Thoughts on Index Investing

• Overall, index funds have been effective investments for the past 50 years, but the future isn’t the same as the past: For most people, an inexpensive index fund would have been the best investment to make up to this point, with returns higher than trying to speculate, day trade, follow the herd, time the market, or invest in most actively managed funds. However, this time period has had conditions that may change in the future, in which case we do not know if index funds will be good investments. Some of the unique characteristics of the times since end of WW2: cheap oil, American economic dominance, relative peace and security, low prices of food and utilities relative to technology and entertainment, growing US population, and low interest rates. Not guaranteed into the future.
• Cap-weighting = buying things because they cost more: Most indexes are based on what the stocks cost, not on how good the business is. When a stock goes up in price, then all the index funds buy it; when it goes down in price, the index funds sell it. The assumption is that stocks go up in price because the company is doing better, and go down in price because the company is doing worse. This is known as the Efficient Market Hypothesis, the idea that the market is always right. I (and many economists and incredibly successful investors) do not believe this hypothesis is correct. Instead, we know that the price of stocks can be much higher or lower than the actual business is worth, so it does not make sense to buy a stock because it goes up in price. Short selling, pump and dump, meme stocks, bubbles, and the psychology of individual investors all impacts whether a stock goes up or down.
• Cap-weighted Index Funds make mispricing worse: Also, as the index funds fight each other to buy and sell the same stocks, so they actually contribute to the stock prices being higher or lower than they should be.
• Owning evil or bad businesses: You get the good companies and the bad companies. Some are working to cure cancer, some have made billions selling tobacco products. Some are building wind turbines, and others pay lawyers to get out of cleaning up their oil spills. And even if you get a fund that avoids the evil companies, you might still own companies that you know aren’t going to last. For me, that would have been K-mart, Kodak, and Radio Shack. Index funds own a piece of hundreds of terrible businesses, and you have no option but to waste your money on them all.
• You give up your voting rights in how these companies are run. Companies are owned by the stockholders; when you buy a share of a public company, you get a vote on who is in charge and some aspects of how it is run. The company will send you information and usually a ballot to place your vote, called a Proxy, and you get a vote for each share you own. When you buy an index fund, the company who manages the index fund takes your money as well as your votes in all of the companies on the stock market, and they get to decide how those companies are run, not you.
• Most Index funds do not use the votes they take from you for good. For example, consider the proxy votes from September 2020 for Tesla. Every share owner was allowed to vote on 3 Board members and 5 other items. Item 5 was whether there stockholders can make decisions with a >50% majority, or whether to continue requiring a super majority. 2 was to approve paying Elon Musk and the other managers at Tesla huge piles of money, instead of using that money for other purposes. Item 6 was to take a deeper look at whether to continue to require employees to go through forced arbitration when there is a dispute with the company. And Item 7 was to write a report on human rights, following claims that some of the materials used in the cars were mined by children. Take a second and think about how you would vote on each issue, then compare that to how the following index funds voted on behalf of their investors:

  How Some Index Funds Voted on Tesla General Meeting, Sept. 2020

  Item	Tesla Board Recommendation	Vanguard Primecap	Vanguard Others	BlackRock Advantage Global Fund, Inc.	TIAA
  4: Report on Paid Advertising	Against	Against	Against	Against	Against
  5: Adopt Simple Majority Vote	Against	Against	For	For	For
  6: Report on Employee Arbitration	Against	Against	Against	Against	For
  7: Additional Reporting on Human Rights	Against	Against	Against	Against	For

  This is just one vote for one company, but when you think about all the shares owned by all the index funds, this can help explain why so many companies make crummy decisions that make our world a little worse.

• Some index funds seem to be selling your votes to the companies you’re paying them to watch over: The financial management firms that oversee Index funds also do financial management work for other companies. That sometimes includes the companies that you’re paying them to watch over and vote on your behalf as an owner. According to one paper, the managers of index funds will vote differently in proxies for companies that pay them than those that don’t.
• Excessive power concentration: Human beings are terrible vessels for large amounts of power. A company that manages your investments manages a sizeable chunk of the economy, and can use that power for their own ends, whether political or financial. Even if we assume they’ll never intentionally misuse this power, having trillions upon trillions of dollars resting in the hands of a few people is inherently less secure than spreading that responsibility among many more.
• Fees: Index funds take a percentage of your investment money every year, some more than others.

International Index Investing

Why invest in an index fund of foreign companies?

Most developed countries have companies that are traded on stock exchanges, and there are many different index funds that allow you to select individual countries to invest in. Depending on the value of that country's currency versus the U.S. dollar, you may get more for your money by investing abroad. If that country is unstable or has a weakening currency versus the dollar, then your investment may do worse than investing in the US stock market, or you could lose the entire investment. Also, when foreign companies pay dividends, they may withold foreign taxes. However, if you think that:

• The US market is overcrowded, and everybody competing has made stock prices too high
• The foreign country's market is undervalued due to something that isn't really that big a deal, and you can get more value for your investment
• The US dollar will decline in value more than a foreign currency (For instance, because the Fed is printing more money, because other countries will produce more valuable products, because US companies are raising prices to increase profits while providing less value to foreign purchasers, or that the dollar's use as a foreign reserve currency and main currency for oil trading will be less important)
• The other country has unique trade items that will increase the value of its currency, and or
• The quality of the other country's businesses is equal to or better than that of similar US businesses

then investing in other countries may make sense.

Questions I ask to decide if it makes sense to invest in a foreign country

1. Is the country stable? Does it have a functioning democracy, rule of law, and an educated population that takes care of each other?
2. Will the country do better or worse in a warming planet with rising sea levels?
3. What does the country have or produce that gives them an advantage over other countries?
4. Can the country be independent in food, water, and energy?
5. Do they have room to grow with influx of migrants due to global warming?

Countries I invest in, and why

• Canada (iShares ticker EWC): Our neighbors upstairs, with an economy that is closely linked to ours. They have tons of mineral resources, insane amounts of fresh water, abundant cheap hydropower as well as biomass and wind, and miles and miles of land that will be increasingly arable in a warming planet.
• Chile (iShares ticker ECH): One of the most developed countries in South America, they are rich in lithium and minerals needed to produce fertilizers that are critical to the world's food supply. Their seasons are opposite ours, so they grow fruits and vegetables when we can't. The Pacific provides huge amounts of seafood and they sit on some of the strongest wind resources on the planet. They usually are powered mostly by hydropower, but a multiyear dry spell has forced them to rely on fossil fuels while building out their solar infrastructure. This dry spell, combined with large edits to their constitution (to help the working class) have scared away investors recently. Earthquakes may be a threat, but one that they have been preparing for.
• Finland (ishares ticker EFNL): A high-tech economy with boatloads of wood products as a backup plan. Highest quality of life and best educated population on the planet, and the people don't take crap from Russia. If they are brought into NATO, that's even less of a concern. Many large cities are coastal, but with a little elevation, and not many other natural disasters. Nokia is probably the most famous Finnish company, and they are now focused on providing 5g infrastructure. Major companies in Finland focus on providing a steady stream of renewable energy and materials for the rest of the world.
• Sweden (iShares ticker EWD): Like Canada and Finland, Sweden is predicted to gain agricultural productivity from a warming climate, and is moving quickly toward 100% renewable energy. They are known for quality engineering, mining, and timber. Unlike most of its trading partners, Sweden uses the Kronor and not the Euro, so it is unlikely to be affected by other countries and their debts. In fact, it has a budget surplus. It is a little concerning that Stockholm is built on islands, but as one of the richest countries, it is likely to be able to adapt.

I also invest in some individual companies in Japan and Taiwan, but don't invest in broad index funds due to the proximity to China, high population densities relative to future agricultural productivity, and declining population in Japan. Argentina seems less politically stable than Chile, and New Zealand has no real competitive advantage over other countries. Australia is already having a lot of trouble with climate change. Norway is excessively dependent on sales of North Sea oil and excessively fjordy. Most of the rest of the countries typically identified as "developed" are highly populated, jammed up against each other, lacking strong competive advantages, and/or placed on islands, but I would consider individual stocks for companies with good moats.

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