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Another Legendary Investor Sounds the Alarm on Investments that Have Taken Over Nearly Half the Stock Market

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I warned investors last year to heed the words of Vanguard founder Jack Bogle when he sounded the alarm on index funds. Now, Michael Burry, whose story was immortalized in The Big Short as one of the first investors to call the subprime mortgage crisis, has echoed Bogle’s warning. CNBC’s Yun Li reports Burry has said of the bubble in index investing “the longer it goes on, the worse the crash will be.”  She writes:

Low-cost passive vehicles have gained popularity on Main Street. Passive investments have now taken over nearly half of the stock market as more investors shun stock pickers and flock to index funds, according to Bank of America Merrill Lynch. Equity passive funds alone have ballooned to a more than $3 trillion market in less than 10 years, according to Morningstar. These funds mirror just about anything that can be tracked. They include indexes such as the S&P 500 or the Russell 2000.

“Trillions of dollars in assets globally are indexed to these stocks,” Burry said. “The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”

Many notable investors have sounded alarms on the proliferation of passive investing. DoubleLine Capital CEO Jeffrey Gundlach previously said it is causing widespread problems in global stock markets. He called it a “herding behavior” and said it has reached “mania status.”

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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