Sunday, December 28, 2008

WaMu and the problem with index funds

Like everyone else, we've been wondering what we did wrong. What can we learn from the WaMu story?

We were, after all, WaMu investors, albeit indirectly. We own index funds that, at one time or another, probably owned shares of WaMu. The track record of the low expense index funds has been very good since John Bogle, an honorable man, pioneered them at Vanguard. The thesis has been that money managers, when their salaries and other overheads are included, can't beat index funds. Of course, there have been exceptions.

Hmm. Maybe any money manager who beats index funds should be immediately investigated by the SEC.

But I digress.

The problem with index funds is that they're only as smart as the market, and only as good as publicly traded companies. If the market's regulatory frameworks are broken, if corruption is on a historically seasonal upswing, if the world is too complex to detect theft, then index funds are just a way to get taken.

The problem is, obviously, that index funds are only as good as the publicly traded company.

So are there any alternatives to index funds for the retail investor?

See also:
  1. Complexity collapse
  2. Disintermediating Wall Street
  3. The future of the publicly traded company
  4. The role of the deadbeats
  5. Firewalls and separation of powers
  6. Marked!

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