Question

Detail an investment strategy that could be used to exploit a passive investing ‘bubble’, making sure to explain why/how your proposed strategy has merit, the type of investor that might consider implementing your strategy, as well as any limitations or risks. Note, you can consider any asset- classes or types of securities in your investment strategy.

Answer 1

To exploit the passive investing 'bubble', the best method would be to participate in the bubble as well. The reason is that the market itself does not care much about the intrinsic value of securities, but only cares for the market value of the securities. The assumption of the existence of the passive investing bubble itself proves that the investors do not care for the intrinsic value of the securities because if the investors did care for it there would't be this bubble in the first place. The risks associated is obviously the loss during the market overturn i.e. when the market price for the securities starts going down. To cope up with this risk and to minimize the loss in such a situation the investor can either sell their stocks in the market downturn which would minimize the loss, or wait for longer time when the stock will again begin to regain its price from the fall or the investor can short the stocks during the downfall of the market i.e. they can sell a stock which they don't actually possess and then buy the stock when the stock price goes down.

All these methods should not be used by day traders but can be used by swing traders or passive investors according to their needs. The swing traders can short his stocks in such a time and sell his stocks at the downfall whereas a passive investor can hold on to the securities for a long time, till it regains price.