Isn't Indexing Dumb Money?

In an interview with Barry Ritholtz, David Einhorn said that "markets are fundamentally broken" because there is so much indexing occurring and that index investors are not price sensitive and don't consider value when purchasing. John Authors at Bloomberg goes into better detail including a reference to the Bernstein paper from 2016 that likened indexing to Marxism. 

There has long been a sentiment that believes indexing is dumb money. If you are an indexer then this should not be the first time you're hearing that. I don't know whether Einhorn believes indexing is dumb money or not, I think he is alluding to that idea but I don't know. It wouldn't be a stretch though for someone like Einhorn to believe this to be the case. And for the all the hedge fund managers and other types of managers of discretionary pools of capital trying to deliver alpha, it would seem to me that they should welcome more indexers to the party. More "dumb money" should be an opportunity to exploit indexed money flows and deliver even more alpha. 

I say the same thing about indexing all the time. It is absolutely a valid way to go but at times it is a very painful ride. The only real problem IMO would come from somehow not realizing that at times, the index will go down a lot. Not realizing this will increase the odds of panic selling which is of course a very problematic behavior. 

Individual investors and investment advisors have a huge advantage over market participants like Einhorn. People who engage in the manner he does have to win against the market and other similar investors. Not everyone will agree with this but as a do-it-yourselfer (or advisor helping individuals), all you need to do is avoid catastrophic mistakes, stay sort of close to the market and manage things that don't really have much to do with performance, examples of which include sequence of return risk and keeping emotions in check. All this in pursuit of having enough money when you need it and making sure your money lasts as long as you do.

A huge priority for me as an advisor is making sure that clients have no worries about meeting their normal, portfolio cash flow needs. "Now may not be the best time to buy a $200,000 car," I had a similar conversation to that a long time ago, is a conversation I don't mind having but "you need to stop taking your $3500 monthly check" is one I hope to never have. 

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