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July 05, 2004
Index funds
> My idea is that if you buy the total market with something like
> that you are going to do pretty well for little input on your part as
> long as the total economy is pretty much o.k.
At one level, I agree.
At another level, I see us lemmings all going over the cliff. By investing in index funds, we buy representative samples. A representative sample must by definition be weighted in favor of big companies who make up larger shares of the market. So we can consider this a conservative investment, in the sense that it tends to help conserve the situation we have.
We're also going to keep our hands off, not even voting at board meetings. Board meeting elections look almost identical to what they taught us in school concerning elections in totalitarian places. Somebody to whom you have no access gives you limited yes or no choices concerning issues whose context you barely understand. You're job is to vote intelligently. Occasionally, some "progressive" group gets a buys some stock -- democracy, but for owners; where'd they get this idea? -- and makes a motion to say, "This company has to respect human rights in China," or something like that. The annual report makes this look like an extremist position, so the few people who vote don't even go along with that.
We're hands off, but somebody must not be, so who? The choices are: the guy running the fund; guys running companies owned by the fund. Now, the guy running an index fund has a relatively straightforward job. He doesn't pick stocks. No voodoo. He looks at the market positions, which tell him which stocks to buy. The hard part maybe lies in taking big positions without getting caught doing it by other guys who just stand by, knowing you're going to take a big position, and cash in on that buy with financial levers that push the money from your pocket to his. But other than that, the index fund could almost be run by a simple computer program.
Probably the guy in charge of the index fund is, however, going to try to have some influence on the CEOs of his largest positions. He doesn't want them doing anything very obviously disasterous. He wants them to follow the rules and so forth, so at least when things tank it's not his fault, and he can still get his salary and bonus and golf club membership for doing something a simple computer program could do. On the whole, he must leave it up to the CEOs, though. After all, they're supposed to be motivated to run their companies well.
Therefore the system puts the decisions squarely in the lap of the guys running the biggest companies. The system tells them, "Everybody's going to be hands off about this. Basically, you have one imperative: You'd better look good in the market. If you don't, our fund has to drop you in favor of one of your peers. Everybody's retirement, college money, whole way of life is riding on this. Do what you have to do, but you'd better look good in the market."
Then we get laid off when we're perceived by our CEO as not making our company look good in the market. And we get a whole lot more nervous about how our investments are doing, so we check the prices a lot. But we still don't change the message to the CEOs.
Indeed, we intensify the message as more of us retire, or are out of work because the CEO decided to lay us off, and get more worried about our investments. The system reinforces the pressure on the CEOs, and these guys, partly due to our hands off attitude, have both high pressure and absolute discretionary power. It seems amazing they stay as human as they do.
Hmm, great thoughts for a Monday morning...
Posted by Mark at July 5, 2004 09:39 AM