# Why is index investing so looked down upon?



## NewbieInvestor88 (Feb 21, 2021)

A lot of successful people (Buffett/Lynch/Bogle) have suggest repeatedly that for the average person, an index fund is all they need. 

So why don't average people follow that advice?


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## Thal81 (Sep 5, 2017)

Because it's boring as hell and you'll never score any homeruns.
(I invest only indexes)


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## MrMatt (Dec 21, 2011)

Most people think they're above average.
It's boring.

Billions of marketing dollars.


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## gardner (Feb 13, 2014)

NewbieInvestor88 said:


> So why don't average people follow that advice?


I think it is in large part because that is not actually the advice most retail investors receive. Most folks go with the bank or investment house/pension operators advice, and those folks have a vested interest in churning your account unnecessarily, buying things that suit their employer's goals and generating the highest commission possible, consistent with the plausible fulfillment of their supposed duty to the investor.

The inevitable failure of the likes of IGM Financial have been predicted for years, based on the notion that everyone would switch to index funds chosen by robo-advisors or couch potato strategies, but it hasn't happened so far. There's still lots of money to be made by sticking it to the retail investor.


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## cainvest (May 1, 2013)

Two main reasons I see most often ...

They don't want to manage their own investments
They can't manage their own investments


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## dotnet_nerd (Jul 1, 2009)

It's how human beings are wired. We do what we're told.

Finance: Buy mutual funds, you need professionals to mange your money
Sheep: Ok

Church: Unless you pay us a monthly tithe, you will roast in the flames of hell forever and ever.
Sheep: Oh. Hang on, I'll get my chequebook

Nutrition Experts: You have to throw away red meat, eggs and butter. They're bad for you (even though we've lived on them for thousands of years.) You need to eat this liquidy plasticy stuff instead. It's "heart healthy'


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## MrMatt (Dec 21, 2011)

Scott Adams’ Financial Advice


A few years ago I read some short financial advice by Scott Adams, the author and creator of the Dilbert cartoon. It’s great advice–it’s perfect for 95% of Americans’ financ…




www.mattcutts.com





The thing is that a lot of this stuff is intimidating to people, so they are a bit scared of it.

That nice guy with the 3% MER, high load funds, well he'll answer the phone, and come to your house when it's convenient for you.

Also most people don't understand money (or math) and their parents don't. They're financially illiterate. but there are all these experts willing to help you for "free".


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## Eclectic12 (Oct 20, 2010)

NewbieInvestor88 said:


> A lot of successful people (Buffett/Lynch/Bogle) have suggest repeatedly that for the average person, an index fund is all they need.
> 
> So why don't average people follow that advice?


Most of the average people I know have their eyes glaze over and run away screaming about how complicated investing is and how they need someone to do it for them. 

Yes, I am exaggerating but few I know are willing to talk about the basics, never mind indexing or stock picking.


Cheers


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> Most of the average people I know have their eyes glaze over and run away screaming about how complicated investing is and how they need someone to do it for them.
> 
> Yes, I am exaggerating but few I know are willing to talk about the basics, never mind indexing or stock picking.
> 
> ...


glazing over would benice.

I actually had a few young guys in my office ask basics, and I had older guys come and they said I was management and just trying to rip them off by offering overtime.

Like they asked how people can think that working overtime would result in less take home pay.
I pulled up the schedule 1 and walked through it, and explained marginal tax rates.


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## james4beach (Nov 15, 2012)

NewbieInvestor88 said:


> So why don't average people follow that advice?


I think there are two big factors

1. Markets really do look like magic to most people, and they ask the question: why should this index thing just go up (at a high rate) over time? It's a rather shocking proposition actually and many people won't believe it. Many people doubt that this really will play out the way it's promised, because it sounds too easy, too good to be true.

I'll add that it took me about 12 years before I believed it too. If you look at my first posts when I first joined CMF, I was very skeptical about the market index and I thought it was a dumb idea (or implausible) that you can simply hold the stock index and make good money.


2. Media, books, and folklore (stuff about Wall Street) have taught most people that "investing in stocks" is about being smart and picking and choosing, trading in and out. To most people, this kind of trading and high-activity is what investing is. It's a mental model of what investing is... and people expect to see it happen.

You'll notice that some of the stock pickers on this board are quite antagonistic towards index investing. They seem to have a strong belief that "with a bit of smarts" you can do better than an index, which is a belief in that Wall Street image of smart people making smart decisions, buying and selling, etc.


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## NewbieInvestor88 (Feb 21, 2021)

james4beach said:


> I think there are two big factors
> 
> 1. Markets really do look like magic to most people, and they ask the question: why should this index thing just go up (at a high rate) over time? It's a rather shocking proposition actually and many people won't believe it. Many people doubt that this really will play out the way it's promised, because it sounds too easy, too good to be true.
> 
> ...


The thing is, people with kids (particularly young ones) do not have time to truly do the Buffett/Lynch approach of looking for undervalued companies (unless investing is a hobby of theirs).


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## james4beach (Nov 15, 2012)

NewbieInvestor88 said:


> The thing is, people with kids (particularly young ones) do not have time to truly do the Buffett/Lynch approach of looking for undervalued companies (unless investing is a hobby of theirs).


Yeah, it's hard to find the time. But many people try to do this and fail at it anyway. It's not true that it just takes "some work" to find good companies and beat the market. It is in fact very hard for ANYONE to beat the market index in the long term. Many people do try very hard, spend lots of time doing it, and still fail to beat the index.

There have been studies on this. People who make serious efforts at stock picking can succeed for a few years. Can definitely get a good 1 year return or 5 year return. But the longer and longer you go, the less successful people are with stock picking. There are very few people... even experts... who can beat the market over periods like 20 years.

It might be a hobby to some people, but it's probably a waste of time, since you likely aren't going to beat the index. If it's fun though, sure, no problem with a hobby.

Also, Buffett and Lynch's successes are frequently misunderstood. Buffett for example was a rather aggressive speculator in his very early years. His trading was more like an active trader or hedge fund, and that's how he built his enormous wealth. He didn't get super rich by buying boring blue chip companies... was making very aggressive moves.

Lynch as well is misunderstood. He *does not* have a long track record. His mutual fund was actually only open to the public for about 9 years, and his total track record (with public data and public money) is only 9 years which is incredibly short. He also did this during a stock market boom, when it's generally very easy to pick just about any stock and make money. We actually have no idea how Lynch would have performed longer term. For all we know, Lynch might have just gotten lucky with a few good stock picks... but he never invested during a declining market, so his results should be ignored IMO.

For some reason, many people buy into the "stock picking" story, but it's an incredibly weak story when you dig into it. No doubt a very few people do beat the index long term, but it's extremely rare.


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## Ponderling (Mar 1, 2013)

So people may wonder about me and my owning individual Canadian stocks over a Canadian index fund. The issue I have is that Maple indexers have a huge slant to financials, energy and materials, So my efforts to but balanced positions in 11 sub index areas is in a way to better index hold candian exposure that the TSE index itself provides.


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## doctrine (Sep 30, 2011)

For me, I do both index investing and individual investing. My RRSP and TFSA accounts are fully indexed, I have fully invested in them every year since they were created, which for my RRSP dates back close to the start of this century. I have fantastic 8-10% long term returns in line with the indexes.

But I also invest in individual stocks. I take it very seriously, and as long as I am successful I will probably keep at it. I started my capital pool making a boatload of money coming out of the 'great recession', mostly in small caps that didn't recover for years after 2008-09. My current boatload of money is coming from cyclical financials, materials, and energy that were just killed in COVID and have returned me anywhere from 100-300%. I probably could have made as much in 2008 if I had more capital, but I recognize a one-a-decade opportunity when I see it. I now have 10 year annualized returns of 24.4%. Of course, this is with some money flow, in that I dump money in the account in bear markets and then withdraw some later, which does juice my IRR because it works out more than it doesn't, but that is still a time and money weighted return figure.

I think self reflection is important and if I wasn't outperforming, I might just revert to indexing. It's definitely easier. Not nearly as fun, and so I see the attraction that people have. For me, the sweet spot is setting up longer term trades that you don't have to monitor daily - I do have a day job and a family.


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## diharv (Apr 19, 2011)

Its not glamorous and it works. So naturally, people will do the opposite.


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## Jimmy (May 19, 2017)

Index investing is fine. I used to have only index funds for 30 years following the advice of advisors too or paying ETF MERs but have more time now to study stocks. More work but the returns are much better.

A 500 large cap stock index having both good and bad companies can be easily beaten just by using factors alone which William Bernstein made quite clear in his book, " The 4 Pillars to investing"

Over his study period ( think it was 100 yrs) US large caps had an average annual 3.5% real return. The following factors all performed better :
Value 5%, foreign 4% , Small cap 5%, small value 7%, Emerging markets 6%,and REITs 5%

If you have the time,better returns are there. If not Indexes are fine.


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## james4beach (Nov 15, 2012)

diharv said:


> Its not glamorous and it works. So naturally, people will do the opposite.


There was an interesting thread I dug up at CMF from many years ago. Someone had asked about investing their $1 million, and people suggested couch potato indexing. The person responded and said, is it really that simple? This sounds wrong (because it can't be that easy). If "zero effort" indexing is that easy, then what are all these advisors doing? What are all the traders doing?

Fast forward 8 years or whatever it has been since then, and that person would have seen their $1 million grow to $2.5 million if they had gone with the dumb old indexing approach.


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## diharv (Apr 19, 2011)

I hear you. I started my TFSA with intention of sticking with the Moneysense Couch Potato strategy using tD E series funds. Of course, I deviated and started doing some individual stock picking. I still have some of the E series funds, but the ratios have been shot to hell and my returns are probably not what they would have been had I stayed the course.


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## james4beach (Nov 15, 2012)

diharv said:


> I hear you. I started my TFSA with intention of sticking with the Moneysense Couch Potato strategy using tD E series funds. Of course, I deviated and started doing some individual stock picking. I still have some of the E series funds, but the ratios have been shot to hell and my returns are probably not what they would have been had I stayed the course.


I'm a disciplined investor now, but I really screwed things up when I began.

My dad got me into index investing (using RBC's index funds at the time) over 20 years ago. How I wish I had just stuck with them, instead of doing all the various other things I did instead -- which hurt my returns. I'm back on track now, but in my early years, I didn't understand or appreciate how great index investing was.


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## milhouse (Nov 16, 2016)

To take it from the top, I think the first question to ask is whether "average people" know what an index fund is and are aware of passive index investing.
And then, do they understand how passive index investing works and why it is a good long term investment strategy?

Not trying to poopoo on index investing as half my portfolio is configured towards it. But if you look back on that 5 year G&M Stategy Lab competition between growth, value, dividend, and indexing, growth (which was heavy on the FANG's IIRC) handily beat the other strategies while Andrew Hallam's well diversified and balanced index portfolio came in last. And based on how the markets have been since the competition ended about 4 years ago, it wouldn't surprise me if that if it ran a decade to now, growth would still be way ahead. On the surface, that's a pretty seductive story which does illustrate that non-indexing strategies can outperform for a non-insignificant period of time. But it obviously doesn't tell the whole picture when you also take into consideration overall investing timelines, risk tolerance, risk capacity, effort needed to groom your portfolio, etc. It goes back to what you're trying to achieve, what you're willing to accept, etc. Passive index investing ticks a lot of boxes off for many people's requirements but they don't necessarily know it.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... For some reason, many people buy into the "stock picking" story, but it's an incredibly weak story when you dig into it. No doubt a very few people do beat the index long term, but it's extremely rare.


You do realise that index investing and under $200 a trade commissions are relatively recent in the market, right?

In any case, as I said originally, I believe it is only a small set of investors that are aware of the choice. 
Once I look beyond family - it is in the 90%+ range of people using their bank MFs or an advisor who is putting them in MFs.


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I'm a disciplined investor now, but I really screwed things up when I began ...


A disciplined investor with how many experimental portfolios?
I'd say you are still dabbling but that's me. 

I do realise that the main parts are described as indexing but if you are that convinced indexing is the way to go and are disciplined about it, why waste time dabbling?


Cheers


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## My Own Advisor (Sep 24, 2012)

I think you can BTSX or Dow but it is rare - it takes years of disciplined investing and even then, a bit of luck/timing.

We all know timing the market rarely works. 

The best most investors can hope for is index-like returns whether by owning a an indexed fund (great idea) or a mix of individual stocks and indexed funds. 

Some stock picking can deliver amazing results but the challenge is keeping that up over 20, 30 or more years. Hard to do.


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> You do realise that index investing and under $200 a trade commissions are relatively recent in the market, right?
> 
> In any case, as I said originally, I believe it is only a small set of investors that are aware of the choice.
> Once I look beyond family - it is in the 90%+ range of people using their bank MFs or an advisor who is putting them in MFs.
> ...


They're not new developments

Vanguard launched index funds in 1976, I personally have $29 commission stock trades from the early 2000's.

I'd suggest index funds have literally been around for the entire investing lifetime of someone in the accumulation phase of their financial journey.


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## MrMatt (Dec 21, 2011)

Saw a great youtube ad from RBC with the tagline.
Maybe fees don't tell the whole story.
Which I googled and got this link. Which shows how their fund beats the peers.


Performance, Advice and Fees All Matter - RBC Royal bank



Not a bad fund, but it is interesting that it doesn't beat the index.





RBC Select Balanced Portfolio A, Fund, performance | Morningstar


Morningstar Financial Research conducts Analysis on Markets, Mutual Fund, Stocks and ETFs through Investment Data and News.




www.morningstar.ca





It's interesting that they list a benchmark in the prospectus, but don't show relative performance.
Really it's no wonder novice investors believe this.


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> A disciplined investor with how many experimental portfolios?
> I'd say you are still dabbling but that's me.
> 
> I do realise that the main parts are described as indexing but if you are that convinced indexing is the way to go and are disciplined about it, why waste time dabbling?


Yes I dabble, but I'm disciplined at it. I can't shake off my curiosity of stock-picking, so I still have some individual stocks. But I do it with strict position size limits, benchmarking, written rules and guidelines for myself. The only significant stock-picking I do is my 5-pack, which is a handful of TSX stocks in lieu of the index. This is very disciplined and follows strict portfolio construction rules; you might not even call it stock picking, since it's entirely systematic and rules-based.

In any case, the breakdown of all my investments are 15% stock/sector picking, 85% pure indexing.

And yes I understand the irony of posting this as I simultaneously post my Bombardier speculation. That position was much less than 1% of my portfolio.

What's important here is being disciplined and systematic, as opposed to ad hoc. Indexing helps someone stick to a disciplined strategy. Stock-pickers and dabblers (like me) can also be disciplined, but it's more difficult to pull that off.


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## Rusty O'Toole (Feb 1, 2012)

They do. So many people have switched to index funds that experts are afraid it is skewing the market. Index funds now control 17.2% of US listed companies, up from 3.5% in 2000 according to Investopedia. CNBC says

Passive management now accounts for 45 percent of all assets for U.S. stock-based funds.
That’s up from just around 25 percent a decade ago.
and that was 3 years ago. It's most likely higher now.








Passive investing automatically tracking indexes now controls nearly half the US stock market


Market share for passively managed funds has risen to 45 percent, up a full point from June 2018, according to data this week from Bank of America Merrill Lynch.




www.cnbc.com


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## Bananatron (Jan 18, 2021)

Dunning Kruger, essentially.


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## Bananatron (Jan 18, 2021)

Rusty O'Toole said:


> They do. So many people have switched to index funds that experts are afraid it is skewing the market. Index funds now control 17.2% of US listed companies, up from 3.5% in 2000 according to Investopedia. CNBC says
> 
> Passive management now accounts for 45 percent of all assets for U.S. stock-based funds.
> That’s up from just around 25 percent a decade ago.
> ...


How does passive investing skew the market? Is it because its based on M.Cap?, ie inflating the larger companies?


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## Rusty O'Toole (Feb 1, 2012)

Bananatron said:


> How does passive investing skew the market? Is it because its based on M.Cap?, ie inflating the larger companies?


Because it means every stock on the board is being bought willy nilly. So bad stocks are being inflated in price. It also means if stock prices dip and the punters panic and pull out their money, either out of fear or because they are broke and need it to pay bills, the whole board drops like a rock.


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## Bananatron (Jan 18, 2021)

Rusty O'Toole said:


> Because it means every stock on the board is being bought willy nilly. So bad stocks are being inflated in price. It also means if stock prices dip and the punters panic and pull out their money, either out of fear or because they are broke and need it to pay bills, the whole board drops like a rock.


Are the punters buying index funds though, or things like TSLA and bitcoin? IDK, I really don't see a huge difference in the market if you and I stopped buying ETF's and bought equity based mutual funds. Although the explanation you gave (about buying the dogs along with the winners) makes some sense.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> They're not new developments
> Vanguard launched index funds in 1976 ...


Sure .... though the "existing" is a bad choice on my part as I was thinking more of when Canadian investors could invest in index products such as MFs or ETFs.

I keep reading posts about how a Canadian can't buy a US MF so the existence of Vanguard's MF is of no use AFAICT.

One the Canadian side, TD eSeries is written up as one of the first where it's a bit over 20 years old.
ETFs on both sides of the border are at about the thirty year mark.




MrMatt said:


> I'd suggest index funds have literally been around for the entire investing lifetime of someone in the accumulation phase of their financial journey.


Existing ... sure. 
Usable by a Canadian like me .... not for my accumulation phase - unless I missed a way to buy a US MF.


Cheers


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> Sure .... though the "existing" is a bad choice on my part as I was thinking more of when Canadian investors could invest in index products such as MFs or ETFs.
> 
> I keep reading posts about how a Canadian can't buy a US MF so the existence of Vanguard's MF is of no use AFAICT.
> 
> ...


My point is that these aren't really recent developments. 

Sure, you're not going to find many retirees extolling the virtues of their VBAL ETF & $9.99 commissions, but it's been decades.


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## james4beach (Nov 15, 2012)

I am far less worried about "index investing bubbles" than I might have been a year ago.

Look at what's been popular in the last year. Everybody thinks they're a stock picking genius again. The kids have started stock picking individual names, Cathie Wood is becoming the next Buffett with her ARK bubble stock picks, etc.

There is no danger whatsoever that there is "too much indexing" happening. Just about everyone these days thinks that indexing is stupid, and thinks that they can beat indexing.


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## MrMatt (Dec 21, 2011)

Rusty O'Toole said:


> Because it means every stock on the board is being bought willy nilly. So bad stocks are being inflated in price. It also means if stock prices dip and the punters panic and pull out their money, either out of fear or because they are broke and need it to pay bills, the whole board drops like a rock.


I don't agree. Though i'd love to have the data supporting it.
I think for most stocks, including index ETFs, it's just assets sitting there not being traded.

Most of the price action is a relatively small sliver of traders bidding things up and down. 

I don't think an index holder is causing a market distortion any more than another stock holder.

now if there is a rush of money in, sure there can be a disruption, but if people overpay for a stock, or sell too low, well that's just because the market isn't perfectly efficient.

The argument for indexing isn't that the market is efficient, it's that the market is efficient enough to make trying to beat it not worth the effort. I believe this is true for most people.


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## dotnet_nerd (Jul 1, 2009)

james4beach said:


> I am far less worried about "index investing bubbles" than I might have been a year ago.
> 
> Look at what's been popular in the last year. Everybody thinks they're a stock picking genius again. The kids have started stock picking individual names, Cathie Wood is becoming the next Buffett with her ARK bubble stock picks, etc.
> 
> There is no danger whatsoever that there is "too much indexing" happening. Just about everyone these days thinks that indexing is stupid, and thinks that they can beat indexing.


You can't even call kids investors. They're gamblers, the stock market to them is just a giant casino.

In fact it's more than that. Casinos are games of blind chance. Kids with $$$ today are groupies looking to ride the shirttails of the next WallstreetBets rockstar.


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## Rusty O'Toole (Feb 1, 2012)

Wall street bets is an outlier. It is a crazy offshoot of another Reddit stock board which was itself somewhat loony compared to more mainstream boards. The name says it all - they regard what they are doing as gambling not investing. It is a happy hunting ground for the wildest day traders and gamblers who take pride in going all in on long shots and losing their entire account in a day.


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## MrMatt (Dec 21, 2011)

Rusty O'Toole said:


> Wall street bets is an outlier. It is a crazy offshoot of another Reddit stock board which was itself somewhat loony compared to more mainstream boards. The name says it all - they regard what they are doing as gambling not investing. It is a happy hunting ground for the wildest day traders and gamblers who take pride in going all in on long shots and losing their entire account in a day.


I'm glad there are wingnuts like wallstreet bets. the GME debacle, ideally, will have people re-evaluate their risk and exposure.
The GME related pain was relatively small, both in size (billions) and number of people (few thousand)

Look at something like the Canadian mortgage market, where people are indebted to the limit, and can't afford a 2,3,5% mortgage rate hike.

I think risk tolerance is one of the most under considered aspects of financial management today.


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## Spudd (Oct 11, 2011)

MrMatt said:


> I'm glad there are wingnuts like wallstreet bets. the GME debacle, ideally, will have people re-evaluate their risk and exposure.
> The GME related pain was relatively small, both in size (billions) and number of people (few thousand)


I have been highly amused to see people posting in the WealthSimple Trade subreddit saying that they have contacted WealthSimple to make sure they'll still be able to sell their Gamestop when it's over a million bucks a share. LOL. 

I'll give them one thing, they sure are patient. It's been months now and they're still banging the Gamestop drum.


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## MrMatt (Dec 21, 2011)

Spudd said:


> I have been highly amused to see people posting in the WealthSimple Trade subreddit saying that they have contacted WealthSimple to make sure they'll still be able to sell their Gamestop when it's over a million bucks a share. LOL.


they deserve to lose their money.


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## Rusty O'Toole (Feb 1, 2012)

How can a deli in rural New Jersey with sales of less than $36,000 in the last 2 years, be valued at over $100 million by the stock market? Could it be that the stock is being bought automatically by index funds that are obliged to own every stock on the market?









U.S. Financial Markets Have Become A Giant Mirage Built On A Foundation Of Fraud


Would you pay more than 100 million dollars for a single deli in rural New Jersey that had less than $36,000 in sales during the last two years combined? I know that sounds like a



theeconomiccollapseblog.com


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## cainvest (May 1, 2013)

Rusty O'Toole said:


> Could it be that the stock is being bought automatically by index funds that are obliged to own every stock on the market?


Two things ...
Is there an index fund that buys OTC stocks?
Who would own such an index fund?


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> My point is that these aren't really recent developments ...


I can remember people talking about how low fee, no load MFs avoided the seven year wait for a deferred service charge to disappear in less than decades.

Personally, despite it existing for a long time, I doubt many had index funds on their radar until they could easily buy them.

Cheers


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> Personally, despite it existing for a long time, I doubt many had index funds on their radar until they could easily buy them.


They're not very new but as I understand it, index funds are still NOT heavily used by Canadian investors. I believe that our uptake of index funds is pretty weak.


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