My portfolio after listening to @profplum99's excellent interview with @ttmygh and @fleckcap
Don't worry, a thread is coming 😇
Don't worry, a thread is coming 😇
I've shared some of Mike's interviews and concepts before, but this episode in particular was insanely good
If you've followed @profplum99 for a while, here's an overall summary of the episode
If you're not familiar with his work, you can skip this - I don't think you'll quite get the rich flavor of Mike's ideas (though it's a great, short summary for those who know his general pitch)
If you're not familiar with his work, you can skip this - I don't think you'll quite get the rich flavor of Mike's ideas (though it's a great, short summary for those who know his general pitch)
For my non-finance followers: this thread 🧵is for you. Yes, YOU!
The topics Mike discusses require some understanding of finance, but the implications are MASSIVE and not at all limited to finance
The topics Mike discusses require some understanding of finance, but the implications are MASSIVE and not at all limited to finance
Let's start at the top: Mike's core focus these days is on the effects of passive investing on the structure of the stock market
The #DDTG phenomenon, Robinhood traders,"stonks always go up," $HTZ / $CHK rallying in bankruptcy, etc - it's ALL related to this
The #DDTG phenomenon, Robinhood traders,"stonks always go up," $HTZ / $CHK rallying in bankruptcy, etc - it's ALL related to this
Let me rewind to April for a moment to another fascinating conversation between @profplum99 and @RaoulGMI
Mike notes that $GDXJ, the ETF tracking junior gold miners, traded at a 💥25% DISCOUNT💥 to its net asset value (NAV)
I.e. if they held $100 of value, you could buy for $75
Mike notes that $GDXJ, the ETF tracking junior gold miners, traded at a 💥25% DISCOUNT💥 to its net asset value (NAV)
I.e. if they held $100 of value, you could buy for $75
That seems odd, no? Like the fabled $20 bill Eugene Fama supposedly wouldn't pick up from the sidewalk because it couldn't possibly have existed - someone else would obviously already have picked it up if it did (apocryphal, can't find the source)
This gets to Mike's c̴r̴i̴t̴i̴q̴u̴e̴ complete rejection of the Efficient Market Hypothesis (EMH). This is just one glaringly obvious example of its failure
See his paper, Policy in a World of Pandemics, Social Media and Passive Investing, for more: logicafunds.com/policy-in-a-wo…
See his paper, Policy in a World of Pandemics, Social Media and Passive Investing, for more: logicafunds.com/policy-in-a-wo…
Okay, fine, maybe for a brief moment, there was an arbitrageable security that wasn't arbitraged immediately. Who cares?
This is just the tip of the iceberg (and it's not actually an earth-shattering realization - discounts to NAV happen sometimes due to illiquidity)
This is just the tip of the iceberg (and it's not actually an earth-shattering realization - discounts to NAV happen sometimes due to illiquidity)
Much more worrying is the effect of ~market capitalization-weighted index funds on the broader market
For those not versed in the lore around indexation, some dogma:
* You piggyback on aggregate decisions of the whole investing universe
* You do not transact or affect the market
For those not versed in the lore around indexation, some dogma:
* You piggyback on aggregate decisions of the whole investing universe
* You do not transact or affect the market
Some problems with the dogma:
* Not all companies captured in indices
* If the market is 100% passively indexed, no one studiously sets prices (this is the case well before 100%, but we'll get there)
And the big one:
* OF COURSE they transact & affect the market! Duh! 🤦♂️
* Not all companies captured in indices
* If the market is 100% passively indexed, no one studiously sets prices (this is the case well before 100%, but we'll get there)
And the big one:
* OF COURSE they transact & affect the market! Duh! 🤦♂️
Now we get to this episode. In 2015/2016, Mike, who comes from a fundamental analysis background, noticed another absurdity: Shanghai stocks going limit up (CANNOT TRADE) on ZERO VOLUME, for DAYS ON END
That's right - prices magically rose *WITHOUT ANY TRANSACTIONS*
That's right - prices magically rose *WITHOUT ANY TRANSACTIONS*
I won't detail the process (listen to the episode for more), but basically, they got something wrong in how some indices were constructed
You see, indices aren't actually market cap-weighted in the US, usually. They're *float* weighted, meaning, based on shares AVAILABLE
You see, indices aren't actually market cap-weighted in the US, usually. They're *float* weighted, meaning, based on shares AVAILABLE
If I own 90% of a company and issue 10% to the public, no one is trading my 90%, but nonetheless, those shares are reflected in the market cap of my company
So if I'm an index fund trying to buy based on market cap, once I get big enough, I'm gonna have a hard time - no shares!
So if I'm an index fund trying to buy based on market cap, once I get big enough, I'm gonna have a hard time - no shares!
Ex: Company A market cap = $100
* I own $90 / 90 shares
* Public owns $10 / 10 shares
* Entire index's market cap is $500
* Ergo, index needs 1/5 weighting of Company A
* If fund has $100 to deploy, they need $20 to be Company A
* But wait, they can only buy 10 shares ($10 now)
* I own $90 / 90 shares
* Public owns $10 / 10 shares
* Entire index's market cap is $500
* Ergo, index needs 1/5 weighting of Company A
* If fund has $100 to deploy, they need $20 to be Company A
* But wait, they can only buy 10 shares ($10 now)
* Prices be damned, % weighting is God
* Fund buys 10% of float (1 share) at $1/share
* Remaining holders aren't selling
* Fund NEEDS those shares, raises bids until they get them
* Now aggregate market cap AND Company A market cap went UP. Say C.A. is now 50% of total. Need MOAR
* Fund buys 10% of float (1 share) at $1/share
* Remaining holders aren't selling
* Fund NEEDS those shares, raises bids until they get them
* Now aggregate market cap AND Company A market cap went UP. Say C.A. is now 50% of total. Need MOAR
Now the question is, how high do they have to bid until *I* sell some of my 90 shares? Good question - I'm not selling.
There is no price I will sell at, yet this fund NEEDS me to sell to meet their weighting algorithm
Prices now go ~infinite
There is no price I will sell at, yet this fund NEEDS me to sell to meet their weighting algorithm
Prices now go ~infinite
This sounds absurd, but according to Mike, you've already seen this dynamic even if you never traded Shanghai stocks
Remember the Dot Com bubble? Contra conventional wisdom, Mike says the relevant factor wasn't tech but tightly-held, recently IPO'd (incidentally, tech) companies
Remember the Dot Com bubble? Contra conventional wisdom, Mike says the relevant factor wasn't tech but tightly-held, recently IPO'd (incidentally, tech) companies
Here's a Motley Fool article from 2003 about why insider ownership is a bullish sign - to them, it's all about fundamentals of the business and potential for Wall Street to recognize company *value*
Nothing about index funds, float-weighting, etc.
fool.com/investing/gene…
Nothing about index funds, float-weighting, etc.
fool.com/investing/gene…
Okay, that's weird, but we fixed it, right?
Mike has mentioned elsewhere the difficulties of actually *determining* the realistic float. Say, Company A holding shares of Company B while comtemplating a takeover. Will not sell for any reason. Is that float? 🤷♂️
Mike has mentioned elsewhere the difficulties of actually *determining* the realistic float. Say, Company A holding shares of Company B while comtemplating a takeover. Will not sell for any reason. Is that float? 🤷♂️
I hope I've piqued your interest but I'm almost at the thread limit, so I'm gonna stop here for now, to be continued later
What did we learn?
* Markets sometimes do extremely irrational things
* Algorithmic, price-insensitive buying is the most irrational of all. All in the name of "free money" from piggybacking on the entire discretionary investing universe - the most rational of all pursuits!
* Markets sometimes do extremely irrational things
* Algorithmic, price-insensitive buying is the most irrational of all. All in the name of "free money" from piggybacking on the entire discretionary investing universe - the most rational of all pursuits!
I want to give my profuse thanks to @profplum99 for sharing his thoughts, and to @ttmygh, @RaoulGMI, @fleckcap, @CoveringDelta, @tracyalloway, @TheStalwart, and all the others who have interviewed Mike over the years. I've listened to almost every interview he's ever done
Go listen to the episode! Really! I'll be back with more later, but at the end of the day I'm just a poor proxy for Mike's words (I'm an application security guy who mostly loses money trading options for goodness' sakes!)
overcast.fm/+aAHu8AYkU
open.spotify.com/episode/0l2hhc…
overcast.fm/+aAHu8AYkU
open.spotify.com/episode/0l2hhc…
Bonus! I even found @profplum99 stumping @wbmosler in an old debate between WM & @BobMurphyEcon re: MMT
tl;dw, Was it rational for Greece to adopt the Euro in light of its subsequent crisis due to monetary inflexibility? If not, are voters adequately equipped to guide MMT? (No)
tl;dw, Was it rational for Greece to adopt the Euro in light of its subsequent crisis due to monetary inflexibility? If not, are voters adequately equipped to guide MMT? (No)
