Published on Dec 06, 2019 in The Index Fund Bubble
Last update: Dec 13, 2019
I think most people aren’t fully aware of what a share of a company is and what rights it affords you if you’re an owner.
Shares aren’t just financial assets that fluctuate up if the company does well and down if they do poorly. They are real shares in companies, nearly identical to the shares that Jeff Bezos owns in Amazon or Mark Zuckerburg owns in facebook.
Above all else, shares are ownership of cashflows in a company. If the prospect of future cashflows goes up, the market will raise the price of the shares.
But that’s not all…
Shares also come with voting power. You know the “corporate executives” that are destroying the planet, middle class, and generally, the world (depending on which news you consume)? Well, those people aren’t hired into their jobs like you and I. They are voted in by shareholders.
When you own shares in a company, you get to vote on the general direction of the company and how it operates, such as who gets hired to run the company and how they are incentivized and compensated.
An index fund is a collection of shares in a list of companies. When you buy a share of an index fund, you’re really buying partial shares into 100, 1,000, maybe even 10,000 individual assets.
But what happens to your vote? Do you get a partial vote?
The answer is no. And this is a big problem.
There are three companies who manage the vast majority of index fund assets—Vangaurd, Fidelity, and Black Rock.
When you buy shares of their index funds, they retain the right to vote on your behalf.
That means there are three top executives (one each at Vangaurd, Black Rock, and Fidelity) who get to chose how to vote for all of the companies in all of their index funds for all of their customers. That’s trillions of dollars worth of stock and voting power that now lays in the hands of three people.
Do you think these three highly-paid Wall Street executives are going to vote how the average American investing in their funds would vote? Do you think they’ll vote how you’d vote? I personally doubt it. I think they will vote for their own self-interests and disregard important topics like climate change, income inequality, and even the stability of the long-term economy.
The first argument I made for liquidating my index funds was based on my perceived risk, and frankly, speculation. This argument against index funds is based on facts.
When you buy index funds, you consolidate corporate voting power into the hands of three Wall Street executives.