It's also possible that Vanguard just delivers the same products as their competitors, just at a significantly lower price (management cost).
Keep in mind also that "growing" in this context doesn't refer to huge profits (as far as I know). As far as I can see, as a non-expert, Vanguard just offers the same products as everyone else, except at half the yearly management cost. I mean, when you're looking for some index fund, and Vanguard is one third the cost, is it any surprise they're taking away customers from the incumbents?
Collapse how? And what would the fallout be, that investors lose some money through lawyer fees and auction write-downs? The value added is in the services of trading the underlying equities, not the companies issuing the actual stock, which are as sound as the market indices they replicate.
Imagine you have a class full of studious and competent students, they do well on exams and generally display the performance characteristics and output you'd expect from a class full of studious and competent students.
Then the rules change. From here on in, plagiarism is no longer a code violation. The obvious happens, everyone copies from the smartest kid in the class, measured by the heretofore pretty reliable indicators of proficiency built up in the previous system.
But the next year comes along, and everyone's just that little bit less certain who the smartest kid in the actual class is, so instead they start measuring by how rich his father is, or how confident he sounds when he makes his declarations.
Iterate the system a few generations, and although the first iteration will indeed result in better results across the board for all students, as people become more and more unhinged from the underlying realities of scholastic performance for students as they come and go through the system, would it not stand to reason that eventually you're just going to have a bunch of idiots copying people who yell the loudest, and seem the most like they're successful?
This analogy has its limitations but let's go with it a small way.
Everyone has the choice to copy who they think is smart or write their own answer.
Each person compares the expected value of writing their own answer with copying whoever they think is smart.
Some win, some lose. As it gets harder to work out who is smart yet everyone is copying, beating that average becomes easier. That proportion of the class who are capable of beating that average have an incentive to try it.
Stock picking has been massively overvalued for a long time. The costs people have paid for that value have been far too high. The index wins because it is /cheap/, the costs of investing in the index are low. As the market is now adjusting to that mispricing, among those stock pickers who can actually do it, there will be some good opportunities. Stock picking, whether buy someone like Buffet, or by an algo shop or whatever isn't going to go away. Every time the market is mispriced there's an opportunity. Price will end up somewhere close to value in the long run. It's amazing that with index funds it took so very long to happen. Malkiel pointed it out pretty clearly in a popular book that hasn't been out of print since, what, 40+ years ago. It's great, everyone should read it for its market insights, especially if you want to pick stocks.
You're absolutely right, it does have its limitations, and they show in the issues you raised with it in a way that doesn't actually apply to the nature of the analogy as it criticises the original situation under examination. The nature of indexing is such that it's treated by practitioners as if it were an "objectively correct" (and obvious, no question about where the volume is flowing, the numbers are right there.) answer to the correct investment allocation, so it isn't actually so much the case that there are people just copying random other picks because they like their haircut or it's a popularity contest or whatever (although I suppose you can still make the argument that you're making some kind of decision in an index based on which index fund you're allocating your investment to, but even there you could take a no favourites approach by indexing index funds.)
The core point I was trying to make though is that the market is efficient in net across a great variety of actors all making their own judgement with regards to how much a given thing is worth because it's assigning so many eyeballs and independent evaluations to the pricing question for a given item.
When you swap that out and replace it with a system in which n% of the trade volume is just copying the rest of the trade volume, that reason applies inversely proportional to the volume that such indexing takes place, until a market with just one guy calling all the shots and everyone else indexing him may as well just be centrally planned, and thus afflicted with all the heinous cancers thereof.
Your point about the deleterious effects of the above also simultaneously lowering the bar on the challenge of beating the average though is something I hadn't thought of, and is completely correct. I guess that is how indexing would collapse when you got to some state where the market was mostly just ignorantly following the tiny minority of organic judgement being exercised, and that tiny minority turns out to be inadequate. The market then recovers by stock picking once again being conducted by specialists, and as you say, this would be a situation wherein stock picking was massively undervalued, as opposed to the (maybe present?) situation where it was massively overvalued.
Thanks for the book reference, I'll definitely check it out.
Post hoc ergo propter hoc. Articles like this showed up for Enron and MCI/WorldCom and all the others, extolling one virtue or another and showcasing their success. Now we have one for Vanguard, ergo it will fail.
I'm not serious, of course. But pride does seem to come before the fall, and just out of an excess of caution I might move some money out of my vanguard funds next week.
You've got to take in to account that Vanguard doesn't actually do much - just buy stocks on your behalf and charge 0.12% for doing so. If it stopped doing that because some other operator was doing it for 0.08% it wouldn't be a big deal.
The bigger deal would be if the general market collapsed for some reason but that would affect everyone, not just Vanguard.
Ok. I'm curious why you're telling me this. What's your motivation?
There's certainly no point in arguing with me, since I'm both reasonably poorly informed and aware of it; I have made no bones about the fact that my post was unserious. Yet you leap to the defense of what should, after all, be a very unexciting thing. And you aren't alone in doing so.
That, like this breathless article, is mildly troubling to me. These institutions should engender no loyalty, embody no attributes; only then does the market actually work. Evidence of those tendencies suggests the distorting effect of human psychology. And in tone it is too much like what we saw before the collapse for my liking.
Well I've known Vanguard for about 30 years and am a fan as it's saved the investing public many billions over that time, certainly if you compare them to normal fund management companies even if just buying and holding shares directly is probably cheaper still.
But I was just pointing out they offer a rather dull, value for money service and are not going to collapse Enron style. They could decline Sears style however.
You're comparing Vanguard to Enron & MCI / WorldCom. Would you mind explaining your analogy? It doesn't make sense to me. I don't think, for example, my investments in Vanguard funds are precarious because they are over-leveraged in bespoke weather derivatives.
