I've said this in another thread, the business of all these "startups" seems not to be of making a sustainable business, but instead it's more of a pyramid scheme where one set of investors are trying to make money of the next round of investors (up to and after IPO). If we view it like that it makes sense, the merger/acquisition will increase stock prices because it seems like there is a holistic strategy. At some point the whole house of cards is going to fall down, but by that times all the early investors will have left and made a big buck.
Wealth is transferred from ordinary folk via the IPO-retirement-fund axis to the plethora of agents involved in the whole scheme, from the employees bashing out code and UX, right through to everyone involved the M&A and IPO and the whole tax / tax agent / government tax agency cadre.
Huh. That's a novel use of stupid index fund money. Just get your shitty investments listed on the stock exchange and cash out. Index fund buyers don't care, they'll swallow it right up and it's free to crash and burn at their expense. You could even do it deliberately, as long as it follows securities regulations. Being a pure momentum strategy, index investing has no intelligence.
At one point this would make index fund investing as a whole significantly less profitable. With all the horror stories we've seen unfold in the last five years, you could begin to suspect that boards actively and knowingly execute this strategy. You can only hope that a money manager would be smart enough to avoid the SoftBanks, Ubers and WeWorks. But I don't know that's a given. Shorting them out of your portfolio isn't an obvious strategy either, due to borrow costs and so on.
Anyone given a significant amount of thought to this?
Uber is not in the S&P500. And no fund manager is consistently doing better than the market. "Stupid index fund money" looks pretty smart in that regard.
It's false that no fund manager is consistently beating the market; you can easily find actively managed funds that have beaten the market for the last 5 years. The big debate is whether this is due to luck or skill, whether it's possible to tell the difference and whether it's possible to determine which fund manager will be successful in the future.
Uber is part of some indexes; S&P500 isn't the only one. The efficient markets hypothesis is obviously false, although from a distance it's usually a decent approximation.
And in case I'm about to get downvoted for violating the consensus -- 100% of my long-term investments are currently in index funds. But with the growing share of indexed investments, this is a very interesting question.
There are currently trillions of dollars (and growing) following the simple momentum strategy that index funds represent. It almost beggars belief that this is not, and will never, be exploited for gain.
> The big debate is whether this is due to luck or skill, whether it's possible to tell the difference and whether it's possible to determine which fund manager will be successful in the future.
And the other factor is this: if it is skill, do the high-fees still give you a better risk-adjusted return?
> do the high-fees still give you a better risk-adjusted return?
Yes. With your standard 2 and 20 fee structure, you don't pay performance fees on anything below 8% returns. Performance fees are where bonuses come from, so anyone coming up short sees capital and employees disappear overnight.
RenTech has a 40+% performance fee on their Medallion fund because it consistently generates 60% returns YoY.
You might have indicated you were talking about a hedge fund with non public listings and no transparency. If investing was as easy as picking whatever did well in the past then we'd all be billionaires.
> You can only hope that a money manager would be smart enough to avoid the SoftBanks, Ubers and WeWorks
The problem is, no one has much other choice than to go this route and invest into the "next potential unicorn". With classic stocks stagnating and many government bonds in low to negative interest territory, it's hard to make any noticeable profit.
The way to fix this would be to reform pensions to a government-backed system such as Germany or Austria have - that reduces the amount of "dumb money" in the system.
I don't see how this reduces returns for indexers in particular. Investing in an index means you get the market average. This may result in lower returns for the total market and thus also for indexers but for some active investors to overperform thanks to this some other active investors will need to underperform. Winning that directional bet requires someone else to take the other side of the bet and lose. Total market returns are zero sum.
There are several total market indexes and funds which follow them. They hold companies proportional to their market capitalization, irrespective of profitability. VTI holds 29,546,017 shares of Uber as of 5/31 for example.
Well, they're in the Russell 1000 and others, not to mention a bunch of ETFs that are basically indexes of their own. If you want a properly diversified global index fund portfolio, you wouldn't want to limit yourself to 500 of the largest American companies.
Mine contains 4 funds covering ~2500 global companies.
You wouldn't know them; the funds themselves are Norwegian. IIRC, the reference indexes amount to 50% MSCI World, 16% MSCI Emerging Markets, 16% MSCI Small Cap and 16% VINX Benchmark (Nordics).
Philosophy is diversification, broad coverage of both developed and developing markets, with both high-tech niche industries (heavily overrepresented in the Nordics) and global growth companies (overrepresented in the Small Cap index). Been considering specifically adding China, but dislike the political risk and human rights of top leadership. You might argue that the USA is still overrepresented in this allocation.
I was probably underestimating the number of companies covered by this; the Small Cap index alone represents more than 4500 companies. Although I doubt that my funds actually own all of them.
> Wealth is transferred from ordinary folk via the IPO-retirement-fund axis
Pretty much this. It's so infuriating to watch never-going-to-be-profitable businesses cash out on the backs of people's retirement accounts. It's one thing for a company's 401k to be stuffed with this crap, but when municipalities like CalPERS are investing in these indexes, it's outright criminal IMO.
Will it fall down? When? (The whole global macro climate right now is a wealth transfer scheme, i guess from ultimately third world countries to (eventually) investors)
Honestly it might not. How many of these companies have - or will - simply get acquired then shut down? Or, exist as part of a larger operation a la Uber Eats and could eventually get shut down with little fanfare, or exist as a permanent loss leader?
Couldn't agree more. I've also made this point ad-nauseam. How is this not more the typical story. The tech industry we all work in is just so good at selling snake oil in terms of technology that isn't relevant at inflated prices, we seem to have branched out into entire companies that don't make sense.
