Pulse of the Market - February 2022
Passive investing through index funds is seen as "extremely safe". But there is another argument on why passive investing is not as safe as it seems. The topics: The passive investing bubble and Web 3
The Passive Investing Bubble: The Lack of Price Discovery
The consensus/ prevailing narrative is that investing in index funds (or passive investing vehicles) like $SPY, $QQQ, $VOO, which track large baskets of stocks, is the best way to invest your money. It takes away the thought, volatility, hidden variables out of investing and instead spreads your wealth over a large set of different stocks in mostly different sectors.
However, legends like Michael Burry and Peter Lynch, have started to push back against this narrative and sound the alarm on passive investing arguing that passive investing in ETFs, mutual funds etc have created its own bubble, which stems from a lack of price discovery.
Peter Lynch and Michael Burry Label Passive Investing as a Bubble
Quote from the article: “The value of passively managed US assets has ballooned from $3.1 trillion at the end of 2016 to $7.5 trillion today, whereas the value of actively managed US assets has only grown from $3.7 trillion to $6.1 trillion over the same period, Bloomberg data shows”
Do you notice what all 7 of these companies have in common? The make up the largest weight in each of these passive investment vehicles, ultimately pushing their market cap (or the companies overall value) to even greater heights as passive money flows in regardless if these companies are worth more based on fundamentals (spoiler: most really aren’t trading at a fair price but are being propped up by TRILLIONS of passive investment money).
With passive investing, you aren’t looking critically at these companies balance sheets, revenue growth, multiples, income statements etc. What happens when the quant funds/ mutual funds finally reverse and start to sell these companies after analyzing the company’s fundamentals? This perceived “safe haven” of investing won’t be seen as a safe haven once these indexes become overly bloated at the top (which they are dangerously getting to at this point).
If you are aimlessly buying into an index fund without reviewing the vehicles weighting, strategy, etc you are just as guilty (or even more guilty) of creating a bubble as the person who is buying an individual stock and actually assessing the company’s fundamental value constantly and making their own decision. And just looking at this graph (data just from 2016) you can see passive investing started to rapidly pick up after 2008 as the narrative of “safety” was fed to the masses without any real pushback. What happens when this inevitably goes too far?
Web 3.0: Why People Who Mock are Usually Wrong
When society is introduced to a new technology, surprisingly the first instinct is not to explore, or ask thought provoking questions, but to mock those who are innovating. Don’t believe me? Just watch this video of Bill Gates getting mocked in 1995 on live television. Notice who tweeted the video? Maybe the most innovative entrepreneur in in history (Paypal, Space X, Tesla, Boring Company, Neuralink, Starlink and probably many more companies in the future).
Venture Capital or VC is where new technologies are born before society even finds out about them. Larry Cheng seeded Chewy, the ecommerce Pet Store, when no else would. Click into the tweet then read the thread. Some really important points are made.
A lot of the new technologies (on the far right of the graph below) were mostly seen as gimmicks or technologies that “didn’t make sense.” Great examples are smartphones with no buttons (remember laughing at the iPhone when you had your Blackberry), tablets, the Internet, social media etc. Usually when the masses doesn’t understand something their first instinct is to mock. But once the ball gets rolling and mass adoption is underway, you can’t mock anymore since the train has left the station.
Here is adoption of technology in graph form. You can argue semantics of how society will react but can you argue data? Adoption of groundbreaking technology goes parabolic if you can’t tell even though the majority of society rejects the technology initially for years.
Gamblers, Thanks for Playing
Looks like the margin bomb blew up in some peoples faces in December 2021, January 2022 as there was a mass stampede to get rid of margin. Margin is great when everything is going up but no so great during a rapid correction. Also it looks like it peaked right in the middle of the year (June 2021) as I noted below.
The writing was on the wall since August….
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