or peak indexing. I was fascinated by the implications of Jared Dillian’s article on the effects of indexing in investing at Bloomberg View:
Indexing is screwing up a lot of things. This is not news. Equity investors focused on bottom-up, fundamental analysis have been complaining for years about how hard it is to make money. They complain about valuations being too high and out of whack with reality. They complain about how the market goes up every day. They complain about how things don’t make any sense. The stock market has entered Bizarro World, and nobody really knows why, but they suspect that this is all somehow related to indexing, which, as a strategy, has attracted trillions of dollars in assets under management.
In quantum mechanics physicists have found that even passive observation, paradoxically, can change the phenomena that are being observed. In other words if a tree falls in the forest and there’s no one there to hear it, it may still make a sound but it could be a different sound.
I did a little quick investigation and learned that the economic effects of indexing is tremendously under-studied. I did manage to find one paper on the subject by Jeffrey Wurgler. The graph at the top of this post is from the paper.
My speculation is that I think I can see at least two effects of stock market indexing and the associated passive investment on the general economy. I think it reduces business investment and that it results in boosting prices of some stocks at the expense of others.
Setting aside a number of issues in the paper, as this isn’t a corporate finance class, I wonder how any participants here reconcile the belief in real world effects of a 1% change in beta on CAPM pricing with the notion that taxes do not matter. The Obamacare tax alone was a 20% increase, on top of a similar increase in base rate.