Lead-Lag Live Fantasy vs Fundamentals: Seth Cogswell on Bubbles, Passive Flows, and What Breaks Next
Aug 26, 2025
Seth Cogswell, Founding Partner and Portfolio Manager at Running Oak, dives deep into the world of investing. He discusses how the current market strength stems more from fantasy than fundamentals. Cogswell warns about the hidden risks in passive strategies and the destabilizing effects of concentrated index flows. He emphasizes that Fed stimulus has only postponed risks, not eliminated them, and champions the significance of mid- and small-cap stocks when narratives shift. His insights challenge conventional investing wisdom in today's volatile landscape.
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Contradiction Between Sentiment And Flows
- Markets show wide investor unease while flows concentrate into passive and momentum strategies.
- That mismatch increases systemic risk because people are acting certain in an uncertain world.
How Cap Weighting Creates A Momentum Machine
- Cap-weighted passive investing mechanically amplifies winners and underweights losers through a feedback loop.
- Over decades this creates persistent overweighting of overvalued names and underweighting of undervalued ones.
Use Equal Weighting To Express Uncertainty
- Use equal weighting to benefit from mean reversion and to sell winners and buy losers automatically.
- Equal weighting expresses uncertainty and adds diversification versus concentrated cap-weighted bets.