Valuing Stocks in a Passive Investing Era

Are index funds a silent disruptor? Or are the concerns overblown? In this grab-your-popcorn episode, Michael Green returns to the show after his previous appearance elicited a wave of compelling feedback from listeners. These included very smart individuals in academia and practice who were interested in hearing a counter perspective. Joining Michael today for a lively debate is Randolph Cohen, Senior Lecturer of Entrepreneurial Management in the Finance Unit at Harvard Business School. In our conversation, Michael shares his deep concerns about how index funds and target-date funds might be distorting financial markets, honing in on the tension between market efficiency and price elasticity. Randolph counters with an academically grounded perspective, drawing on his PhD and years of research and teaching at one of the world’s leading business schools. With Ben and Cameron moderating, the discussion explores both sides without reaching a definitive conclusion. Tune in to witness this spirited, nuanced exchange and decide where you stand!

Key Points From This Episode:

(0:00:14) Introducing Michael Green, Randolph Cohen, and today’s topics of debate.

(0:06:00) Defining passive investing, distinguishing between the two different meanings of “the rise of passive investing”, and how much of the market is currently held by passive investors.

(0:12:53) Michael’s concerns with the high levels of passive investing and Randy’s response.

(0:20:55) Addressing the proliferation of target-date funds and their use in different scenarios.

(0:28:48) Debating risk in the market, raised valuations, and retirement savings diversification.

(0:42:22) A breakdown of the biggest thing Michael and Randy disagree on: how passive investing is impacting stock market valuations.

(0:57:06) Answering the question: does inelasticity rise with passive, and how does it shape the impact of active managers?

(01:06:14) Unpacking whether the rise of passive has made the markets more efficient; an accompanying refresher on the two types of passive.

(01:09:27) Reasons to doubt whether there really is a rise in both types of passive and the effect of the rise in mega firms.

(01:19:16) The state of fundamental analysis in the current market and Michael’s response to a recent paper by Goldman Sachs attempting to isolate the component of passive.

(01:23:30) Unpacking the cross-sectional impact on stock valuations from index investing and insights on the work of Valentine Haddad.

(01:31:28) The implications of today’s subject matter for investors and what they should be doing with this information.

(01:44:22) Reflection on why more experts don’t share Michael’s level of concern.

(01:47:42) Randy’s takeaways from today’s conversation, why he still does not share Michael’s level of concern, and what he might be worried about.

Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/ Michael Green on Substack — https://substack.com/@michaelwgreen Michael Green on LinkedIn — https://www.linkedin.com/in/michael-green-9a15142/ Michael Green on X — https://twitter.com/profplum99 ‘Yes, I give a fig… Thoughts on markets from Michael Green’ — https://www.yesigiveafig.com/ Randolph Cohen — https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6597

Randolph Cohen on LinkedIn — https://www.linkedin.com/in/randy-cohen/

Dangerous Visions Podcast — https://podcasts.apple.com/us/podcast/dangerous-vision-with-randy-cohen/id1477519445

Episode 302: Michael Green — https://rationalreminder.ca/podcast/302 Episode 322: Marco Sammon — https://rationalreminder.ca/podcast/322 Episode 310: Antoinette Schoar — https://rationalreminder.ca/podcast/310 Episode 212: Ralph Koijen — https://rationalreminder.ca/podcast/212 Episode 314: Valentine Haddad — https://rationalreminder.ca/podcast/314 Episode 224: Scott Cederburg — https://rationalreminder.ca/podcast/224 Episode 284: Scott Cederburg — https://rationalreminder.ca/podcast/284 The Grossman - Stiglitz Paradox (feat. The Plain Bagel) — https://www.youtube.com/watch?v=zoXMZxe8crI

Books From Today’s Episode:

Irrational Exuberance — https://www.amazon.com/Irrational-Exuberance-3rd-Robert-Shiller/dp/0691166269 

Papers From Today’s Episode: 

‘The Disappearing Index Effect’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4294297

‘Passive Investing and the Rise of Mega-Firms’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4851266

‘Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723265

Valentine Haddad on Google Scholar — https://scholar.google.com/citations?user=PlPjP48AAAAJ

‘How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing’ — https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=3821263

‘Household Portfolios and Retirement Saving Over the Life Cycle’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4068063

‘The equity premium: A puzzle’ — https://www.sciencedirect.com/science/article/abs/pii/0304393285900613 ‘In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3686935