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These kinds of phenomena make me slightly worried about the long-term viability of index funds as an investing strategy. There is absolutely nothing about this

These kinds of phenomena make me slightly worried about the long-term viability of index funds as an investing strategy. There is absolutely nothing about this information that reflects on Tesla's value as a company, or its business prospects. And, while there's certainly some intrinsic value in an S&P 500 listing - as an advertising device, if nothing else - it's hard to imagine that it's worth $50bn. That leaves me worrying that what's really going on here is that index investors have created a large arbitrage opportunity that people were trying to exploit.

SketchySeaBeast 6y ago
Why does this make you worry about index funds? Assuming you invest in a well diversified fund, the more of the market you invest in, the less one securities shenanigans matter.
- mumblemumble 6y ago
  A lot of people are just piled onto S&P 500 index funds, often because that's the only passive option offered by their 401(k) plan.
  - SketchySeaBeast 6y ago
    In that case it's really just one index fund - the one that matches the S&P, and not index funds in general. I'm not sure why you use this as evidence of the S&P being an issue as they explicitly excluded that TSLA craziness.
    - mumblemumble 6y ago
      We seem to be running afoul of the is-ought problem here. I'm not talking about how things ought to work. I'm inclined to agree with you on that front, but it's also not the concern I'm raising. I'm saying that this craziness strikes me as an indication that how things are actually working may not be how they ought to work. Or at least not how they ought to work according to the advice that's being given to countless retail investors.
      - SketchySeaBeast 6y ago
        But I'm still confused - the TSLA craziness is specifically excluded from index funds. If you had money in TSLA chances are you put it there yourself outside of an index fund and certainly not one that was S&P 500 focused (which is apparently the default choice).
        mumblemumble 6y ago
        The big pop and big drop around the S&P 500 decision is not just TSLA craziness. It's also S&P 500 craziness - people were, I'm guessing, speculating on the expected effect that an S&P 500 listing would have on demand for TSLA shares. Or, to put it another way, I think we just saw another indication that the S&P 500 index is not immune to Goodhart's Law.
        robjan 6y ago
        Think it's more that there are lots of less sophisticated investors in on TSLA. Inclusion in the SP500 does not usually send a stock to the moon because it's already priced in.
        hartator 6y ago
        I think his point was TSLA should be included in the SP500 whatever index management think of this stock just based on numbers and not including it is kind of going against the market.
pedrocr 6y ago
If you're indexing using just the S&P500 you're arguably making a quite directional bet on big established companies over the rest of the market already. Much broader indexes are in common usage. For someone indexing with those the fact that someone tried to arbitrage Tesla's entrance into the S&P500 and failed just looks like any other market movement. There are people on both sides of that bet, some won, some lost, and you get the average return between them both.
omalleyt 6y ago
> And, while there's certainly some intrinsic value in an S&P 500 listing - as an advertising device, if nothing else - it's hard to imagine that it's worth $50bn The value of being in an index is that 80% of the market is passive investing, most of which tracks indices. If TSLA were added to the S&P500, all of these index-tracking funds would have to buy it in order to continue to track the index

SketchySeaBeast 6y ago

Why does this make you worry about index funds? Assuming you invest in a well diversified fund, the more of the market you invest in, the less one securities shenanigans matter.

mumblemumble 6y ago
A lot of people are just piled onto S&P 500 index funds, often because that's the only passive option offered by their 401(k) plan.
- SketchySeaBeast 6y ago
  In that case it's really just one index fund - the one that matches the S&P, and not index funds in general. I'm not sure why you use this as evidence of the S&P being an issue as they explicitly excluded that TSLA craziness.
  - mumblemumble 6y ago
    We seem to be running afoul of the is-ought problem here. I'm not talking about how things ought to work. I'm inclined to agree with you on that front, but it's also not the concern I'm raising. I'm saying that this craziness strikes me as an indication that how things are actually working may not be how they ought to work. Or at least not how they ought to work according to the advice that's being given to countless retail investors.
    - SketchySeaBeast 6y ago
      But I'm still confused - the TSLA craziness is specifically excluded from index funds. If you had money in TSLA chances are you put it there yourself outside of an index fund and certainly not one that was S&P 500 focused (which is apparently the default choice).
      - mumblemumble 6y ago
        The big pop and big drop around the S&P 500 decision is not just TSLA craziness. It's also S&P 500 craziness - people were, I'm guessing, speculating on the expected effect that an S&P 500 listing would have on demand for TSLA shares. Or, to put it another way, I think we just saw another indication that the S&P 500 index is not immune to Goodhart's Law.
        robjan 6y ago
        Think it's more that there are lots of less sophisticated investors in on TSLA. Inclusion in the SP500 does not usually send a stock to the moon because it's already priced in.
      - hartator 6y ago
        I think his point was TSLA should be included in the SP500 whatever index management think of this stock just based on numbers and not including it is kind of going against the market.

pedrocr 6y ago

If you're indexing using just the S&P500 you're arguably making a quite directional bet on big established companies over the rest of the market already. Much broader indexes are in common usage. For someone indexing with those the fact that someone tried to arbitrage Tesla's entrance into the S&P500 and failed just looks like any other market movement. There are people on both sides of that bet, some won, some lost, and you get the average return between them both.

omalleyt 6y ago

> And, while there's certainly some intrinsic value in an S&P 500 listing - as an advertising device, if nothing else - it's hard to imagine that it's worth $50bn The value of being in an index is that 80% of the market is passive investing, most of which tracks indices. If TSLA were added to the S&P500, all of these index-tracking funds would have to buy it in order to continue to track the index