I couldn't agree less with Matt Newell's view point.
Before the internet, most investors were professionals - doing research the old-fashioned way - active investors dominated and stock picking was the order of the day.
Fast-forward to today:
(1) passive investing is now the dominant form (that's dumb money - capitalism used to channel capital to where it could be used most productively - that is no longer the case - market efficiency has been torpedoed)
(2) every man and his dog now thinks he is Warren Buffett - Robin Hood and other platforms enable cheap and easy access to the market - most of these people don't have a clue - the stock market has become a casino for many
(3) social media has created a situation where hype drives markets more than fundamentals - fake news and false narratives drive the market
(4) stock based compensation has spiraled out of control and companies buying their own over inflated stock to offset dilution is amplifying dislocations between intrinsic value and market price
(5) loose monetary policy for 15 years - the ZIRP era - created an everything bubble which created an illusion that markets only go one way. Suddenly every retail investor thought they had cracked the code - the day of reckoning is coming when the young generation experience their first proper draw down
Do you still think that the market is more efficient today than it was several decades ago?
(1) Passive only works if it is a small part of investing because it relies on active investors determining which are good opportunities and then following them based on movements in market cap. Passive investing was less than 5% two decades ago, it is now more than 50%. Jack Boggle - the inventor of passive investing - said that if passive investing ever became dominant then the market would descend into chaos (quote 2017 from the Berkshire Hathaway annual meeting). Well, chaos may have now arrived!
(4) US companies are deploying >$4 trillion each year in repurchasing shares, mostly driven by SBC offsets. Deutsche Bank did some interesting analysis around this. It isn't small and it has distorted market valuations.
Really nice read!
Thanks Nils!
I couldn't agree less with Matt Newell's view point.
Before the internet, most investors were professionals - doing research the old-fashioned way - active investors dominated and stock picking was the order of the day.
Fast-forward to today:
(1) passive investing is now the dominant form (that's dumb money - capitalism used to channel capital to where it could be used most productively - that is no longer the case - market efficiency has been torpedoed)
(2) every man and his dog now thinks he is Warren Buffett - Robin Hood and other platforms enable cheap and easy access to the market - most of these people don't have a clue - the stock market has become a casino for many
(3) social media has created a situation where hype drives markets more than fundamentals - fake news and false narratives drive the market
(4) stock based compensation has spiraled out of control and companies buying their own over inflated stock to offset dilution is amplifying dislocations between intrinsic value and market price
(5) loose monetary policy for 15 years - the ZIRP era - created an everything bubble which created an illusion that markets only go one way. Suddenly every retail investor thought they had cracked the code - the day of reckoning is coming when the young generation experience their first proper draw down
Do you still think that the market is more efficient today than it was several decades ago?
Hi James. I hope you are right! We'd have more opportunities going forward.
A few thoughts:
1) Passive is still too small in terms of share of total AUM to make markets inefficient.
2) True!
3) Agreed.
4) Primarily an US issue. But similar to 1) ... this isn't making markets entirely inefficient - too small volume.
5) I think the Everything Bubble popped in 2021/22. The illusion (for retail investors) that markets only go up is still very present, agreed.
Disagree on (1) and (4)
(1) Passive only works if it is a small part of investing because it relies on active investors determining which are good opportunities and then following them based on movements in market cap. Passive investing was less than 5% two decades ago, it is now more than 50%. Jack Boggle - the inventor of passive investing - said that if passive investing ever became dominant then the market would descend into chaos (quote 2017 from the Berkshire Hathaway annual meeting). Well, chaos may have now arrived!
(4) US companies are deploying >$4 trillion each year in repurchasing shares, mostly driven by SBC offsets. Deutsche Bank did some interesting analysis around this. It isn't small and it has distorted market valuations.