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A lot of people seem to have read this and think that Burry is worried that the indices are weighted by market cap. That is not the issue. The issue is that a
by omarhaneef 7y ago
A lot of people seem to have read this and think that Burry is worried that the indices are weighted by market cap. That is not the issue.
The issue is that a large proportion of the index is smaller caps that no one bothers to look at and price properly, and yet massive amounts of money are in ETFs and other contracts that take a position on those smaller, less followed names.
So these small names in the large index have been artificially driven up. Sort of like CDOs. You just look at the rating, or the P/E of the 500 stocks in the SP500, but you don't bother to do a deep dive.
Were someone to do the deep dive, you would see that they are massively overvalued (and therefore so is the SP500, for instance).
- jpalomaki 7y agoIf the small cap valuations are totally wrong, shouldn’t some simple measures like P/E show it clearly? Edit: The P/E values on Russel 2000 seem to be almost double compared to S&P 500 [1]. Also some point out that the value is not correct as it leaves out negative earnings which are common among small caps [2]. [1] https://www.wsj.com/market-data/stocks/peyields https://www.wsj.com/market-data/stocks/peyields [2] https://goldco.com/russell-2000s-price-to-earnings-ratio-is-high/ https://goldco.com/russell-2000s-price-to-earnings-ratio-is-...
- omarhaneef 7y agoI think the point is people use the measures that you can clearly see easily (like the P/E), and therefore you don't go down to the level of the stock (oh, temporarily raised earnings, forecast for reduced earnings, and as you point out, negative earnings etc). Note: this is not my argument, but what I understand Burry to be arguing.