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Frankly, I think passive investing has ruined the fundamentals of investing and in part responsible for the poor financial health of our economy. While the ide

by Rury 6y ago

Frankly, I think passive investing has ruined the fundamentals of investing and in part responsible for the poor financial health of our economy. While the idea behind passive investing may seem like a good one, people often forget it's a double edge sword. By this I mean, when you invest into an ETF or index fund, that money in turn goes into everything underneath it. All too often that money isn't invested in the underlying equities in any intelligent way, and so some of it ends up in ridiculously bad equities. Because of this, there are complete zombie companies that are worth multi billions today, which sell no more than 2 widgets a year and haven't seen growth for nearly a decade... They are only worth so much because money keeps flowing into them from being apart of a hot ETF.

nradov 6y ago
Could you give us examples of those zombie companies? What are the ticker symbols and which indexes include them?
- Rury 6y ago
  NNDM is an example. Hasn't seen any growth despite having a marketable product over their entire 8 year timeframe. Worth ~2B right now despite only making ~3.4M in revenue per year and losing ~50M per year. All thanks, to becoming apart of ARKK.
  - superdimwit 6y ago
    ARKK is far from passive
    - Rury 6y ago
      Sure it is. The money you put into it is placed for you. That's passive. The fund itself may algorithmically place it in various things, but that's outside your control. Conversely, look at super undervalued companies like JKS and CSIQ. JKS is the largest and fastest growing solar company in the world BTW. Yet these companies sit mostly under foreign market ETFs which have never been very popular, and hence why they largely remain undervalued.
      - deleted 6y ago
        [deleted]
      - fighterpilot 6y ago
        That's not the definition of passive investing, what you're talking about is the distinction between agency trading and proprietary trading. ARKK are active investors because they're using discretion to pick specific investments. They say so themselves: "ARKK is an actively managed ETF"
  - fighterpilot 6y ago
    NNDM has nothing to do with passive investors. It's bid up by retail hype.
    - Rury 6y ago
      Nope, recent prices are largely correlated to ARK activity. Price decreases have largely been due to the 11! offerings NNDM has recently made, to tap ARK investors money. https://cathiesark.com/ark-combined-holdings-of-nndm https://cathiesark.com/ark-combined-holdings-of-nndm
      - fighterpilot 6y ago
        NNDM is heavily retail driven, it's been a fan favorite for a year. Their institutional ownership is only 10%[1]. It's similar to IBIO, NKLA, etc, where there's some attention from funds but retail hype on social media is driving it up. ARKK has been buying NNDM, yes, but: - they're not passive. they're active. - they only own 5% of the stock. almost any public stock will have at least 5% owned by some fund, so it's not notable and doesn't disprove the notion that it's retail driven. - ARKK are known to pile into retail frenzy stocks, so that correlation is going to exist often. [1] https://www.nasdaq.com/market-activity/stocks/nndm/institutional-holdings https://www.nasdaq.com/market-activity/stocks/nndm/instituti...
        Rury 6y ago
        Institutional Ownership % doesn't mean squat as far as trading activity goes. You and I could trade 1 share back and forth a billion times a day, and it wouldn't have any impact on institutional ownership %. The vast majority of trade activity recently is from ARK. You can see this by looking at the link I showed and compare the strong correlation in rising stock prices and ARK buying. Alternatively any retail investors that jumped in, likely did so from news of ARK buying.
        fighterpilot 6y ago
        > Institutional Ownership % doesn't mean squat as far as trading activity goes. You and I could trade 1 share back and forth a billion times, and it wouldn't have any impact on institutional ownership %. We're talking about pricing/valuation, not trading volume. Institutional ownership does convey relevant information in regards to valuation, because it tells you who bought and didn't later sell, and therefore who contributed net buy flow over the last year. Trades that get closed (i.e., trades that contribute to volume but not ownership) don't have permanent price impact in expectation, and are therefore not useful for answering the question of "why is this stock so high for no good reason?". > The vast majority of trade activity recently is from ARK. You can see this by looking at the link I showed and compare how their "WEIGHT IN PROTFOLIO %' dropped despite their "SHARES HELD" has remained constant. I don't get this logic. If portfolio % drops but shares held remained constant, that means they largely stopped trading NNDM and increased the size of their other (non-NNDM) holdings. Also, that link shows they traded only a few million in volume in March in NNDM, but total NNDM volume over that month was in the hundreds of millions. So they only traded 1-2% of total volume. > Dilution reduces Institutional Ownership %, as well as individuals ownership % Why do you say this? If they do an at-the-market offerring and sell it on-market primarily to retail bids, the retail ownership % will increase proportionally.
  - nradov 6y ago
    NNMD is a weak example. Out of the top 10 mutual fund holders only FNCMX is a passive index fund. https://finance.yahoo.com/quote/NNDM/ https://finance.yahoo.com/quote/NNDM/ And FNCMX is relatively small with only $11B in assets. So if you want us to take your argument seriously you'll have to provide a better example.
    - Rury 6y ago
      >Out of the top 10 mutual fund holders only FNCMX is a passive index fund Uh... KOMP is the 3rd largest holder of NNDM and a passive fund. But regardless, whether these are passive/active is besides the point. Which is that most investment activity nowadays happen through vehicles that act as a basket of equities, and because of this, some of this money ends up flowing into bad equities given the vast majority of them don't trade on any sound fundamentals. I mean ARK surely doesn't, despite being actively managed.
deleted 6y ago
[deleted]
imtringued 6y ago
I'll be honest. What you said is so oversimplified that it cannot be possibly the only factor. Sure there might be a misallocation factor but as others have said, active traders benefit from this. How do active traders make money? Easy, they make money off of volatility and volatility increases as the market size increases. So greater passive share means more profit potential for active traders. What is even the function of a trader? A trader is providing liquidity so that buyers and sellers can get fair prices for the thing they want to buy. Who are buyers and sellers? People who believe in the company or in the case of an index fund, people who believe in the index and expect it to net a return in the future. If there are not enough active traders then index funds will pay unfair prices and that is a loss for the index fund. Now lets get to the meat of your post, zombie companies or rather low productivity companies are a function of interest rates and interest rates are set by the market and usually they are set based on inflation + desired margin. Inflation is low, or at least not high enough, so interest rates are relatively low. The Fed does control the interest rates to some extent but it does so for inflation targeting. However most of the time the Fed rate is slightly above the actual market rate, this is especially the case with negative interest rates where a lot of central banks want to stay above 0% if it is feasible. If inflation goes up the Fed will normalize the interest rates. High interest rates are a barrier to companies with low returns. If your company makes a 2% return every year and your interest is 3% you will go out of business. If your company makes losses and obtains a 0%-1%% loan then it can stay afloat thanks to the debt. Now the obvious problem is, if the Fed is doing everything it can to increase inflation and subsequently raise interest rates then why on earth do we see very low inflation? If interest rates are lower than inflation it means everyone (including foreign entities) is putting their money into savings. After all, if people spent it on consumer goods it would drive up prices and therefore inflation. So it isn't going there. Actually, there is a way for consumer spending to increase savings. China is running a trade deficit by pegging their currency to the yuan. This means the government just outright buys USD so you can exchange them for yuan and the government stockpiles the USD in US treasury bonds. In my opinion they do this because China has an aging population, it's basically a retirement fund, when China is doing poorly they are hoping the US economy is doing well. Ok, China (and pretty much everyone exporting in USD) is saving. Who else is saving? Retirement funds. The US has an aging population that puts money aside for retirement. It also has a retirement motto that everyone is supposed to save for themselves so even the working population is putting money aside. Rich people save a disproportionate percentage of their salary. They simply cannot spend all of it because they are simply that rich. Think of Bill Gates. A lesser effect also applies to city dwellers in top cities. They get paid a lot more than the countryside. Think of all the people on HN with stock compensation or people on HN who put their excess money into stocks. This portion is growing bigger over time. Automation plays into savings as well. Higher productivity means you can put more money into capital via machines that merely consume electricity instead of spending your money on workers who must consume food and water. If everyone is saving and nobody is spending then how are workers supposed to get paid for their work? It's clearly impossible, unless that money is being invested and new jobs are being created. This is why people shouldn't put money under a mattress or why we don't want deflation. It will cause unemployment. Give it to your bank and your bank will give it to a company that creates jobs. But since interest is so low or in theory negative (banks don't pass negative interest on) the banks are basically telling you that they don't want your money and you should put it elsewhere. Enter the stock market and housing market. Low yields in conventional markets (bank accounts, treasury bonds, mortgage bonds, etc) cause investors to flee these markets and enter riskier markets. They will spend it on stocks instead, they will also spend it on housing directly. That's where all those speculators that don't want to rent the house out come from. They aren't looking for a good investment, they are looking for an investment that isn't worse than conventional assets. It's almost as if we have run out of good investments.
LatteLazy 6y ago
The great thing about markets is they reward people who correct them. Pick a stock you're sure is bad and short it, you'll do everyone a favour and make a tidy sum...

by Rury 6y ago

nradov 6y ago

Could you give us examples of those zombie companies? What are the ticker symbols and which indexes include them?

Rury 6y ago
NNDM is an example. Hasn't seen any growth despite having a marketable product over their entire 8 year timeframe. Worth ~2B right now despite only making ~3.4M in revenue per year and losing ~50M per year. All thanks, to becoming apart of ARKK.
- superdimwit 6y ago
  ARKK is far from passive
  - Rury 6y ago
    Sure it is. The money you put into it is placed for you. That's passive. The fund itself may algorithmically place it in various things, but that's outside your control. Conversely, look at super undervalued companies like JKS and CSIQ. JKS is the largest and fastest growing solar company in the world BTW. Yet these companies sit mostly under foreign market ETFs which have never been very popular, and hence why they largely remain undervalued.
    - deleted 6y ago
      [deleted]
    - fighterpilot 6y ago
      That's not the definition of passive investing, what you're talking about is the distinction between agency trading and proprietary trading. ARKK are active investors because they're using discretion to pick specific investments. They say so themselves: "ARKK is an actively managed ETF"
- fighterpilot 6y ago
  NNDM has nothing to do with passive investors. It's bid up by retail hype.
  - Rury 6y ago
    Nope, recent prices are largely correlated to ARK activity. Price decreases have largely been due to the 11! offerings NNDM has recently made, to tap ARK investors money. https://cathiesark.com/ark-combined-holdings-of-nndm https://cathiesark.com/ark-combined-holdings-of-nndm
    - fighterpilot 6y ago
      NNDM is heavily retail driven, it's been a fan favorite for a year. Their institutional ownership is only 10%[1]. It's similar to IBIO, NKLA, etc, where there's some attention from funds but retail hype on social media is driving it up. ARKK has been buying NNDM, yes, but: - they're not passive. they're active. - they only own 5% of the stock. almost any public stock will have at least 5% owned by some fund, so it's not notable and doesn't disprove the notion that it's retail driven. - ARKK are known to pile into retail frenzy stocks, so that correlation is going to exist often. [1] https://www.nasdaq.com/market-activity/stocks/nndm/institutional-holdings https://www.nasdaq.com/market-activity/stocks/nndm/instituti...
      - Rury 6y ago
        Institutional Ownership % doesn't mean squat as far as trading activity goes. You and I could trade 1 share back and forth a billion times a day, and it wouldn't have any impact on institutional ownership %. The vast majority of trade activity recently is from ARK. You can see this by looking at the link I showed and compare the strong correlation in rising stock prices and ARK buying. Alternatively any retail investors that jumped in, likely did so from news of ARK buying.
        fighterpilot 6y ago
        > Institutional Ownership % doesn't mean squat as far as trading activity goes. You and I could trade 1 share back and forth a billion times, and it wouldn't have any impact on institutional ownership %. We're talking about pricing/valuation, not trading volume. Institutional ownership does convey relevant information in regards to valuation, because it tells you who bought and didn't later sell, and therefore who contributed net buy flow over the last year. Trades that get closed (i.e., trades that contribute to volume but not ownership) don't have permanent price impact in expectation, and are therefore not useful for answering the question of "why is this stock so high for no good reason?". > The vast majority of trade activity recently is from ARK. You can see this by looking at the link I showed and compare how their "WEIGHT IN PROTFOLIO %' dropped despite their "SHARES HELD" has remained constant. I don't get this logic. If portfolio % drops but shares held remained constant, that means they largely stopped trading NNDM and increased the size of their other (non-NNDM) holdings. Also, that link shows they traded only a few million in volume in March in NNDM, but total NNDM volume over that month was in the hundreds of millions. So they only traded 1-2% of total volume. > Dilution reduces Institutional Ownership %, as well as individuals ownership % Why do you say this? If they do an at-the-market offerring and sell it on-market primarily to retail bids, the retail ownership % will increase proportionally.
- nradov 6y ago
  NNMD is a weak example. Out of the top 10 mutual fund holders only FNCMX is a passive index fund. https://finance.yahoo.com/quote/NNDM/ https://finance.yahoo.com/quote/NNDM/ And FNCMX is relatively small with only $11B in assets. So if you want us to take your argument seriously you'll have to provide a better example.
  - Rury 6y ago
    >Out of the top 10 mutual fund holders only FNCMX is a passive index fund Uh... KOMP is the 3rd largest holder of NNDM and a passive fund. But regardless, whether these are passive/active is besides the point. Which is that most investment activity nowadays happen through vehicles that act as a basket of equities, and because of this, some of this money ends up flowing into bad equities given the vast majority of them don't trade on any sound fundamentals. I mean ARK surely doesn't, despite being actively managed.

deleted 6y ago

[deleted]

imtringued 6y ago

I'll be honest. What you said is so oversimplified that it cannot be possibly the only factor. Sure there might be a misallocation factor but as others have said, active traders benefit from this. How do active traders make money? Easy, they make money off of volatility and volatility increases as the market size increases. So greater passive share means more profit potential for active traders. What is even the function of a trader? A trader is providing liquidity so that buyers and sellers can get fair prices for the thing they want to buy. Who are buyers and sellers? People who believe in the company or in the case of an index fund, people who believe in the index and expect it to net a return in the future. If there are not enough active traders then index funds will pay unfair prices and that is a loss for the index fund. Now lets get to the meat of your post, zombie companies or rather low productivity companies are a function of interest rates and interest rates are set by the market and usually they are set based on inflation + desired margin. Inflation is low, or at least not high enough, so interest rates are relatively low. The Fed does control the interest rates to some extent but it does so for inflation targeting. However most of the time the Fed rate is slightly above the actual market rate, this is especially the case with negative interest rates where a lot of central banks want to stay above 0% if it is feasible. If inflation goes up the Fed will normalize the interest rates. High interest rates are a barrier to companies with low returns. If your company makes a 2% return every year and your interest is 3% you will go out of business. If your company makes losses and obtains a 0%-1%% loan then it can stay afloat thanks to the debt. Now the obvious problem is, if the Fed is doing everything it can to increase inflation and subsequently raise interest rates then why on earth do we see very low inflation? If interest rates are lower than inflation it means everyone (including foreign entities) is putting their money into savings. After all, if people spent it on consumer goods it would drive up prices and therefore inflation. So it isn't going there. Actually, there is a way for consumer spending to increase savings. China is running a trade deficit by pegging their currency to the yuan. This means the government just outright buys USD so you can exchange them for yuan and the government stockpiles the USD in US treasury bonds. In my opinion they do this because China has an aging population, it's basically a retirement fund, when China is doing poorly they are hoping the US economy is doing well. Ok, China (and pretty much everyone exporting in USD) is saving. Who else is saving? Retirement funds. The US has an aging population that puts money aside for retirement. It also has a retirement motto that everyone is supposed to save for themselves so even the working population is putting money aside. Rich people save a disproportionate percentage of their salary. They simply cannot spend all of it because they are simply that rich. Think of Bill Gates. A lesser effect also applies to city dwellers in top cities. They get paid a lot more than the countryside. Think of all the people on HN with stock compensation or people on HN who put their excess money into stocks. This portion is growing bigger over time. Automation plays into savings as well. Higher productivity means you can put more money into capital via machines that merely consume electricity instead of spending your money on workers who must consume food and water. If everyone is saving and nobody is spending then how are workers supposed to get paid for their work? It's clearly impossible, unless that money is being invested and new jobs are being created. This is why people shouldn't put money under a mattress or why we don't want deflation. It will cause unemployment. Give it to your bank and your bank will give it to a company that creates jobs. But since interest is so low or in theory negative (banks don't pass negative interest on) the banks are basically telling you that they don't want your money and you should put it elsewhere. Enter the stock market and housing market. Low yields in conventional markets (bank accounts, treasury bonds, mortgage bonds, etc) cause investors to flee these markets and enter riskier markets. They will spend it on stocks instead, they will also spend it on housing directly. That's where all those speculators that don't want to rent the house out come from. They aren't looking for a good investment, they are looking for an investment that isn't worse than conventional assets. It's almost as if we have run out of good investments.

LatteLazy 6y ago

The great thing about markets is they reward people who correct them. Pick a stock you're sure is bad and short it, you'll do everyone a favour and make a tidy sum...