"In one of your latest memos, you have raised the issue of passive investing and ETF. Could we approach the point where the market gets inefficient if too much money is invested passively?
We could. We don’t know where that threshold is. Today, about two thirds of investment money is estimated to be actively managed. People say markets will still be efficient as long as 20% of the money is actively managed. But the truth is, we simply don’t know. If you take it to the extreme: If active investing was zero, that is, nobody does any analysis, markets would be in chaos because there is no price discovery. So in a sense, passive investors are free-riders on the work of active investors, because they believe the latter make the markets efficient and prices fair. So ETF investors are benefiting from the efficiency of the system without doing anything for it. But is that relationship sustainable forever?"
We could. We don’t know where that threshold is. Today, about two thirds of investment money is estimated to be actively managed. People say markets will still be efficient as long as 20% of the money is actively managed. But the truth is, we simply don’t know. If you take it to the extreme: If active investing was zero, that is, nobody does any analysis, markets would be in chaos because there is no price discovery. So in a sense, passive investors are free-riders on the work of active investors, because they believe the latter make the markets efficient and prices fair. So ETF investors are benefiting from the efficiency of the system without doing anything for it. But is that relationship sustainable forever?"
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