The Hidden Risks of Passive Investing | Steven Bregman

The rise of indexation has given many investors a cheap and straightforward way to access the stock market. But now that over half of all investing dollars are allocated to passive strategies, is the dominance of passive investing creating market distortions in ways that meaningfully alter share prices?

Steven Bregman, president and co-founder of Horizon Kinetics, has been tracking the consequences of passive indexation’s rapid rise, and on this sixteenth episode of Forward Guidance, he shares with viewers his findings.

Bregman explains key factors such as the crowding-out effect and hidden illiquidity that can explain the drastic outperformance of equity giants such as Apple, Microsoft, and other mega-cap stocks ($NVDA, $TSLA, $FB, etc.) that now comprise nearly half of the S&P 500.Bregman argues that the S&P 500 in 2021 is no longer a “diversified” basket of stocks as it was 30 years ago, because so many out-of-favor stocks such as oil drillers, gold miners, and other businesses that benefit from bouts of inflation (such as the one right now) have been “crowded-out” of the index.

At the end of this nearly two-hour masterclass in passive investing, Bregman reveals a formula that he argues is guaranteed to beat the S&P 500: “select for the smart penny.

”Horizon Kinetics’ website:

Jack’s prior interview with James Davolos, Portfolio Manager of the Horizon Kinetics Inflation Beneficiaries ETF ($INFL):

About $INFL:

Horizon Kinetics’ Twitter handle: @HorizonKinetics

Jack Farley’s Twitter handle: @JackFarley96

NOTE: Regarding the chart at 01:49:20 -- we do not know and cannot confirm if this is the official chart Horizon Kinetics specifically use.


00:00 Introduction
00:38 What Is Passive Investing?
12:13 Is the S&P 500 Truly Diversified?
22:07 The ETF Return Guessing Game
30:40 Oil and Gold In Passive Strategies
39:46 The Crowding Out Effect
51:01 AMC and Meme Stocks: The Crowding Out Effect In Action?
56:43 Is Debt Inflationary, or Deflationary?
01:27:49 Watering Flowers And Cutting Weeds
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