Tuesday, August 16, 2016

On Inflation and Indexing (Buy & Holdism)

From a correspondent,

Indexing makes perfect sense in a long term inflationary environment. Inflationism is guided by the idea of buying things regardless of their value. Indexing follows the same logic.


Taylor Conant said...

So I guess the idea is that central bankers, in their quest to create inflation, either provide the market with extra dollars or else go buy assets themselves, and they don't care about the quality bought with the new dollars but the quantity of inflation created.

And indexing is similar because the indexes don't care if the things they buy are cheap, or well managed, or have good long term earnings prospects, they only care if they fit the arbitrary rules for inclusion in the index and thus can contribute to the "quantity" of the strategy.

Is that how they're similar?

CP said...

To illustrate a strategic gap common to today's portfolio managers, George Sokoloff, PhD, founder and CIO at Carmot Capital, proposes an interesting thought experiment – a breakdown of a typical, well-diversified investment strategy in 1912.

Teetering on the cusp of revolution, war and depression, Sokoloff's point is that, even following a modern portfolio management strategy, the manager would stand to lose the vast majority of their assets.


Taylor Conant said...

The funny thing about that thought experiment is it is doubtful anyone "diversified" as widely, or in that way, in that period of time (it would've been anachronistic to do so...) In fact, the business cycle wasn't yet globally coordinated, though it did have regional epicenters. Calamity was a localized phenomenon.

Indexing and inflationism are odd because they rest on the idea that what we want is more dollars rather than more things. Ceteris paribus, would I rather have more shares of the S&P500 over time, or have the shares I own trade for more dollars? I would think I'd tend to have a "real" advantage under the former circumstances.