On Apr 4, 2008, at 9:01 PM, Seth Ackerman wrote:
> If the capital markets consisted of everybody
> just parking their money blindly in index funds and not engaging in
> active trading, where would the external discipline on managers come
> from? How would shareholder value objectively manifest itself?
As it happens I asked John Bogle, godfather of index investing, this very question when I interviewed him last week. (I cut it out of the broadcast version because I thought it was too arcane for a Pacifica audience. I took a load of shit on the WBAI producers' list for even having interviewed him, since he's a capitalist tool, and so, by extension, am I.) His answer was that index investors are ideally situated to exert discipline over managers because they have to hold the stock - they can't follow the "Wall Street rule" and just sell. So instead they'd lobby managers at underperforming corps, and presumably organize proxy challenges if they resisted. That's a big organizational challenge in a world where index investors are the minority and the Wall Street rule still predominates. But to Bogle, it's direct shareholder pressure rather than indirect pressure coming from a sagging share price that would do the trick.
Doug