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The proposition of an article I recently read was “this is the dumbest stock market in history.” Why is it dumb? In part because of an increasingly popular approach to investing—one that most in the HumbleDollar community, including myself, subscribe to. According to the article, passive index investing is “the very definition of dumb money, because indexers buy stocks without any regard to valuation.” Here are some other points that caught my attention in the article, which I will link to in the comments:
-Fewer and fewer people are actually making a market in stocks using their brains. Most index fund investors are just blindly buying, assuming that someone else is minding the store.
-The dumb stock market, built entirely on blind faith, wouldn’t matter so much if the numbers passed a sanity test. The problem is, they don’t.
-Due to bets on AI, a single company, Nvidia, is worth substantially more than all of the 2000 companies in the Russell 2000 index combined.
-Metrics such as price per earnings and the ratio of total stock market to GDP indicate that stocks are priced at historically high levels, close to valuations during the 1999/2000 bubble.
The conclusion of the article is that investors need to stress test our so-called risk-tolerance sooner rather than later. We may be taking on far more risk than we realize.
After a conversation with my son in which he pointed out I am quite conservatively invested if my pension is included as part of my retirement portfolio, I wondered if he had a point and if I should increase my stock allocation (currently around 63% for my retirement funds). I decided to stick to my “kiss rebalancing goodbye” approach. Still, I have moved a good bit of money from U.S. to international stocks as valuations are not as high overseas. The declining value of the U.S. dollar was also a consideration.
The only individual stock I own (“using my brain” in the parlance of the referenced article) is that of my former employer…shares I essentially got for free, so no brainwork involved. That stock is up over 600% in less than 4 years.
So, it appears I will continue along with my crowd for better or worse. But the logic of this article does have a way of undermining my optimism. I’m wondering what others in the HumbleDollar community think?
Only during massive market crashes or prolonged recessions will we be free of these types of articles, warning of impending doom and how “the next 10 years will see much lower returns.”
The only answer is to ignore these articles and rebalance according to your investment plan.
Agreed.
Recently, I see a lot of “no one can time the markets, but ….”. They then proceed to explain why this time they actually can time the market, and people should be changing allocations, moving to cash etc.
If you pick a plan and set up allocations that match your risk profile, then just ride on through all the noise. Don’t say you are invested long term and then keep thinking short term. Surely that will just drive you mad.
If you define timing the market as saying when the crash will occur, then you are correct.
But there is nothing wrong with saying a crash is probably coming, but we don’t know when. History has shown that this will happen. The problem is, the market can stay crazy longer than you can stay solvent.
Equities are volatile, so there will always be a “crash” coming. If you are a long term investor, set your allocations, rebalance according to a fixed schedule, stop looking at the daily financial news and get on with living a good life!
But that is a truism. It adds nothing to the conversation.
“indexers buy stocks without any regard to valuation.” They also don’t bother to look at what is in that wrapper. It includes tobacco, alcohol, gaming and companies with questionable business practices and poor scores for labor conditions, etc.
The market may be dumb, but indexes appeal because of their simplicity and the fact that they are so highly promoted. That’s with good reason. We’ve had a wonderful bull market and who argues against success? Oh, yes, I know, “very long term the indexes are brilliant”. Simply ignore that lost decade or two, shall we? Most of us “actively” invest from age 25 to 65; a period of 40 years. I say “active” because we are buying. After that comes the ride and decumulation phase. Arends rightly points out some lengthy periods of market malaise and decline.
The domination of tech is a concern, and the Willshire 5000 index now contains only 3400 companies. “It remains to be seen if the bets that are being placed in AI will truly pay off. “ How many times have I read that in the past year?
Arends makes the case “And that means all of us investors need to stress test our so-called risk tolerance sooner rather than later.” Yes! But do we, and are we really financially and mentally prepared for a 30% market decline? Some say they are, but clearly there are those who are not.
European stocks are no escape, either. They do provide some dilution, but the world is still connected despite what one may read and China’s actions dominate markets. People tend to ignore the elephant in the room. People also want to hear where or what to buy to escape the next bear market, as if that is really possible. Bitcoin was supposed to move counter to other markets. It now is a wild beast in its own right. Another fictional safe haven. Eventually, that 5% investment may truly and consistently exceed the broader market. I won’t be here to see “eventually.”
I think of the wringing of hands that occurred when Trump won the recent election. Some bailed. Why? Did the market fundamentals change? Did the value of all of the companies in the S&P 500 suddenly decline?
What happens if it is determined that the AI emperor has no clothes? Where will all of the power and water come from for those vast data centers? Are people willing to hang on to these stocks via indexes for decades to make money? Oh, yes, power generating plants and infrastructure are being built to accommodate them and that’s good for the economy, in the short term. But what if this gamble doesn’t pay off? There will be winners, of course. There will be profitable uses for AI just as there are uses for Quantum computing. But what if we are charged to use Copilot, Claud, ChatGPT or whatever? Will we pay? Will businesses? Will they pay enough to justify the enormous amounts spent? What business model will support the huge sums being invested? It seems no one knows. “Build it and they will come” is not, in itself, a money-making strategy.
Dominance seems to be the theme of the tech companies and that in itself does not guarantee profits.
Oh, yes, the indexes are up. But so is gold. Clearly, not everyone is convinced and the cracks are beginning to show. Arends’ article in Morningstar expresses a concern. I read about two bankruptcies that “rattled credit markets”. Tricolor Holdings and auto-parts supplier First Brands Group. The first reportedly catered to undocumented immigrants. The second may have double-pledged or commingled collateral. It seems there are again serious problems with debt.
How can a large auto parts supplier go bankrupt? I mean, this is a bread and butter business that caters to 300 million registered motorized vehicles in the US and that number increases each year.
The thing about the market that I find disturbing is what instinct are people following, besides greed? Sure, we all want to make money. But is the market a safe place and are companies solid? We can and do quote Warren Buffet frequently, provide all of that sage advice and people chuckle and say “He’s brilliant!” and then, they’ll do something completely contrary. Not a few, but a sufficient number to influence those indexes.
If the market is dumb, then what are the investors? That seems to be Arends point. He says today’s stock market is just “the crowd” chasing money.
Sounds like a fund like Vanguard’s ESGV may interest you for screening out what you mention in your first paragraph.
I remember the old saying “Never ask a barber if you need a haircut”. I think
I will choose the advice Buffett has offered which is to dollar cost average into the S&P 500. (I and many others may cast a broader net and choose the entire US and International market). If the author is smarter than Buffett, where is his evidence?
Buffett is holding a lot of cash (through BH) these days, I understand.
He certainly is. Our Berkshire holdings are just a “tad bit” overweighted, supplemented by a couple index funds. Over a decade ago, Buffett said something like “During boom years, Berkshire may likely lag the market, but during downturns it should perform well”.
Decades ago, he and Munger suggested that “Know nothing investors” would be better off if they simply invested in the broad market rather than attempting to pick stocks themselves. As a know-nothing investor myself, I read between his lines in the late 1980s and began investing in his company. He has described the criteria necessary for him to purchase a company; whether a single share or the entire business. At the top of this list is that the price must “make sense”. His actions today, or rather inaction speaks volumes.
But I still think the average investor in the accumulation phase today ought to continue dollar cost averaging into the domestic and international indexes.
Ignoring the latest salvo at “dumb investing” in indexes that continues to outwit active money managers–shall we pull up S&P Global again?–and moving on to our present market, how should we react?
Valuations are high, in contrast to historical numbers. David Powell lays out good evidence for us in his recent article here. What should we do with that information? Maybe we should take a closer look at our portfolio. If money we’ll need in the next few years is in stocks, now is probably a good time to move it to something more conservative.
As for deciding how to allocate our money across the globe, I’ll again link an article from Jonathan that gives his thoughts. If someone thought their international investment should be a little more in line with the world market cap, now would probably be a good time to make a change.
And tell your son that Jonathan would give him points for encouraging you to include your pension in your portfolio calculation.
Ed, somehow I missed seeing your comment until now. Thanks for linking to the articles by David and Jonathan (sounds like a Biblical reference)…they’re good ones. And yes, I’m pretty pleased with the amount of financial wisdom my son has acquired at his tender age.
This is a bunch of hooey, Ken. Wall Streeters tugging at your heartstrings to boost their year-end bonus.
There is a ton of research which shows the use of index funds avoids the worst sort of mistakes investors make when emotion clouds judgment or when investors buy individual stocks. They are the best tool by far for building wealth, if you are disciplined enough to not interrupt their terrific compound growth. Earning market average gains every year for decades is powerful.
Also this: using index funds does not mean you’re ignoring price. Bloody fallacy.
My main takeaway from the article was not that people need to switch from passive indexing to active investing, but that current perceptions of risk may be distorted for all classes of investors.
I continue to use my brain. The 10K report of every stock you can invest in is available online, and the conference call transcripts are widely available. This is the golden age of investment information, so why not take advantage of it?
“Still, I have moved a good bit of money from U.S. to international stocks as valuations are not as high overseas. The declining value of the U.S. dollar was also a consideration.”
What do I think? Read the article below that I posted earlier this week:
https://humbledollar.com/forum/are-you-invested-in-international-markets/
David, I think you and I are tracking pretty closely here.
Index investing can be quite dumb. There were several companies I followed closely because they were frauds in plain sight. I’d listen to their conference calls, do a deep dive on their financials, read their false press releases, and quarter after quarter you could watch fraud take place. When I would check to see who owned the company’s stock, the largest shareholders were always Vanguard, Fidelity, Black Rock, etc. The index money. Right now, the largest shareholder of Strategy (MSTR), by far the largest bitcoin treasury company, is Vanguard. Yep, Vanguard, the company that won’t allow its customers buy bitcoin ETFs nor will they create their own bitcoin ETF owns, indirectly, a huge amount of bitcoin. You can’t make this stuff up. My question is, what happens when the “passive bid” for some reason no longer shows up? That could be a really bad day.
As of September, Strategy is no longer in the S&P 500, so no longer held by Vanguard VOO/VFIAX.
Actually, Strategy recently qualified for the S&P 500 but was not allowed in. The Vanguard VEXAX (Extended Market Index Fund) has MSTR as its second largest holding. The Vanguard Total Stock Market Fund (VTSAX) and the Vanguard Growth Income Fund (VIGAX) also own shares.
Perhaps the actual “strategy” of Bitcoin treasury companies like Strategy is to find a backdoor into indexes? Still a small fraction of the bigger “haystack” but I do wonder about contagion should crypto go south at some point.
Here is a link to a earlier news article posted on Morningstar on the exclusion from the S&P index that Ken links below.
Is that the one where the stock price has a 10/1 ratio to the bitcoin they actually hold?
Right now, Strategy (MSTR) is trading at about 1.43 times their net assets.
The dumb stock market is not surprising because if we look at what is dumb around us we would not be surprised it includes the stock market.
Ain’t that the truth!
I think today looks a lot like 2000. I’m confident history will repeat itself. I’m certain that I have no idea when it will happen.
The present seems more likely to rhyme with the dot com meltdown than repeat it, but the outcome will be the same.
As long as we have smarty pants, active fund managers and trades to provide price discovery I’m happy to blindly trundle along behind them hoovering up the average market return in their professional wake, all while paying up to 90% less in annual fees.
Here’s the article:
https://www.morningstar.com/news/marketwatch/20251010209/this-is-the-dumbest-stock-market-in-history
Not surprisingly, at the end of this article is an ad for Morningstar Investor.