Mike Green | The Dangers of the Rise of Passive Investing

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The case for passive investing is a very strong one. With most active managers failing to keep up with the market, the arguments for passive are difficult to refute. But has the rise of passive introduced significant risks to the market? Our guest this week thinks it has. We talk to Simplify Asset Management's Mike Green about the potential dangers of the rise of passive investing and what they mean for investors. We also get his take on comparisons between the current market and the 2000 bear market, inflation and Fed policy, and the future of fundamental investing.
We hope you enjoy the discussion.
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ABOUT THE PODCAST
Excess Returns is an investing podcast hosted by Jack Forehand (@practicalquant) and Justin Carbonneau (@jjcarbonneau), partners at Validea. Justin and Jack discuss a wide range of investing topics including factor investing, value investing, momentum investing, multi-factor investing, trend following, market valuation and more with the goal of helping those who watch and listen become better long term investors.
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[@JscottMays]

Prof p. Is a beast. Great interview. Green is one hell of a thinker.

[@ExcessReturns]

Agreed!

[@Zockerbeatz]

Great episode, last 5 minutes are especially worth it

[@ExcessReturns]

Thank you, the fact you made it all the way to end means a lot to us. Appreciate it.

[@kurtleimkuehler]

Great knowledge ty!

[@ExcessReturns]

Glad you enjoyed it!

[@HepCatJack]

On re-watching the video, I now picked up on Mike's comment that the inflation was more like the 1940's than it was like the 1970's. Lynn Alden's newsletters had also made a similar observation. There are some similarities with the 1970's though. One example was when the Iranian oil was taken off the market in 1979 because of the hostage crisis, causing what was eventually called the second "Oil shock". A similar event occurred in 2018 when the kibosh was put on the Iran nuclear deal. The U.S in the 1970's had to pay for the Vietnam war and it did so via money printing. The U.S today is paying for the Iraq and Afghan war and it engaged in money printing during the Pandemic and in QE prior to the pandemic.

[@Kulturjunky]

Great guy

[@ryanmelvey8764]

eventually this will lead to the mother of all equity bubbles. but i don't think we are there yet. another key part of this is that these mega-cap tech names issue stock to their employees. so the index fund flows are directly influencing the pay structure for these firms, and they can attract more talent as their market cap grows

[@ExcessReturns]

Thanks Ryan. That's an interesting point re stocks options and passive flows impacting pay and incentive structure.

[@risd1071]

first time viewer of the channel. why is japan selling 30y usts a deflationary situation? im not much of an economist

[@ericchang7706]

Great discussion. Thanks so much.

[@ExcessReturns]

Thanks Eric, we appreciate your support and glad you found value in the convo.

[@kensteinhoff261]

Really great. I've been thinking exactly this for some time but not had the skills/time to quantify. He suggested something that I think makes things worse, which is most "active" managers must keep their heads down to stay close to even with benchmark indices. Jacks question (essentially why not go with the flow) was spot on. The trick would be riding the wave and getting out in time (e.g. timing)...selling SPY ahead of the exit (since the selling is as inelastic as the buying). Does Excess Returns have a factor strategy (other than Green's long/short etc.) to exploit the various responses to liquidity to which capitalization based buying is insensitive to?

[@ExcessReturns]

Hi Ken, thank you for watching and your comments. At the current time, we do not run a quantitative strategy that tries to exploit this idea but it's something we will discuss.

[@rocking1313]

If I understand your point correctly Ken, passive flows create additional pressure/moral hazard for fund managers to "bet" with investor monies - why not try your hand at speculative tech, crypto etc. even if as a fund mgr you know long term prospects are not great. From the fund manager's perspective better to keep your job this year instead of losing it due to comparisons with passive driven benchmarks...so active fund mgrs role as a fiduciary can be diluted and greatly diminished in a market dominated by passive inflows....

[@CuchBe]

❤

[@youregonnaattackthem]

Fantastic interview

[@austinwagstaff710]

His comment at 36:30 sadly aged well. It made me think of SVB

[@rowanwood5397]

Passive is 45% of the market. This leaves less people to make decisions, such as buy the dip, sell the top, whatever. This makes the market more rigid. This rigidity causes increased volatility (more corrections and more crashes). At what level of passive will the increase of passive money start to level off or climb much more gradually? And how much more volatile will the market be at this level. Forecasts welcome.

[@emcardleinvest]

Great episode. Thanks guys

[@davieb8216]

I don't think accademics would call XIV "passive" 8:30. There is diffinitely a scale.

[@davieb8216]

Active managers will have a big opportunity to outperform. Only the bad managers are getting fired so the market is becoming better priced.

[@davieb8216]

Good talk overall. Thanks guys.

[@HepCatJack]

There are people using the coffee can approach to investing who find out upon logging in their brokerage account after many years of inactivity that the govt. long ago seized the assets and sold them. A person can eventually get the money from that sale back upon filling paperwork but it won't be what the assets would have been worth had the govt not sold them. Something to keep in mind. Some countries also have squatter rights so that a squatter can break in and occupy an unoccupied home and after a number of years claim ownership. Sometimes the descendants of the original owner are surprised to find out they no longer own the property. Andrew Carnegie may have had a point when he said: "Put your eggs in the same basket, and watch that basket"

[@ExcessReturns]

Yes, watching the basket (but probably not too much) seems like it would be important. Thanks for your continuous support of Excess Returns.

[@deedeemao6809]

aren't you guys a buncha "pro traders", don't you like the volatility?