When Buyers Don't Care About Value: How Passive Money Distorts Everything

The passive investing revolution has fundamentally changed market structure by making markets highly inelastic - small changes in supply and demand create large price movements, especially in the largest stocks.

• Passive strategies like index funds don't evaluate price or value - they simply buy when receiving cash and sell when cash is demanded
• Every dollar flowing into large-cap stocks can create up to $100 in market capitalization through a multiplier effect
• Active managers who sell overvalued securities lose their "voice" in the market, reducing price discovery
• Value investing has struggled partly because passive flows reinforce momentum in the largest stocks
• The system depends on continuous inflows - if people stop contributing due to job loss or retirement, prices could fall dramatically
• The dot-com bubble was partly driven by similar mechanics related to low-float stocks and index futures
• These distortions affect bonds as well as stocks, explaining anomalies in yield curves
• Most investors remain unaware of these structural changes, like "fish unaware of water"

Guest: Michael Green, CFA
Webpage: https://www.simplify.us/leadership
X: https://x.com/profplum99
Webpage: https://www.yesigiveafig.com/podcast

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[00:00:00] Intro/Passive Flows Distort Market Pricing.
[00:05:53] Mike Green's Career Journey.
[00:13:55] The Sharpening of Passive Management.
[00:24:32] Understanding Market Inelasticity.
[00:42:12] How Size Affects Stock Elasticity.
[00:55:52] Value Distortion and Corporate Debt.
[01:11:03] Credit Markets and Bankruptcy Risk.
[01:22:32] The Dot-Com Bubble and Passive 1.0.


DISCLAIMER:
Information presented on this program is believed to be factual and up-to-date, but we do not guarantee its accuracy, and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the options presented. Encompass More Asset Management LLC is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC) and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.