I'm not ready to write off passive "index" investing. Burt Malkiel ("A Random Walk Down Wall Street") showed that trying to pick outperforming stocks or money managers is a fools' game. I still think that's true. But the instruments of passive investing have not been updated since the original work, and they are showing their age. The people writing the research didn't use the S&P500 because they thought it was a perfect reflection of public markets: it was just the best available given the constraints of that time -- before PCs, websites, high-speed data, etc. It's long past time to update what passive investing should be passively invested in, which is the entire public market, and -- I suspect -- the entire global public market.
Fair point. I think we have to distinguish among flavors of the efficient-markets hypothesis; but Malkiel's point was a little more sociological than Eugene Fama: the market may not be perfectly efficient but the best bet might still be to get the most diversification possible, and not try to outsmart the players. And of course the Fama-French factors (not just momentum) shouldn't exist in a perfectly efficient market. I worked for three years for the dean of mean-reversion trading in listed stocks, and that shouldn't have worked either, though it did (and I could retire on it!)
What I'm taking away from your essay, though, and which I think is most valuable, is that today's IPO candidates are positioned to exploit the mechanics of passive investing in a dangerous way that will hurt most people while benefiting a very few. I think that's true. I just think the fix is to scrap today's mechanics and find truly diversified mechanisms for the Average Joe Saver to use.
so whats the alternative? do maryland teachers pull money from index funds and seek an asset manager that picks stocks that she thinks are winners? this article is great at pointing out how we got here and how shitty a place "here" really is, but thats not enough, really, b/c to harken back to the day when folks walked uphill to/from wall street, back when smart people asked tough questions and different opinions made markets - does that exist in any format for that maryland teacher? For that matter, what does anybody who has enjoyed the right so far but is uneasy with current valuations or new IPOs , what do they do? do they sell everything, find a cap gains dodge and go all cash? or self direct into single name stocks ala Warren Buffet? I guess the answer is: Yeah, thats what maryland teachers ought to do.
The answer is for a UBI and a guaranteed government pension big enough to live on.
The wealthy individuals have enough money to pay for it through wealth taxes and corporations need to pay a tax on gross income, not nothing due to manipulating the tax code.
If they complain then they lose their right to be part of the US economy.
Keep the faith, keep the truth and by hell or high water, keep writing.
Remember, this is a blip in time. Tomorrow will bring another chance to experience change, perhaps good, perhaps not.
It is what we make of it, gold or lead?
Fun fact, did you know, despite industrial utility, lead causes severe health risks and does not break down in the environment? Strange!! Gold does not cause health risks and does not break down in the environment.
What is it with the SpaceX deal that bothers you so deeply?
It is you who reminded me, the WHOLE purpose of the markets is to SELL.
We now have a front row seat to the rinse phase of the wash, rinse, repeat WS cycle. Shocker, Elon and the usual cronies are acting out their parts in what looks to be the most beautiful pick pocket performance in financial history. Consider ourselves lucky, we see it, understand it and know better. Most pedestrian investors (gamblers) are clueless.
Can't control it, can't change it.
It's all a distraction and white noise.
Find the signal. Stay the course, and remember...
"Half the world lives
Half the world makes
Half the world gives
While the other half takes"
Half the World by RUSH
Let's live a little, make some cash and give back to those who need it most.
This is the problem. There is a strong social justice argument for capitalism, but those who end up on top get corrupted away from capitalism and towards something else. Feudalism. We have heard this before under another “ism”. “Four legs good two legs better!”
I'm confused! Capitalism isn't a social justice philosophy, that might be Communism, or Socialism, or some another "ism". Definitely not capitalism.
For fun I queried Gemini with this - "Has a pure capitalist economy ever existed on planet Earth, and if so where?"
Gemini's answer:
"The short answer is no. A "pure" capitalist economy—often defined as a system of total laissez-faire with zero government intervention, no taxes, no public infrastructure, and no regulations—has never existed on a national scale.
While many nations are primarily capitalist, they all operate as mixed economies. Even the most market-oriented societies in history have maintained some level of state involvement to enforce property rights, manage currency, or provide for national defense."
Ayn Rand's "Atlas Shrugged" attempted to stir the imagination of her readers into action, as have many authors since. Yet, here we are. Digesting the workings of those who once traveled in their private rail cars to Jekyll Island.
You lost me on the "Leg" thing, though once lost, I did find my way to my destination - my place today.
I give much thought to Garrett's writings, as everyone should. He (that's you Garrett) is (I believe by my own life's knowledge) one of few authors who brings clarity and depth of insight from the gobbledygook spewing with the force of a fire hose from those with layers of agendas.
My point is this:
Life is what you make of it.
Time waits for no human, as it doesn't know human.
Express your thoughts, let the "Universe" read it, digest it and decide it's value.
This is all we can do, as with the understand of these truths, no human can:
force a horse to drink water or push a rope while it remains straight
Maybe this IS gobbledygook, maybe not.
When you sit next to a multi-billionaires on their private jets, as I have for decades, you may see the the workings of the world as you have never seen before. You may see your side, of the world. And understand, It's not theirs.
Go in peace, with wisdom, with a better understanding of how our universe is working today. And, as a wise author once said, "Stay positive". Or is it "With all your getting, get understanding"?
Read it in the '80's. If memory serves, it's a story of political satire, as a warning against totalitarianism and the perversion of revolutionary ideals.
Who doesn't like a great story framed around talking farm animals.
I would not use the word crony when discussing Musk. Hard work and alot of risk have gone into building space x. Crony,that word, is little surprising.
How would we even begin to correct this situation? This picture you paint seems like the solution is less like turning a battleship, and more like trying to unburn a candle.
I think this can simply be summed up by naming SpaceX (and maybe Space, more broadly) as the next container that's been created to benefit those at the top of the food chain that always benefit and first.
Luckily, the S&P500 and the NASDAQ100 indices are float-adjusted, so the forced moves by including SpaceX will be mitigated (NASDAQ100 in particular penalizes any company with <20% free float).
I think the free markets have been "broken" for a while:
- passive investing (I agree with you) breaks price discovery, removes the choice of which stock to allocate capital to, and even removes voting rights from shareholders to the ETF companies
- stock dilution is now almost a no-go: the market is no longer a way to raise capital (you wrote in some other article that this fundamental feature of the market is no longer used) for investment (except for very small companies), now what matters is only your valuation, against which you can get loans (issue bonds).
- even dividends are now frowned upon (this was noticed already by W.Buffett: if a company can reinvest capital at a high ROI, it is better it does that rather than distributing it), and stock buybacks are preferred, since reducing float propels the valuation.
There might be also other ways in which it is now "broken", in the sense that it is now very different than what was theorized by Adam Smith and implemented by the early regulations.
But if we stop consider it broken and just think it's different, I think we can conclude that the best game-theoretic approach to the market now would be different.
The fact that now Blackrock, Vanguard and others own a large fraction of the stocks (and therefore voting powers) already makes voting powers tricky. I, as a holder of a stock, prefer at this point that founders retain the powers, since they already demonstrated they were good stewards of the companies, and I would hate seeing them outvoted by the ETF companies that are just aggregating the money from others, but not necessarily their interests.
I'm more worried about the lack of accountability coming from the other special provisions.
This is more about society than the market, though: it's baffling that such conditions can even be held in court.
Awesome article! My thoughts go now to the dystopian movies of our future where it is corporate America. Big business has diluted the power of we the people. Here Elon will put mandatory tools in our brain for ultimate placement of the population.
Please may I have another! Thank you. You're so kind. Now where's my universal basic income check?
"Doing some back-of-the-envelope math, a name like Apple would compress from roughly 9% to about 8.3%.
Across $500 billion in capital, that implies billions in Apple sold… not because of anything related to Apple’s business, but because the index math demanded a reallocation.
The same will go for Microsoft, Nvidia, Amazon, Meta, Broadcom, and Tesla…
All of them will be trimmed."
So what you are saying is that those stocks will be available at a discount?
Maybe this will make index fund investing far less popular over the long run in the US. Of course, if Trump and his party succeed in ending democracy completely, our financial markets will be like those in authoritarian countries anyway, and so no one but insiders and suckers will trust them, but if something in the ballpark of democracy survives, then if there are not reforms, smart educated people will typically go with diversified funds that are actively managed to exclude Ponzi and sucker stocks like Tesla and SpaceX (what do those two have in common?)
I get what you stated. Me I’m just happy to have the opportunity to own or trade SpaceX. Truly it’s capitalism at its best. Just a note you “ chose” to live in Maryland.
This is such a fantastic piece and it should be picked up by every serious financial outlet. Really well done. 👏🏼
I'm not ready to write off passive "index" investing. Burt Malkiel ("A Random Walk Down Wall Street") showed that trying to pick outperforming stocks or money managers is a fools' game. I still think that's true. But the instruments of passive investing have not been updated since the original work, and they are showing their age. The people writing the research didn't use the S&P500 because they thought it was a perfect reflection of public markets: it was just the best available given the constraints of that time -- before PCs, websites, high-speed data, etc. It's long past time to update what passive investing should be passively invested in, which is the entire public market, and -- I suspect -- the entire global public market.
It’d be great to have real price discovery, wouldn’t it?
Tom:
If Burt Malkiel were right about markets, momentum wouldn’t exist…
Fair point. I think we have to distinguish among flavors of the efficient-markets hypothesis; but Malkiel's point was a little more sociological than Eugene Fama: the market may not be perfectly efficient but the best bet might still be to get the most diversification possible, and not try to outsmart the players. And of course the Fama-French factors (not just momentum) shouldn't exist in a perfectly efficient market. I worked for three years for the dean of mean-reversion trading in listed stocks, and that shouldn't have worked either, though it did (and I could retire on it!)
What I'm taking away from your essay, though, and which I think is most valuable, is that today's IPO candidates are positioned to exploit the mechanics of passive investing in a dangerous way that will hurt most people while benefiting a very few. I think that's true. I just think the fix is to scrap today's mechanics and find truly diversified mechanisms for the Average Joe Saver to use.
so whats the alternative? do maryland teachers pull money from index funds and seek an asset manager that picks stocks that she thinks are winners? this article is great at pointing out how we got here and how shitty a place "here" really is, but thats not enough, really, b/c to harken back to the day when folks walked uphill to/from wall street, back when smart people asked tough questions and different opinions made markets - does that exist in any format for that maryland teacher? For that matter, what does anybody who has enjoyed the right so far but is uneasy with current valuations or new IPOs , what do they do? do they sell everything, find a cap gains dodge and go all cash? or self direct into single name stocks ala Warren Buffet? I guess the answer is: Yeah, thats what maryland teachers ought to do.
The answer is for a UBI and a guaranteed government pension big enough to live on.
The wealthy individuals have enough money to pay for it through wealth taxes and corporations need to pay a tax on gross income, not nothing due to manipulating the tax code.
If they complain then they lose their right to be part of the US economy.
I call stuff like this predatory economics, where the rich and powerful prey on the working class in so many ways.
Great read Garrett…I always learn something from you. Seems like there is nothing we can do about this right?
I have resigned myself to the inevitability of where we are as a nation...
Garrett,
Save your resignation for retirement or death.
Without struggle there is no gain.
Keep the faith, keep the truth and by hell or high water, keep writing.
Remember, this is a blip in time. Tomorrow will bring another chance to experience change, perhaps good, perhaps not.
It is what we make of it, gold or lead?
Fun fact, did you know, despite industrial utility, lead causes severe health risks and does not break down in the environment? Strange!! Gold does not cause health risks and does not break down in the environment.
I'm going with Gold. How say you?
Cheerio
Garrett,
What is it with the SpaceX deal that bothers you so deeply?
It is you who reminded me, the WHOLE purpose of the markets is to SELL.
We now have a front row seat to the rinse phase of the wash, rinse, repeat WS cycle. Shocker, Elon and the usual cronies are acting out their parts in what looks to be the most beautiful pick pocket performance in financial history. Consider ourselves lucky, we see it, understand it and know better. Most pedestrian investors (gamblers) are clueless.
Can't control it, can't change it.
It's all a distraction and white noise.
Find the signal. Stay the course, and remember...
"Half the world lives
Half the world makes
Half the world gives
While the other half takes"
Half the World by RUSH
Let's live a little, make some cash and give back to those who need it most.
Be happy, don't worry.
This is the problem. There is a strong social justice argument for capitalism, but those who end up on top get corrupted away from capitalism and towards something else. Feudalism. We have heard this before under another “ism”. “Four legs good two legs better!”
Hey George,
I'm confused! Capitalism isn't a social justice philosophy, that might be Communism, or Socialism, or some another "ism". Definitely not capitalism.
For fun I queried Gemini with this - "Has a pure capitalist economy ever existed on planet Earth, and if so where?"
Gemini's answer:
"The short answer is no. A "pure" capitalist economy—often defined as a system of total laissez-faire with zero government intervention, no taxes, no public infrastructure, and no regulations—has never existed on a national scale.
While many nations are primarily capitalist, they all operate as mixed economies. Even the most market-oriented societies in history have maintained some level of state involvement to enforce property rights, manage currency, or provide for national defense."
Ayn Rand's "Atlas Shrugged" attempted to stir the imagination of her readers into action, as have many authors since. Yet, here we are. Digesting the workings of those who once traveled in their private rail cars to Jekyll Island.
You lost me on the "Leg" thing, though once lost, I did find my way to my destination - my place today.
I give much thought to Garrett's writings, as everyone should. He (that's you Garrett) is (I believe by my own life's knowledge) one of few authors who brings clarity and depth of insight from the gobbledygook spewing with the force of a fire hose from those with layers of agendas.
My point is this:
Life is what you make of it.
Time waits for no human, as it doesn't know human.
Express your thoughts, let the "Universe" read it, digest it and decide it's value.
This is all we can do, as with the understand of these truths, no human can:
force a horse to drink water or push a rope while it remains straight
Maybe this IS gobbledygook, maybe not.
When you sit next to a multi-billionaires on their private jets, as I have for decades, you may see the the workings of the world as you have never seen before. You may see your side, of the world. And understand, It's not theirs.
Go in peace, with wisdom, with a better understanding of how our universe is working today. And, as a wise author once said, "Stay positive". Or is it "With all your getting, get understanding"?
You decide, for today you still have a choice.
It’s an economic system designed to act in the best interest of society (social) by rewarding participants based on their contribution (justice).
I suggest you read Animal Farm…
Good afternoon,
Animal Farm, some of George Orwell's best work.
Read it in the '80's. If memory serves, it's a story of political satire, as a warning against totalitarianism and the perversion of revolutionary ideals.
Who doesn't like a great story framed around talking farm animals.
Thanks for the suggestion.
I would not use the word crony when discussing Musk. Hard work and alot of risk have gone into building space x. Crony,that word, is little surprising.
OK.
Read the S-1. Then let me know your word.
My word for him is huckster.
How would we even begin to correct this situation? This picture you paint seems like the solution is less like turning a battleship, and more like trying to unburn a candle.
When the candle is spent, you discard the nub and get a new candle.
I think this can simply be summed up by naming SpaceX (and maybe Space, more broadly) as the next container that's been created to benefit those at the top of the food chain that always benefit and first.
Luckily, the S&P500 and the NASDAQ100 indices are float-adjusted, so the forced moves by including SpaceX will be mitigated (NASDAQ100 in particular penalizes any company with <20% free float).
I think the free markets have been "broken" for a while:
- passive investing (I agree with you) breaks price discovery, removes the choice of which stock to allocate capital to, and even removes voting rights from shareholders to the ETF companies
- stock dilution is now almost a no-go: the market is no longer a way to raise capital (you wrote in some other article that this fundamental feature of the market is no longer used) for investment (except for very small companies), now what matters is only your valuation, against which you can get loans (issue bonds).
- even dividends are now frowned upon (this was noticed already by W.Buffett: if a company can reinvest capital at a high ROI, it is better it does that rather than distributing it), and stock buybacks are preferred, since reducing float propels the valuation.
There might be also other ways in which it is now "broken", in the sense that it is now very different than what was theorized by Adam Smith and implemented by the early regulations.
But if we stop consider it broken and just think it's different, I think we can conclude that the best game-theoretic approach to the market now would be different.
The fact that now Blackrock, Vanguard and others own a large fraction of the stocks (and therefore voting powers) already makes voting powers tricky. I, as a holder of a stock, prefer at this point that founders retain the powers, since they already demonstrated they were good stewards of the companies, and I would hate seeing them outvoted by the ETF companies that are just aggregating the money from others, but not necessarily their interests.
I'm more worried about the lack of accountability coming from the other special provisions.
This is more about society than the market, though: it's baffling that such conditions can even be held in court.
Awesome article! My thoughts go now to the dystopian movies of our future where it is corporate America. Big business has diluted the power of we the people. Here Elon will put mandatory tools in our brain for ultimate placement of the population.
Please may I have another! Thank you. You're so kind. Now where's my universal basic income check?
You wrote:
"Doing some back-of-the-envelope math, a name like Apple would compress from roughly 9% to about 8.3%.
Across $500 billion in capital, that implies billions in Apple sold… not because of anything related to Apple’s business, but because the index math demanded a reallocation.
The same will go for Microsoft, Nvidia, Amazon, Meta, Broadcom, and Tesla…
All of them will be trimmed."
So what you are saying is that those stocks will be available at a discount?
It behaved this way for centuries. There was a transfer of capital in exchange for accountability, transparency, and public governance.
Centuries??? 🤨🤨🤨
Ooooooo talk more about ATF, JVL 🙌🙌 if you happen to know about ABA, OT, SLP and spEd even better but I know that world is incredibly nitche
Maybe this will make index fund investing far less popular over the long run in the US. Of course, if Trump and his party succeed in ending democracy completely, our financial markets will be like those in authoritarian countries anyway, and so no one but insiders and suckers will trust them, but if something in the ballpark of democracy survives, then if there are not reforms, smart educated people will typically go with diversified funds that are actively managed to exclude Ponzi and sucker stocks like Tesla and SpaceX (what do those two have in common?)
I get what you stated. Me I’m just happy to have the opportunity to own or trade SpaceX. Truly it’s capitalism at its best. Just a note you “ chose” to live in Maryland.