Academics Battle Over Index Funds in WSJ
Posted By John Schroy On 27th June 2006 @ 11:35 In Fund Shares, Economic Theory, Fund Managers | No Comments
The grim, grey editorial pages of the Wall Street Journal have become a field of glory, with flashing knives, slings and arrows, as famous academics battle to defend the besieged [1] Efficient Market Hypothesis and the purity of Index Funds.
 The Battle of the Academics
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In an editorial published on June 27, 2020, Burton G. Malkiel joined with John C. Bogle of the Vanguard Group, to fight for “capitalization-weighted indexing” against the insurgency of Jeremy Siegel, Eugene Fama, Robert Arnott, and Kenneth French, proponents of a heretical notion of “fundamental-weighted indexing”.
Professor Siegel Throws Down A Glove
Professor Jeremy Siegel had opened the fray by an earlier editorial in the Wall Street Journal of June 14, 2020, proposing that index funds should be weighted on the basis of dividends rather than market capitalization.
Professor Malkiel replied with haughty disdain, calling for caution before accepting the Johnny-come-lately “new paradigm” of “fundamental-weighted indexing”, since this would imply that the “old paradigm — reflected in more than $3 trillion of capitalization-weighted index investment funds — is in error”
Joining Professor Malkiel in the defense of capitalization-weighted indexing was none other than [2] John C. Bogle, who, as patriarch of the Vanguard Group that manages $340 billion in index equity assets, has a very, very large dog in the fight.
The Efficient Market Hypothesis Falls Wounded
The first casualty in this war has been the Efficient Market Hypothesis, first nicked by Professor Siegel in his opening article (see: “[3] Efficient Market Hypothesis: Current State of Belief“).
But it is Professor Malkiel that dealt the most grievous wound to Efficient Markets, rushing to “put to rest the canard that the remarkable success of traditional market-weighted indexing rests on the notion that markets must be efficient.”
In this, he seems to recant his former arguments that efficient markets were the justification for index funds, as propounded in his book, “[4] The Index-Fund Solution: A Step-by-step Investor’s Guide“,
“First, there is considerable evidence that our securities markets are extremely efficient in digesting information about individual stocks or about the stock market in general. … it is precisely because professionals are so diligent in continuously examining stock prices for any mispricing that the market always reflects their best judgment regarding all information that is known.
… as a result, prices fully reflect all known information, and even uninformed investors buying a diversified portfolio at the tableau of prices given by the market will obtain a rate of return as good as that achieved by the experts. … they should simply buy and hold a large group of stocks that represented the stock market as a whole.
In other words, investors would be well-served by buying an index fund.”
Entrenched Positions and the Rule of Mammon
Now, lesser mortals, trying to follow closely the reasoning of these “economic scientists”, can not help but notice the back-tracking, inconsistencies, occasional recantations, retractions, disavowals, and pervasive disregard for the scientific method.
 Mammon
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Of course, it has been clear for years, especially after the spectacular rise and fall of [5] Long Term Capital Management, that professors of economics and finance do not take vows of poverty but are frequently engaged in a multitude of money-making schemes: writing books, touring the lecture circuit, serving on boards, and sponsoring diverse projects — making themselves more subject to the Rule of Mammon, than any ascetic search for Truth.
Over the last generation, a large part of the U.S. capital market has been built upon the dicta of this or that professor, and with a lot of money and time invested, there are serious entrenched positions to defend.
These ideas, even when erroneous or unproved, are important to understanding the sociology of the capital market and are therefore relevant to Capital Flow Analysis.
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Article printed from Capital Flow Watch: http://capital-flow-analysis.com/capital-flow-watch
URL to article: http://capital-flow-analysis.com/capital-flow-watch/academics-battle-over-index-funds-in-wsj.html
URLs in this post:
[1] Efficient Market Hypothesis: http://www.capital-flow-analysis.info/investment-tutorial/lesson_7.html
[2] John C. Bogle: http://www.amazon.com/exec/obidos/redirect?link_code=as2&path=ASIN/0071364382&tag=centerforc
api-20&camp=1789&creative=9325
[3] Efficient Market Hypothesis: Current State of Belief: http://capital-flow-analysis.com/capital-flow-watch/efficient-market-hypothesis-current-state-of-bel
ief.html
[4] The Index-Fund Solution: A Step-by-step Investor’s Guide: http://www.amazon.com/exec/obidos/redirect?link_code=as2&path=ASIN/0684865963&tag=centerforc
api-20&camp=1789&creative=9325
[5] Long Term Capital Management: http://www.amazon.com/exec/obidos/redirect?link_code=as2&path=ASIN/0375758259&tag=centerforc
api-20&camp=1789&creative=9325
[6] Economic Theory: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=economic-theory
[7] efficient market: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=efficient-market
[8] eugene fama: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=eugene-fama
[9] fund managers: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=fund-managers
[10] Fund Shares: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=fund-shares
[11] index funds: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=index-funds
[12] investment theory: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=investment-theory
[13] jeremy siegel: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=jeremy-siegel
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