Thought of the day

Prof. Plum, AKA Michael Green has been going on for a while what a game changer indexing has become. Diversification becomes less effective, because everyone holds the same five names (yeah, the FAANGMAN lot). To not join the crowd means that you are short Apple. It just shows up in so many passive portfolios. As long as Tim Cook doesn’t issues too much stock-based compensation to himself, the combination of people getting older and richer and saving more as that happens will keep driving Apple higher, whatever the P/E looks like. In fact, it’s worse, because as people throw in the towel and move from active to passive they get more $AAPL. Passive funds hold no cash, so even those closet indexers losing business will still drive more demand into the mega caps.

Will this go on forever? I’m not sure. People may reverse their savings trend as they die and get poorer. They may eventually decide that gold and oil are a better bet. I don’t think it can go on forever, and therefore it must stop, but these things have a lot of momentum, so it might be after we are all dead.

Is this actionable? Probably not. But one day … maybe.