Investing for retirement shifted from a company taking responsibility to employees taking responsibility with the advent of 401k and similar plans instead of defined benefit pensions. Over time it has been noted that picking individual investments tends to do worse than simply buy everything.
As workers pour money into these non-discriminating investments, hoards of people are blindly investing and skewing away from efficient markets. Everyone (scare quotes everyone) is just buying large swaths of everything all the time without regard to fundamentals.
It's all good as long as this continues, but a shift in enough people no longer believing this, will reduce demand and prices will go back down.
In other words, people just buy everything because there is no alternative. If enough stop doing that, prices will readjust downward because too many stocks are overvalued due to the current wisdom of buy regardless of price.
I'm not an expert but I still don't get it. If everyone is buying everything then the whole market is overvalued? Is it possible for everything to be overvalued? Overvalued compared to what yardstick? Stock performance is also not a direct indicator of future company performance. At the end of the day buyers are still taking an educated guess at the future. If everyone does this randomly aren't we just back to the whole market being invested in? If it's not random and skewed to popular companies like Apple or Coke then isn't that another artificial thumb on the scale?
Isn't Burry in essence saying that if everyone sold all their stocks then the market as a whole is a bubble?
Some missing nuance here is that the s+p 500 is not everything!
It's a subset which has essentially been selected for long term performance. There may be a couple Enron's hiding in the set, but on average they are good choices, with much lower risk than the average company not in the top 500.
Yes, there is some hand waving, but it conveys the general idea that current wisdom and circumstances have made investing in large sets of stocks all the time with no regard to the underlying fundamentals does put an upward pressure on prices.
No the s&p 500 is not "everything", it is one, albeit very popular, index. There are many others, but the underlying concepts are the same. Further, the companies are not selected for long term performance. Ignoring some finer details, the s&p 500 is the largest 500 US companies by market cap. Perhaps you are confusing this with the DJIA which is hand selected, though not selected for long term performance by any means; rather, it is selected in a way to represent the economic landscape - how well it achieves this is a matter of debate for sure.
The comparison he gives is that of a theater which keeps getting more and more crowded but the doors remain the same. In the bull market everyone keeps buying more and more index ETFs which are highly liquid. However, over half of the underlying securities have low trading volume. As long as investors keep piling into the ETFs there is no problem. But when investors start selling the ETF, and the ETF has to sell the underlying equities, then prices may fall much faster due to low volume and no demand.
Isn't there also compounding factor here due to them relying on index and rebalancing that. So selling without corresponding demand means that price will drop more than index thus meaning that funds will sell more of that stock to fix the index. Thus generating more downward pressure.
An index fund is an investment you can pick that is a basket of individual stocks.
They are an easy way to get diversification in your portfolio and historically have beat out portfolios where people actively picked out their own mix of individual stocks.
A lot of the investors in the world are just investing in index funds which has artificially inflated the value of the stocks in each index fund.
When an investment has an inflated valuation that does not match the fundamentals of the underlying business behind the stock, there is a bubble.
Markets are supposedly efficient because people pick to buy companies that are good value for the profits they generate and sell companies if they become less valuable.
If people are buying index funds automatically in retirement accounts they are not making this judgement and thus all stocks in index funds are selling at a premium because of this automatic buying pressure. If enough people do this there is potential for the stocks in index funds to be overvalued.
An index fund is a group of stocks. You buy them all together. That means that you're buying everything regardless if everything is worth buying. If tons of money gets put into the index funds, all the prices rise. This could mean that there are mispricings in the market that could eventually hurt the buyers of index funds.
Index funds are still regarded the best choice for a long term passive investor because of the amount of diversification.
He's stating that too many people blindly believe investing in the top 500 companies in the United States is a good plan. This strategy was recommended by Warren Buffet after he won a very unscientific bet.
Michael Burry believes that these people will later want to exit their positions, and won't be able to because the amount of people entering these positions will be lower than those exiting. At which point, the bubble will pop, as the market won't produce buy offers as fast as people attempting to exit their position.
