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When I present a perspective on markets for readers to consider it doesn’t mean I agree with it. The reason for that preamble is that I’m about to describe the views of a man who believes index investing is basically one big Ponzi scheme.

Michael Green, chief strategist and portfolio manager for Los Angeles-based Logica Capital, was recently featured on Bloomberg’s Odd lots podcast. His views are controversial, to say the least.

For Mr. Green, the act of buying an index fund distorts the market. He accepts that if there were a way to hold all stocks in an index without an initial purchase that drives prices higher, it would work the way investors think it does.

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In practice, however, he believes what we have now is basically ‘flows chasing flows’ - assets into index funds lifts stocks prices, attracting still more assets, and on and on.

With this reading, market distortions from index funds are compounded by the fact that investors have been trained to never attempt to time the market by selling stocks to reduce risk. This stabilizes equity prices at high levels, which again attracts more flows. In Mr. Green’s words, “if nobody sells, markets can only go up.”

Mr. Green believes that U.S. financial regulation has also played a role. By mandating that index funds be represented in corporate retirement plans, this has funneled more investor funds into passive investments. He notes that index fund providers like Vanguard and Blackrock now have significant lobbying power to influence new regulation.

The valuation differences between stocks excluded by indexes and benchmark member stocks is cited in the podcast. Academic research has shown a ‘permanent shift in valuation’ with index constituents trading at far more expensive multiples than similar companies not included. In this case it does appear that the market’s role in capital allocation – moving investments towards more profitable companies with better management teams – has been at least partially short circuited by passive investing.

Mr. Green believes markets will pop – with stock prices gapping lower in ‘discontinuous’ fashion - when index fund outflows are consistently higher than inflows. He did not venture a guess as to when this might happen.

I certainly am not convinced of Mr. Green’s arguments although I’m still thinking about it three days after listening to the podcast. His perspective was received with much irritation among finance professionals on social media. Ritholtz Wealth Management portfolio manager Ben Carlson angrily reminded followers of his September column “Debunking the Silly “Passive is a Bubble” Myth” .

I like pondering this stuff and recommend investors of all kinds listen to the podcast. I do not believe he’s right – the vast majority of academic research in finance disagrees with him. But the downside risk if Mr. Green’s concerns are realized is extensive, and it never hurts to be prepared for any eventuality.

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-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

K-Bro Linen Inc. This is a turnaround story. For years, the company invested heavily in its operations putting pressure on the company’s profitability. With its major investments completed, the company’s margins are rebounding and the stock’s valuation is expanding. Over the past three months, the share price has rallied over 20 per cent. The company also offers its shareholders a stable monthly dividend with a current annualized yield of 2.7 per cent. The stock has a unanimous buy recommendation from seven analysts. Jennifer Dowty has this full profile of the stock.

The Rundown

Why the sleepy returns of Casper’s newly listed stock should help all investors rest easier

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Investors should take quiet satisfaction in the lacklustre market debut of Casper Sleep Inc. The trendy maker of mattresses-in-a-box went public on the New York Stock Exchange last week at US$12 a share, briefly jumped as high as US$13.98, and has been falling ever since. On Tuesday, it closed at US$9.92. The clearest message from this sad trajectory is that the stock market remains firmly grounded in reality. Ian McGugan explains why this is noteworthy.

After some bleak months, Canadian forestry stocks’ rebound looks built to last

It’s hard to imagine a better backdrop for Canadian lumber stocks: U.S. home-building activity is strong, lumber prices are rising and duties on lumber exports to the United States are set to decline – underscoring why forestry stocks should continue to recover. David Berman explains.

Lots of ETFs do dividends, but these do dividend growth

Two ETFs that make strong dividend growth a core part of their mission are just about to hit their first birthday. Rob Carrick tells us about them.

Stocks are hitting records. Commodities are plunging. Here’s why investors should be worried

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Prices for many commodities have taken a sharp drop as concerns grow that the coronavirus outbreak will take a significant bite out of global demand for raw materials. Yet, North American equity prices are hovering near record highs, largely unaffected by the economic threat posed by the increasingly global health emergency. For now, markets may stay in a nervous holding pattern before the economic impact of the virus is better understood. But the contradictory signals emanating from the commodity and equity markets suggest investors may have grown dangerously overconfident as the bull market in U.S. stocks enters its unprecedented 11th year. Scott Barlow explains.

This is what those predicting the death of value investing are missing

Value investors are lamenting the state of the market. Problem is, high-tech growth-oriented firms have taken flight despite their lofty valuations while stodgy value stocks have been left behind. The situation has caused many value managers to eat crow when discussing their results with clients. But while value lost the relative performance race in recent years, its absolute returns have been reasonably good over the past decade. Norman Rothery provides this analysis.

My model growth portfolio has generated stellar returns. Here are two more stocks I would add

In September, 2012, The Globe and Mail launched a project called Strategy Lab where four investors would each manage a model portfolio with an initial value of $50,000. Five years later, when we closed down the project, Chris Umiastowski’s model portfolio was worth more than $250,000. And his growth portfolio, focused on disruptors and tech stocks, has grown a lot since then. Chris reveals two more stocks he’d be adding to the portfolio today.

Thought traditional retailers were dead? The second best performer of the TSX this year will come as a shock

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Many traditional retailers are struggling amid stiff competition from online players such as Amazon.com Inc. and the economic impact of the new coronavirus. So why is Aritzia Inc.’s share price up 31.2 per cent so far this year? The stock has delivered the second-best gains on the S&P/TSX Composite Index in 2020, behind Ballard Power Systems Inc. Aritzia deserves a closer look, especially as the retailer sets its sights on U.S. expansion, and our David Berman does just that.

Others (for subscribers)

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: Four dividend stocks that are being traded

Tuesday’s Insider Report: Directors are scooping up these two dividend stocks

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Tech titans’ market heft could signal broader stocks worry

Number Cruncher: Fourteen solid transportation stocks in the wake of virus disruptions

Globe Advisor

Attractive opportunities in recovering U.S. health-care sector

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: I’m 70 years old and never had an RRSP. Is it advantageous or practical to contribute now?

Answer: Maybe. It depends on how much you can contribute and your tax bracket.

Since you have never had an RRSP, you must have a lot of accumulated contribution room. If you are in a reasonably high tax bracket, you could generate a big refund for the 2019 tax year by opening an RRSP before the end of the month and contributing several thousand dollars to it. You will have to convert to a RRIF next year when you turn 71, but the money in the plan will be tax-sheltered until it’s withdrawn.

If you’re in a 40-per-cent tax bracket and have $25,000 to contribute, that will give you a $10,000 refund on your 2019 taxes. So yes, in this case it’s worth the effort.

On the other hand, if you’re in a low tax bracket and don’t have a lot of money available, I would suggest contributing to a TFSA instead. There’s no tax deduction, but the money will be tax-free when it is withdrawn. And there’s no age limit. You can keep on contributing to a TFSA until you die.

--Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

Stock markets Wednesday rose to fresh record highs, showing few signs of concern about the coronavirus. Yet, there’s one pocket of the market still bruised badly from the health scare, and it could offer a good value play for dividend-hungry investors. Ian McGugan will explain.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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