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Sadly, a lot of tech companies would perform better if they threw their cash into index-driven mutual funds.

smeyer 11y ago
By virtue of the way indices work, a lot of public companies in general would have been better off throwing their cash in index-driven mutual funds. That being said, if it were easy to tell ahead of time which these companies are, it would be easy as an investor to beat index-driven mutual funds.
bduerst 11y ago
And they would risk losing investors. Why would someone put money into a company that invests in index-funds, when you can just invest in index-funds?
- fredkbloggs 11y ago
  Right. That's why I suggested Groupon be wound down, not that they continue operating at a loss but invest their cash differently. This does raise an interesting question, though. There seem to be a lot of corporations out there that have no obvious reason for existing: minimal to negative profitability on a sustained basis, uninspiring business with little potential, and a long track record that doesn't suggest a turnaround is likely. Groupon is just one of many. Presumably in many cases, equity in these corporations is held primarily or even entirely by index funds. Why should such a company remain in business? By definition, if all your shareholders are indexers, there is not a single person alive who considers you an above-average investment. In a rational market, such a company would be wound down or the price of its shares would fall so low that it would be taken over by someone who believes he can do better. But the index funds create a sort of circular reasoning, or perhaps an isolated reality separated from outside feedback, allowing these zombies to keep living. A variant of this was covered by http://www.bloombergview.com/articles/2015-07-22/index-funds-may-work-a-little-too-well http://www.bloombergview.com/articles/2015-07-22/index-funds..., but this seems like a more extreme case. Of course, Groupon's "institutional ownership", which includes various active and passive funds, pensions, endowments, etc. is only 65% per Google Finance. There are corporations with 100% and even >100% institutional ownership (i.e., there are a lot of non-institutional shorts). Why do they continue to exist, and what can be done to kill them off?

By virtue of the way indices work, a lot of public companies in general would have been better off throwing their cash in index-driven mutual funds. That being said, if it were easy to tell ahead of time which these companies are, it would be easy as an investor to beat index-driven mutual funds.

bduerst 11y ago

And they would risk losing investors. Why would someone put money into a company that invests in index-funds, when you can just invest in index-funds?

fredkbloggs 11y ago
Right. That's why I suggested Groupon be wound down, not that they continue operating at a loss but invest their cash differently. This does raise an interesting question, though. There seem to be a lot of corporations out there that have no obvious reason for existing: minimal to negative profitability on a sustained basis, uninspiring business with little potential, and a long track record that doesn't suggest a turnaround is likely. Groupon is just one of many. Presumably in many cases, equity in these corporations is held primarily or even entirely by index funds. Why should such a company remain in business? By definition, if all your shareholders are indexers, there is not a single person alive who considers you an above-average investment. In a rational market, such a company would be wound down or the price of its shares would fall so low that it would be taken over by someone who believes he can do better. But the index funds create a sort of circular reasoning, or perhaps an isolated reality separated from outside feedback, allowing these zombies to keep living. A variant of this was covered by http://www.bloombergview.com/articles/2015-07-22/index-funds-may-work-a-little-too-well http://www.bloombergview.com/articles/2015-07-22/index-funds..., but this seems like a more extreme case. Of course, Groupon's "institutional ownership", which includes various active and passive funds, pensions, endowments, etc. is only 65% per Google Finance. There are corporations with 100% and even >100% institutional ownership (i.e., there are a lot of non-institutional shorts). Why do they continue to exist, and what can be done to kill them off?