Matt Levine: prediction

Transcript context

…Investors who index. Again, a Matt Levine question. First, how worried are you about the spread of indexing? Also, if you think of indexing as somewhat endogenous . . . so if more market research is needed, you would expect fewer people to index because there’s a high return to learning something. The flow of funds in and out of indexing — how rational or efficient a process do you think that is at the end of the day? And as we move more and more to indexing, how will this affect securities markets? Please address any combination of those you care to. The thing that I like is that US public markets . . . there are fewer companies, they’re older, they’re bigger, they’re more profitable. That’s an interesting fact about the composition of markets. One straightforward thing to take away from that is that, in a world like that, it makes sense to index more. In a world where you can’t find the next Facebook in public markets, in a world where all companies are the same — they’re established, they’re profitable, the spread between companies is narrower — the returns to the stock picking are going to be a little lower, and it’s more rational to index. The next question is which side of it is causal. I think that there’s probably some story you could tell about the rise of indexing, and the focus on cost and investing generally, leading to a real focus on scale in investing. When investment funds are trying to operate at enormous scale, the attractiveness of a $100 million IPO is lower. The attractiveness of a weird company that doesn’t fit into the index is lower. You have the rise of indexing driving the phenomenon of there being fewer, larger, and more profitable public companies. You have a feedback loop in that sense. I feel like I’ve trailed away a little from your question. Some activities are what we might call nerdy and others are not. Country and western music is not very nerdy. There are plenty of bars, say, in Lower Manhattan that are not very nerdy. Finance has become pretty nerdy. What makes an activity nerdy? [laughter]…

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