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0 pointsomgwtfbyobbq4y ago0 comments

Why do you think prices are completely detached from a company's financial viability and business profitability?

If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them.

Ideally, sure, the fund could have known ahead of time and sold before the company dropped out of the S&P 500, but that's trying to time the market, which generally doesn't go well over longer periods of time. It wants to capture gains in the aggregate over long periods of time, not maximize gains. The more individuals and firms try to maximize gains, the more likely they are to get bit over the long term.

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paulgb4y ago

> If I invested in a fund that's indexed to the S&P 500, and a company doesn't do well and drops out of the index, then the fund will sell that company and buy whatever replaces them.

The company drops out of the index on poor performance because its market cap goes below some threshold, because active investors short it or sell it when its poor performance makes it overpriced. If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.

omgwtfbyobbqOP4y ago

> If every investor is passive, there is no mechanism for the price to reflect the company's underlying finances.

Sure, but that's a big if. We're a long way from 100% anything.

Also, a company can drop out of an index even when it's doing well just because investors are running a short campaign against it, so I would caution against the assumption that all market performance is because of poor company performance.

In general, the trend has been for most active investors to underperform the market, in part because they charge higher fees, but also because successful active investing is very hard to do consistently. People moving away from those active investors and to index funds won't hurt the market because they generally don't do as well as the market.

Now, if people move away from effective active investors, then that could lead to the problems mentioned, but I've never heard of people moving away from effective active investment.

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