JB I glance at anything favorable to indexing; I pore over anything unfavorable. You don’t need people to tell you you’re right all the time. You need people to tell you that you’re wrong. But this was an absurd paper. First, take the simple part. The stock market has nothing—n-o-t-h-i-n-g—to do with the allocation of capital. All it means is that if you’re buying General Motors stock, say, someone else is selling it to you. Capital isn’t allocated—the ownership just changes. I may be an investor, you may be a speculator. But no capital goes anywhere. This is basically a closed system. You have new IPOs and whatnot, but they’re very small compared to this vast thing we call a market, which is now around $24 trillion. The allocation of capital? That’s just nonsense.
MR And the correlation of stocks?
JB There is some evidence that the correlation of stocks, which has always been very high—something like 65 percent, maybe 70 percent now—could very well be caused by indexing. But so what? The efficient market theory ignores the fact that for every buyer there’s a seller. I don’t know why we can’t get this through people’s heads. Cliff Asness is the one who got everything right. He’s one of the smartest guys in the business. One of his headlines was, “Indexing Is Capitalism at Its Best.” I’ll let him be the defender of that, but this Bernstein note was just a sensational thing. It’s a bit like asking your barber if you need a haircut: He has a vested interest in this.”
…”MR Is it a problem if indexing gets to 100 percent?
JB It’s 10 to 15 percent now, and it could easily get to 50 percent. The example I use is stock market turnover, which has run between 150 and 250 percent of late. If we went from no indexing in this theoretical thing to half indexing, say, the turnover would be 125 percent. You immobilize half of the market. For decades the turnover was 25 percent a year, not 125 percent. We don’t need all that turnover, but we have a brokerage business in which turnover generates the returns that the brokerage business earns. And, as everybody knows, if a salesman sells nothing in a month, he brings home nothing—so he has to sell something. He has to believe what he’s doing is right. And he may be doing what’s right, but as a rule he can’t be doing what’s right because there’s someone on the other side of every trade. And all that trading means zero until the croupier in the middle puts his rake down on the table and scrapes off his share of the winnings. Wall Street is a casino, that’s a fact.
- This is on point. It’s not clear that we need all this additional turnover.