long way to go before there are too many passive investors.

    From the conclusion in the indexville post:
    “Where is that minimum level [of active investors]? In my view, far away from the current level, at least at current fee rates. If I had to randomly guess, I would say somewhere in the range of 5% active, 95% passive. If we include private equity in the active universe, then maybe the number is higher–say, 10% active, 90% passive.”

  • Fit DIY Dad September 12, 2019, 12:08 pm

    I’m pretty optimistic about the long term future of America and also with index funds, but I dug a little deeper before the Big Short guy came out with his warning in this post http://fitdiydad.com/index-funds-devils-advocate/

    I like getting a deal, and if you look at the current s&p 500 earnings yield is historically and ridiculously low and way below the mark if you want to get 7% long term, could be lower for an extended period of time and best to jump in with eyes wide open.

    Curious what you think of the article MMM.

    • Buffalo Chip September 13, 2019, 10:03 am

      @FitDIYdad: I read your blog post. It was good. Really good. If this is an example of what you’re going to put out in the future then I’ll be following it.

      A word of realism though. Keep in mind that people are often not so interested in good, new-to-them ideas as they are in having their viewpoints agreed with. Your investment views are outside the passive stock index/ real estate universe of most FI people so you’re going to have a harder time attracting readers.

      Michael Burry’s strategy 10 or so years ago was unpopular, even amongst some of those who were investing in his hedge fund. And now? 😂

      • Fit DIY Dad September 13, 2019, 8:19 pm

        Thanks Buffalo Chip for the kind words.

        Investing in a more value-based approach is definitely something I’m going to write more about for different types of investors, still figuring out the content for the site.

        And I’ve definitely got my opinions on investing that I’ll be sharing and I like to back things up with my own research and analysis, and not just parrot what’s popular or widely believed (but sometimes illogical).

        I’m usually a little early to the “party”, since it’s one thing to have a legit thesis, totally another thing to predict the timing (I have no interest in the latter).

        • Financial Freedom Countdown September 13, 2019, 11:14 pm

          @FitDIYDad your article was good but I believe you are focusing more on S&P500 but what if you hold the entire Global stock market instead of SPY? Agree that true passive does not exist and active decisions are being made wrt inclusion or exclusion based on the index being tracked. Also growth had a monster decade and will likely outperform value in the current monetary environment.

          • Fit DIY Dad September 15, 2019, 1:26 pm

            @FFC If it’s market cap weighted, which most large, popular index funds are, then the S&P500 vs a total US stock market index fund doesn’t make that big of a difference. If you also add an total international index fund to the US one then it’ll change things a bit, probably reduce risk and returns some, but I still wouldn’t be comfortable holding that since the buying and selling mechanism is the same and not very logical.

            For folks that aren’t interested in spending any of their time on their investments index funds are fine. I like the discovery process of investing, so I’m biased, but there are still alternative ways to invest in stocks that can weigh the odds in your favor without spending inordinate amounts of time on discovery where you’ll be better positioned if there’s a bubble and you don’t want to blindly participate in it.

  • freddy smidlap September 12, 2019, 12:27 pm

    i like to point out that buying and holding your own stock picks is NOT the same as buying an actively managed fund, which tend to uderperform. individual investors can do just fine by buying good stocks and avoiding crappy ones and i don’t think it takes a harvard phd to figure out what a crappy stock looks like. i know that’s blasphemy to the index only everybody who doesn’t do it this way is a misguided moron hoard, but part of financial independence is the word “independence.” that’s my two cents worth and i wouldn’t think about telling anyone else how they ought to be doing it unless they ask. i’m happy to see where it all goes.

    • Bennion Redd September 12, 2019, 12:52 pm

      Two downsides come to mind:

      1 – You take on more risk by being more concentrated. Occasionally an Enron will collapse.

      2 – You likely incur more fees by doing many trades yourself, which can add up over time, while you can keep fees extremely low or 0 with many index fund trades.

      • freddy smidlap September 13, 2019, 1:05 pm

        yeah, i forgot to mention that you gotta do it right. be an investor and not a trader. i’ve made 13 trade transactions this year on 600k in stocks. i think that 91 bucks equals about 0.015% to own the exact 35 diversified stocks we own. it’s not for everyone, that’s for sure.

        if i wanted an index i would get some QQQ which has killed the s+p500 over the past 20 years. the price is too high for the bogleheads at 0.4% to make double the return.

  • Bennion Redd September 12, 2019, 12:49 pm

    While I agree with pretty much everything MMM said, I actually do think there is some additional risk in index funds investing in relatively illiquid companies.

    The problem is that during a big sell-off, they will sell off the shares of the illiquid very small companies at a heavy discount, and not get the same discount on the way back up. So rather than just being a temporary price swing, it would be a one-time penalty levied on index funds invested in those illiquid small companies at the time of the big drop.

    I think it’s worth considering a large cap index fund, like S&P 500, as some protection against that risk.

  • Effsysbreak September 12, 2019, 12:51 pm

    Is there another Dmitri Orlov that I’m not aware of? As far as I know, he’s a hockey player!

  • Cubert September 12, 2019, 1:03 pm

    I agree. Hard to imagine such a wide spread of investments failing all-together. I agree fully though too – with hedging your portfolio with real estate. I’d go so far as to say a 50-50 split between Index Funds and Real Estate (rentals, hospitality – AirBNB).

  • Anonymous September 12, 2019, 1:06 pm

    Wow that’s the best explanation of index funds I’ve read.

    With their increased popularity I had wondered about point 1 for awhile, and comparing active fund performance to index fund performance seems like a great way to think about it.

    Now back to auto deposit VTSAX and not thinking about my investments. :)

  • JoeHx September 12, 2019, 1:13 pm

    The only legitimate concern I’ve heard about index funds is that it’s putting stock voting rights in a smaller pool of people. Who makes the votes for each stock when that stock is held in an index fund? The index fund manager?

    • Sean September 25, 2019, 1:51 pm

      Totally agree, there is a possible corporate governance problem with index funds that needs to be addressed. However Jack Bogle seemed quite optimistic in several interviews and this HBR article seems to think it’s all gonna be alright.


      “What happens when index funds run Corporate America?

      Hedge fund activist Bill Ackman posed that question recently in his fund’s annual letter to investors. It’s a really good one. No one knows what consequences the boom of passive investment funds will have for the corporations they own.”

  • Mr. Frugal Toque September 12, 2019, 1:21 pm

    If we ever pushed up against the “Too Much Passive Investing” edge, that would be a *good* thing.
    It would mean that the day traders and micro-traders and those people who do those weird microsecond scams had been removed from the market, and stocks would make nice, lazy curves indicating the actual value of a company over time, according to people who are actually aware of how values are calculated.
    That sounds like Utopia, so I doubt it can happen on a world wide scale.

  • Alex September 12, 2019, 1:23 pm

    It sounds to me like his concerns are more about what would happen if people day traded index funds, rather than the buy and hold investors. They may be a specifically bad vehicle for those trying to time the market and sell during a crash, and I can see the argument that they could exacerbate crashes, but I don’t see how that is a bad thing in the long term as the market re-balances, and gets back to equilibrium. Index funds can’t cause some sort of perma-crash. But maybe he has a point that many people will try to sell indexes in a crash, only making the crash worse in the short term.

    • Married to a Swabian September 15, 2019, 7:16 am

      Yes, that was the part of the article that got my attention: the small exit door.
      The majority of funds are still actively managed – 82% globally according to this article.
      For years, these actively managed funds use robots to execute trades:
      My concern is that this would create the scenario of many investors running for the exits at once…if a certain set of financial data we’re to trigger massive “robo-selling”. At that point, those of us in index funds might also be tempted to sell. We did have the flash crash some years ago…

  • JL Collins September 12, 2019, 1:26 pm

    Like you, my inbox has been filling up with questions on this article which, all due respect to Mr. Burry, is just one more in and endless flow whenever the market gets a bit wacky.

    So glad you decided to respond to it Mr. MM so I don’t have to. :)

    “The great increase in Index fund investment after MMM and Jim Collins started advocating for it :-)”

    About time we got some credit on this. ;)

    • scientist September 17, 2019, 9:25 am

      LOL. But in all fairness, I think it’s a bit tragic how there’s not more reference to Malkiel, Bogle, etc., in all this. I heard about them and read Malkiel as a teenager in the ’90s. As an academic, I’m a little sad about the incestuous/solipsistic self-promoting PR of the blogosphere.

      • Joe September 17, 2019, 5:06 pm

        It’s sad everyone who read the article seems to think MB is focused on the large equity index ETFs and not all the other garbage out there including the most-probably-toxic bond funds. I would bet he doesn’t have much of an issue with the broad-based equity indexes versus the other toxic crap.

  • Elijah Baldwin September 12, 2019, 1:28 pm

    I appreciate the analysis, and I agree that passive and active investments are going to eventually reach a kind of balance where they perform approximately the same. I disagree with your pessimism of non-stock investments in general though.

    I think you’ll find many of these investments can perform quite well in the long term, and improve the risk adjusted returns of a portfolio. With leverage the returns can be even better than the market at equivalent or less risk. But, admittedly, this entire process is not exactly simple and I personally deeply enjoy allocating investments, and making my own financial/investment decisions. I still do use focused index funds often though.

  • FullTimeFinance September 12, 2019, 1:55 pm

    I agree their fears are unfounded. If we got anywhere close to the point where passive could fail then the boat would rapidly shift to active. Would everyone go? No? But everyone doesn’t need too. Just enough to keep prices in check. That happens at the margins not at the volume play, since the volume is buy and hold. That should be plenty to keep markets self moderating.

  • Brian September 12, 2019, 2:01 pm

    MMM, agree with you on daily/weekly/monthly stock market noise. It’s true passive investing has worked for 40 years, but I think you need to look at even longer timescales. 40 years is almost exactly the length of the current long term debt cycle, which has been disinflationary, and good for stocks. It’s due to change, and I worry your brilliant positive philosophy is at risk. Please please check out the free stuff Ray Dalio publishes on long term debt cycles.

  • Chad Carson September 12, 2019, 2:05 pm

    Thanks for the mention of my real estate book, MMM!

    My long-term plan is to increase my allocation to index funds like you and JLCollins preach. I’m still heavy into real estate investments because I’ve always been able to find relatively low risk, high return investments in this arena. But especially in my retirement account I’m making the transition towards equities and agree 100% with your assessment for long-term investors like us.

    • Mr. Money Mustache September 12, 2019, 3:03 pm

      Coach Carson! Nice to see you here and thanks for stopping by.

      Yeah, your real estate techniques and the resulting empire are EPIC. But that definitely took a lot more work and skill on your part than index fund investing, so it is good that you were rewarded with better-than-stock-market returns.

      And if you ever need a break from managing that business and want it to be truly passive, index funds will be there for you.

  • Larry in Maryland September 12, 2019, 2:45 pm

    Great article. Tiny correction: In that first “Breaking News” item, it should say the market’s been flat since January, 2018, not 2017. (It went up a lot in 2017.)

    • Mr. Money Mustache September 12, 2019, 2:49 pm

      Oh, yes thanks very much – I got the 19 months part right but not the year. It is now corrected.

  • Dharma Bum September 12, 2019, 3:03 pm

    I am an “early retiree”. How’d I do it?
    Passive, buy and hold, dividend paying ETFs.
    Total market coverage plus some attention paid to asset allocation.
    Never exit an asset class. Rebalance periodically. AND DON’T WATCH OR LISTEN TO THE “NEWS”. It’s all nonsense.
    I took MMM’s advice years ago, and got rid of cable TV.
    My mind cleared up in a few weeks. I can think clearly now. No nonsensical worries about fake events that have zero effect on my life.
    I do still read blogs, and that’s how I found out about Burry’s latest prediction on ETFs.
    Another reader posted this link:
    It’s a quick, interesting read.
    Have faith mustachians, and heed your guru!

  • Bob Reisner September 12, 2019, 3:34 pm

    There is nothing wrong, over a long enough period of time, using index funds as the mechanism to invest in the equity markets. It is horribly risky to have 90% of investable assets in public equities.

    There have been long periods where equity performance had poor performance for 5, 10 or even 20 year periods. There have been periods in my lifetime with poor equity performance and very high inflation. The risk might be ‘small’ but things happen and the bad might happen to someone’s 90% equity investment pool. Poor investment performance could delay retirement, impoverish someone in retirement or even force them back to work at a time when their skills have diminished or lost value.

    Using the S&P 500 as an example, someone who retired in the late 90s or first couple of years of the new century saw no cumulative increase in their investment until 2012/13. I’ve been retired for decades with a range of income streams and largely immune to the equity market. During the late 90’s/2000s I had homes in two communities with substantial numbers of retirees and late career types. I got to see the impact of sustained poor equity market performance. The ten plus years of equity investment uncertainty caused many emotional stress and a non trivial number real compression in their lifestyle. Some had the catastrophe of watching equity investments fall while they lost their jobs or even worse lost their pensions via company bankruptcy (even some who were retired). Just as bad were a few who had medical events and issues with their kids that required them to draw down a portion of their assets at the bottom of the equity cycle.

    Everyone in the USA should make sure they have 40 quarter of reasonable wages on their social security record … assuring them of an inflation indexed annuity. When retired, there should be a few years of spending needs not covered by SS, annuities or pensions in cash or near cash (bonds, not bond funds).

    And whatever the long term investment pool is, it should be spread across investments that are more diverse than pure equities. Perhaps a passive or active investment in a local business. Maybe a pool of bonds or bond funds. Certainly some real estate as a long cycle inflation hedge (a valuable home, rental properties or REITS). The list of reasonable alternatives to the equity market is substantial and different alternatives will have specific appeal to different persons.

    A retirement stool will be more stable with three legs and will be even better with four or more legs. Investing in index funds for a portion of your savings pool is a good strategy for many and maybe most people. Having 90% of you wealth in equity, index or otherwise, really is a risk that shouldn’t be taken.

    • Michael September 12, 2019, 5:29 pm

      Thanks for sharing your experience and perspective. I’m a strong believer in multiple revenue streams for risk management.

    • Always learning September 22, 2019, 6:47 pm

      Agree with your risk outlook and hedging approach.
      Although I come back here to MMM for mostly emotional pickmeups I take issue with the overly optimistic market and return outlook. Even 20 years of great returns aren’t enough to prove an investment strategy, which has to be always considered in the overall market context and own age situation. It took 20 years for the DJIA to recover the crash of 1929. There would be no income from “index” funds in a scenario like that. More likely it would be complete capital destruction as almost nobody can stand by prolonged time when his investments are evaporating year after year ( with ZERO dividend as they would be cut quickly to save companies).
      I think it is concerning that the US share market is indexed to 45%. Some comments look to convince that a 95% passive market would be a stable or a real market at all! The real issue with too many assets locked in passive funds is the diminishing price discovery. Real market works because of price discovery only, in a prolonged market decline the passive funds would effectively accelerate the price decline as there is less buyers to act in the market – since 45% just follow the trend; I would say the longer the decline the more this risk develops. We’ve seen that somewhat late December 2018 when the decline was perpetuated by the algos. Same principle here.
      Also he is not the first trader to bring that up, lonely voices for sure amid the indexed industry, but worth considering. With most financial inventions historically they were great until they weren’t and we only have long term data with plain stocks and bonds. So yes if you had the right time frame maybe you were a smart indexer, but if unlucky you would be working all your retirement.
      And to the point of a “low” or “equal” market with opportunities – what opportunities? , there would be no market at all, why would anyone ever lock funds in a vehicle that has no returns?! Who would be paying your return? This sounds more like an annuity with promised regular payments but here you give away your capital FIRST and that person turns around and generates return with it somewhere else to pay you that income.
      I don’t remember if MMM ever published his overall asset allocation but it would be worth stressing that he can ride out any dividend or shares declines ONLY because he does have other, substantial income producing assets ( blog, real estate ). It is too risky to advise readers to blindly trust index funds.
      Lastly on Buffet, BH sits on roughly 100B in cash and underperformed the S&P500 for the last 10 years. So if you currently invest money with them you’re purchasing a kinda better money market.

  • Stephen Tamang September 12, 2019, 4:12 pm

    Once a person have no significant debt, he or she must decide what to do with the extra money. Nothing is safe. Everything is just opinion. You can safely narrow it down between 4-5 top options and take your position. Index funds are the fan favorite, but picking a nice stock portfolio and holding until it makes sense to sell is totally reasonable too, imo. reasonable mutual funds – perfectly fine. Financial Advisory firms with good reputations – perfectly fine. Pick your poison and acknowledge there are somethings you just can’t do without risk.

  • Financially Fit Mom September 12, 2019, 4:31 pm

    I’m all for a large group of panickers selling like crazy. Lowers the price for those of us riding the crest.

  • Robert September 12, 2019, 6:41 pm

    I enjoyed the thoughtful response. I think there is some valid concern today about the prevalence of high valued tech companies with little earnings sitting in the index.

    If someone who needs the money next year that could be problematic, but that’s an asset allocation decision and short term money shouldn’t be in an index fund anyways. For the long term investor, it’s just part of the market, some assets are always overvalued and some are undervalued – it will work itself out. We really only need a handful of activist investors (of which there are plenty) to pressure the poorly performing companies.

  • Tim September 12, 2019, 8:07 pm

    Hey MMM,

    On a pixel 2 XL your photo captions don’t look right. every word in the caption stacks above each other. Get your dev to check it out.

  • Jo Web September 12, 2019, 8:07 pm

    What is the best way to use index funds but at the same time not investing in fossil fuel companies? Thank you!

    • Tim September 17, 2019, 7:01 pm

      I would check out CRBN which tries to replicate the risk and return of the global index (MSCI All Country World Index) but has 77% lower carbon emissions than the MSCI ACWI. You could also check out SUSA on the US side that’s more geared toward positive environmental, social and governance issues but also has 44% lower emissions. If you want to get really fancy you could take a look at the Calvert Indices like CISIX which won’t invest in any fossil fuel companies and they also have an active engagement effort to approach companies as owners and talk them into talking positive steps on environmental, social and governance issues.

  • John Steadman September 12, 2019, 9:57 pm

    MMM, love the content here. I think this is the best response to Dr. Burry’s comments I’ve seen yet. However, I do worry that this post has left out one important component to Burry’s criticism- index funds are like CDOs because the underlying assets are fundamentally overvalued. This statement has a lot of implications, but what I took from it is that a lot of these stocks are just not a good buy at their current prices. For instance, five of the top ten largest companies by market cap (Microsoft, Apple, Amazon, Facebook, and Visa, which make up 14% of any S&P 500 Index) are clearly overvalued. But as you go down the list of any total market or S&P 500 index fund, a new list appears- the extremely over-valued stocks. Take a look at Procter & Gamble, Mastercard, Coca-Cola, PepsiCo, Abbott Laboratories, Adobe, Netflix, Medtronic, and PayPal. No one should buy any of these companies at their current prices, yet every index fund does. From what I understand, you win with stocks by buying good companies at good prices and being fearful when others are greedy. To that end, when I look at some of these companies’ numbers compared to their current prices, I don’t want to own any of them for the prices they’re selling at. Curious to hear your thoughts about that concern.

    • Mr. Money Mustache September 13, 2019, 2:28 pm

      Are the companies you listed really overvalued at today’s prices, though? How have you managed to know this when the market consensus says otherwise?

      • Sidney September 14, 2019, 11:32 am

        I happen to agree with Mr Steadman’s concerns about how most index funds are overweighted in stocks that are overvalued. I believe he is referring the underlying companies’ fundamentals, such as P/E, when talking about value, not what the market consensus is willing to pay. There is a feedback loop which involves buying passive index funds and feeding into hedging with short volatility products, which results in increased purchasing of the largest index members. Put another way, investment flowing into the index funds has a greater effect of propping up the prices of the largest companies without taking into account the underlying companies’ values. This should concern all of us who own index funds, rather than assuming everything will be fine because it is easy or convenient.

        • dave September 15, 2019, 7:57 am

          Over-weighting into big overpriced stocks is a concern.

          Lots of index investors overweight slightly into a small value index fund to counteract this a bit.

      • Dharma Bum September 17, 2019, 6:17 am

        As Warren Buffett once said: “By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” (1993 Berkshire Hathaway Shareholder Letter)

        The asset management industry likes to make everyday individuals think investing is hard. This is partly because people want to trust their money with smart people. But it is also because asset managers don’t want individuals to think they could manage their own money.

        Is the market really overvalued right now? At current levels, I don’t think one can base investing decisions off valuations alone. For those with a long-term investing horizon, the most prudent approach is the following:

        Don’t attempt to time the market,
        Determine your personal strategic asset mix
        Build a portfolio of low cost ETFs that align with that mix.


      • Tim September 17, 2019, 7:18 pm

        MMM – to your point in the article you can pretty easily discount the expected future cash flows of a company back to today to get to a view of what the value of the stock is. You can also reverse engineer the cash flows expected by the market based on the stock price (which are impossibly high in many of these stocks). By that (and every other conventional metric – P/E, P/B, P/S vs themselves and peers) many of these stocks are objectively overvalued. To Burrey’s point – index funds are indiscriminate buyers – they don’t care about price discovery or the value of a stock so their naive contribution to market consensus is what is creating the bubble or the over-valuation in these stocks. Market consensus only works if all the buyers care about what the value of the company is. Index funds distort this value with their indiscriminate buying which will always lead to a bubble given enough time. There is no such thing as a free lunch.

    • effigy98 September 27, 2019, 5:43 pm

      The numbers disagree with calling stocks like Amazon overvalued. The EBITDA is very favorable and even shows a stock like Amazon being a value play. Just because a stock has appreciated very quickly and does not have a good PE ratio, does not mean it is not a good value… The growth rate of a company like Amazon are beyond spectacular and their commitment to building extremely diverse income streams makes it an amazing company to continue to invest in, much like the rest of the companies you mentioned. In Seattle, the growth rate of hiring from these companies is nothing like I have ever seen in this area… The demand for information services will probably even accelerate if there is a downturn to cut costs. It is a safe bet that long term these companies will continue their relentless march upwards.

  • Spin September 13, 2019, 12:27 am

    You wrote, “If we knew (theoretically) in advance that a company would never pay any of its future earnings to shareholders, those shares should be worth zero.”

    Not necessarily. A company might have the goal of being bought out by another company. You might know that it will never pay dividends or even turn a profit, but the stock would still be a good investment if the current market capitalization is less than the future buyout price.

    • Mr. Money Mustache September 13, 2019, 2:26 pm

      sure.. but the shareholders of that OTHER company are still hoping for their dividends. And you will be too, if the buyout is done with shares in the new company rather than cash as most buyouts are.

  • Anonymous September 13, 2019, 3:28 am

    it’s the automated spiral that frightens me.

    decisions are made by algorithms that will automatically sell stocks if they fall a certain percentage. There’s little to no human involvement. Stop losses are set at comparable levels so should some big event (US/China trade war, Brexit, a global crisis) cause a market decline, it could trigger a sell-off. Once large investors start selling, others will follow suit and the price will plummet.

    • Mr. Money Mustache September 13, 2019, 2:24 pm

      ..and we index fund investors will enjoy buying more shares during that temporary sale on stocks – bring it on!

    • Married to a Swabian September 15, 2019, 8:16 am

      Agreed. Didn’t see this comment before making mine above.

      The combination of “the rise of the Machines” and stock values pumped up by a sea of liquidity over the past decade is indeed frightening.

  • Chris September 13, 2019, 6:25 am

    There is just something about saying “I don’t think we’re there yet” that isn’t very reassuring.

    I’ll speak for myself but I was under the impression index funds coming undone, wasn’t really possible unless the world was crumbling.

    And if we, at some point “get there”, isn’t it already too late? Won’t all of our index funds have lost the majority of their worth? In other words, should we start preparing now somehow? Is vbtlx even safe because even that’s an index?

  • Michael September 13, 2019, 6:56 am

    Great article. Maybe the greatest problem in understanding life’s issues is news propagated for self-interest. Or more to the point, when a person is being paid for the information they share, rather than doing it because it’s a subject they enjoy, so they freely share… for the good of the community. You will see a parallel problem when it comes to spiritual literature and religion. Also true with doctors and the medical profession. In every line of thought, those who truly enjoy what they do, it’s in their blood. A real doctor is one who will help a person who is suffering, whether they get paid or not. They will get paid of course, but it’s not why, they do what they do.

    One point worth noting, a recession will eventually come and a downward market could be in the cards for 1, 2 or even 10 years. Passive investing in a long bull market is easy, many techniques will be tested if the down-turn is prolonged.

    • Cameron September 16, 2019, 7:55 pm

      And FIRE blogs will become less of a yawn-fest, hopefully

  • Socrates September 13, 2019, 7:06 am

    Hey MMM!

    Sorry, I know very little, but I want to learn.

    “If Actively managed funds start consistently outperforming index funds on average across the entire industry, then we have reached the point of “Peak Indexing”, and you should switch to a good low-fee active fund.”

    It seems to me that that conflicts with Mr Bogel’s underlying rationale for index funds. As I understand his theory, you have two groups, active and passive. Active sets the market, and passive simply follows the market. So passive will always be average. On the active side, they set market by their active trades. Some will do well, some will do poorly. On average, they will do average. Since you as an investor have no good way of knowing who will do well, all you can expect from active is two things: average returns and high fees. Might as well go with index with average returns and low fees.

    If I have that theory correct, doesn’t that mean that active funds CANNOT, across the industry, beat index funds because both averages must be equal?



    • Matt September 17, 2019, 8:48 am

      This is conventional thought, but its wrong. A market index is only “average” over the short term. Over the long term a market index (S&P 500) beats average stocks, and therefore average investors, by over 1% per year. This is because the geometric mean of a market index is always higher than the average stock.

  • FBN2014 September 13, 2019, 8:38 am

    You are so right about the financial news headlines. You can drive yourself insane reading them each day. MarketWatch is the worst offender. Everyday they have either a doom and gloom story or a euphoric story based on the most recent trend of the stock market. As far as Burry’s remarks go, my cynical side says that he is trying to sway market sentiment so that he can use an option strategy or short selling to profit from a market move that he helps to initiate. I doubt that too many people would pay attention to his ranting.

    • Cameron September 16, 2019, 7:57 pm

      Yeah. I thought that about Donald Trump when he first hit the campaign trail…

  • Chris September 13, 2019, 10:06 am

    Burry’s comments make some sense and make for an interesting thought exercise, but I think any damage would be throttled by the following:

    1 – Disproportionate or excessive ownership of S&P 500 stocks would result in inflated P/E ratios across the index. Historical charts show that this isn’t happening.

    2 – Index funds don’t own the “entire” index, but rather some handpicked stocks from the index that meet fund-driven criteria. Many of these funds routinely re-balance based on measured “value”, so if the P/E ratio of a particular stock got out of whack, it would be sold by the fund during a re-balancing and replaced with a different one.

    3 – It’s important to remember that the S&P 500 represents 80% of the total stock market capitalization. So owning primarily, or exclusively S&P index funds doesn’t mean that you’re choking off an enormous portion of the market.

    That said, I still take pause from Burry’s comments and I’ll have to read into it more. He’s a really smart guy who wouldn’t overlook the obvious points I made above.

  • Fool of a Took September 13, 2019, 11:04 am

    New to MMM, really love this article and the site – I could not agree more with nearly everything here. I’ll be a regular now and recommending this to so many others. As for this specific article, again, love it and was just thinking on most of these points myself the other day. Perfect example today about mortgage rates “worst week this year” – attention grabbing – “Here! let’s zoom in on a tiny fraction of time and freak out because we see a sharp drop (or increase) and make a big deal about it.” I’m thirty-fourteen (loved this nugget from MMM) and my parents had a 12% mortgage rate in the late 70’s, everyone survived.

  • Briana September 13, 2019, 11:06 am

    MMM please help. I’ve seen you recommend both Vanguard vehicles (VTI and VTSAX). I have a small stache and am new to passive investing (just paid off all debt except small-ish mortgage). I was going to put my stache in an Ally savings about and get 2.5%, but thinking now I will open a Vanguard account. I have about $15,000. So, what is better, VTI or VTSAX? Or, at least, what is the difference between the two?

    Also, how do I get the lower fees for investing $10,000 w Vanguard–is it automatic or do I have to ask for it somehow? :-/

    • Mr. Money Mustache September 13, 2019, 2:17 pm

      They’re the same! (except you buy VTI through any brokerage including vanguard if you like, whereas VTSAX is a fund you buy from within vanguard without a brokerage account). VTI has no minimum and low fees and faster transactions, so that’s what I use these days.

      • LA September 16, 2019, 1:39 pm

        Hi MMM

        What’s the best choice for Canadians in Canada? How can I access it?

        Many thanks!


  • Michael Spangler September 13, 2019, 11:54 am

    Burry’s second point about the small exit window for thinly traded stocks has a point. But it is also true a given small company with a thinly traded stock will be a very small part of an index fund, unless you find an ETF that only buys small cap thinly traded stocks. But small cap companies are known to be be riskier, so no one who is paying attention will be surprised. And even then all the small companies would have to go the same direction at the same time to really get in trouble.

    The pressure on active traders is getting pretty high given they haven’t outperformed the dart throwing monkey in some time. So expect more and more claims about the doom of passive investing.

  • Marty September 13, 2019, 12:17 pm

    Vanguard is almost 80% of our IRAs. We really did set it and forget and are enjoying the annual RMDs. We also invest in blue chips and derive additional income. We’re quite comfortable and enjoying retirement. We reinvest as well. Start early, love your work, and retire when YOU believe it’s time.

  • Rara September 13, 2019, 2:33 pm

    Right on! I almost drank this koolaid. Needed this article to sober up! Dont know if anybody already mentioned, but according recent morningstar data I saw, passive overtook active.

  • Ryan Schlomer September 14, 2019, 12:16 pm

    Even the active funds pretty much match the S&P 500 or whatever other index they are trying to match. And if they don’t, investment firms offer 9,000 different funds so they can have at least one beat the index.

    I read an article in the past few years that said research showed the Morning Star 5-star ratings were 1 or 2-stars the next year, and the 1-star ratings were 5-stars the next year.

    And one more point… If index funds are creating a bubble in companies that don’t make a profit, then all those active fund investors should be shorting them if they are so smart. I suppose a few of them will get lucky.

  • Stephen Richards September 14, 2019, 12:48 pm

    For me to date the S&P index in a 403b has been great. But when I am older I will have to sell because of the 401k/403b tax rules.

    I wonder what happens as the baby boomers start to have to sell bits of 401ks reaching age 70(?)
    Because indexing is relatively new, this will be the first us population wave to go through this, and I’m not sure how to quantify the effect of the transition to a steady state of buying and selling

    Does anyone have any useful thoughts or modeling on this

  • Max September 14, 2019, 1:22 pm

    What is really going to take this whole index fund strategy down is all the microbreweries opening. I just verified VTSAX owns 228,994 shares of Boston Beer Company Inc (SAM) worth about $89 million.

    The beer stocks are bound to start seeing some real price erosion from all these damn private microbrews opening in every town across America. They must be eating (or should I say drinking?) into their market share. Don’t get me wrong, I love a good local micro-brew, but aren’t some of these breweries start to feel a bit “out of the box”? My latest theory is some of the large-scale corporate breweries secretly own several of the craft breweries, thus offsetting the impact.

    I am far from an expert though; I’m sure they are more diversified than I know. I see Anheuser Busch (BUD) has taken a bit of a hit. I would hate to see my index fund beer stocks left behind like one of my favorites, Pabst Blue Ribbon, with the formal headquarters crumbling in Milwaukee. I don’t think Pabst ever made it to the publicly traded market though.

    I think I will go open a craft beer and ponder this a bit more.


    • lurker September 16, 2019, 6:30 am

      SAM just joined forces with Dogfish Head….one reason the stock rallied? These corporate dudes pay attention some times….cheers

  • Andy September 14, 2019, 3:01 pm

    Excellent, as always, MMM… I chuckled at your examples of news headlines. I’m sure others have noticed this too, but on “financial news” sites (ie: CNN Business, Fox Business, etc.) they actually change the titles of their articles relatively frequently… Even several times a day. Honestly, I think they are just throwing SH*T at the wall to see what sticks… same article, completely different headlines to test out our psychological interest. And, if the title garners a click… success!

    • Money Mountaineer October 22, 2019, 7:09 am

      Andy – your suspicions are correct – this is a ‘thing’. It’s called A-B testing, and is a widely used marketing tool. In this case they put out the same story with multiple headlines, randomly selecting one of those headlines for each website visitor; then based on which headline attracts more clicks, they gradually start to remove the unpopular headlines and replace them with the more popular.

  • Simon September 15, 2019, 4:09 am

    When Jack Bogle created the first ETF he wanted it to be similar to the beach on a warm summers day (like we get here in Australia). He wanted the water to be transparent (investors knew exactly what they were getting). He wanted expertly crafted wooden stairs leading down the beach (investors can easily enter or exit the beach). He charged a minuscule entry fee at the top of the stairs (the insanely low fees of his ETF). He offered free sunscreen to everyone that entered the beach (the ETF didn’t use debt or derivatives, meaning the investor didn’t get burnt). The Vanguard beach was created, and it was the best beach in the world. When Jack passed away a mural was erected at the beach, with Jack posing at the front of a big wooden ship (the Vanguard logo) at the bottom of the mural reads Jack’s catchphrase “stay the course”.

    Many other beaches have now been created, some have tried to rival the Vanguard beach (BlackRock beach). Although they got close and offer investors a pleasant experience, the Vanguard beach reigned supreme. However, a new style of beach was created. These new beach owners claim they are identical to Vanguard and BlackRock beach, but they’re not. At the top of the beach is a sleazy salesman, wearing a full white suit, and white cowboy boots to match (slightly higher fees, and sketchy holdings). The steps down to the beach are jagged stones with broken glass (liquidity issues). But the biggest problem of all is when you get down to the water. Right at the waters edge is a big sewer pipe, spewing out raw sewage into the already murky and disgusting water (derivatives, debt, and funds that claim they are ETFs but track, for example, the index of the twenty biggest gold mining companies). People dip their toe into this water, realize the filth they are in and quickly sprint to the Vanguard beach.

    The problem is the reputation of beaches are taking a hit. However, there is a reason why the Vanguard logo is a big wooden ship with cannons down the sides. It’s so Vanguard can blow up these horrible non-ETFs, and bring these sleazy funds to justice. An ETF is a simple, low-cost beautiful beach, let’s keep it that way.

    *I am writing from Australia, hence the beach theme
    **I have a huge level of respect for Mr. Burry and his views

  • Joe Walker September 15, 2019, 2:10 pm

    Here is another views on index funds:



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