Reading and Thinking

A big earnings week ahead with both Tesla and Boeing reporting their Q1 results, the former today, the latter on Wednesday, and on Saturday 1st May there is the always interesting annual shareholders meeting for Warren Buffet and Charlie Munger's Berkshire Hathaway, another individual stock I added to my portfolio last year, and already up 21.49%.

Buffet and Munger are both known for the amount of time they spend reading, with Charlie Munger being quoted as saying:

"Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think." 

They are not the only ones to espouse the importance of reading. Bill Gates reads one book a week, and Mark Cuban reads for three hours a day. Arthur Blank (owner of Atlanta's Falcons and United) reads for two hours a day, while Mark Zuckerberg gets through a book every two weeks. The claim by his brother that Elon Musk reads two books a day sounds far fetched, but it's likely that Tesla's CEO certainly reads a lot. All books are not equal of course, but the point is that successful people read prodigiously. 

Bill Gates makes a point of finishing all the books he starts reading, which is not something I can claim to do, but this article is worth a read, and you can credit the time spent towards your daily total!

My latest read is "The Joys of Compounding" by Gautam Baid which arrived on Saturday, and the reviews look good even if the price on Amazon is a little high. Shop around. 

In The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Gautam Baid integrates the wisdom, strategies, and thought processes of over 200 preeminent figures in history whose teachings have stood the test of time. Distilling generations of investment and life lessons and compiling it with his personal experiences into a comprehensive guide on value investing, Baid demonstrates their practical applications in the areas of business, investing, and decision making.

At 438 pages it's not a short book, but one of the benefits of working from home is the extra time available for reading. 

Comment Catch Up

As I have mentioned previously, thanks to @Beigemartin who mentioned that he had commented recently but the comment had not appeared, I discovered a treasure trove of unpublished comments awaiting moderation dating back several years. Rather embarrassing really, but I used to receive emails telling me that comments had been received, but at some point this appears to have stopped.

Of course many comments were time sensitive and there's no point commenting on them now, but some of them look interesting and as I've said in the past, comments are a good source of inspiration for future posts. Plus it's just rude to ignore a comment when someone has taken the time to contribute, even if the slight was unintentional.

So if you've commented and not seen your comment published, mea culpa and apologies. I'd rather assumed that leaving comments on a blog was passé but maybe not.

So working my way back in time, and Marty (presumably Beigemartin) had this to say on my March Wrap post a few days ago:

You might consider adjusting your S&P return to GBP, or at least ensuring they are in the same currency, for comparability.

I wasn't sure what he meant by this, since the returns of the S&P 500 versus FTSE 100 were compared to a 100 unit starting amount, and no currency was mentioned. The point I was trying to make was that the US index had grown that 100 units to 270 units while 100 units invested in the UK index had lost value. Thanks to ALuckyA Day, I realised that some of you are looking to compare the actual amount in real terms, taking into account exchange rates and perhaps inflation too, but this is going much deeper than I intended. 

Yes, if you had converted £100 into dollars at the end of 1999, invested that $164 in the S&P 500 and then converted back at the end of the period in question, you wouldn't have £270. (You would actually have more - £336.16 - thanks to Brexit and the exchange rate dropping from around $1.64 in 2000 to today's $1.39, but point taken.) It's good to know people actually think about these posts!   

Going back in time, at the start of the year Wayward Lad commented:

Great to read your blog today. I must confess that I'm not a regular visitor, but being a blogger myself, I know the time and effort to keep it going year-in-year-out is tremendous. Good luck in 2021, and I promise the visit and read more often.

It would be a lot easier to blog if I didn't miss comments for several years! 

My old friend, the very knowledgeable Matthew Trenhaile, took me to task for a line from this post written during the aftermath of the US election back in mid-December:

"If anyone has experience of dealing with any Help Desk, not just Betfair, you'll know that these aren't the sharpest and brightest of people." 

That really is an unpleasant thing to say. The sweeping nature of the statement also of course makes it factually incorrect.

Of course it was a generalisation, but unfortunately my experiences over the years have led me to this conclusion, although Betfair's training may be partly to blame. For whatever reason, the information being given to bettors during the post-US Election period was incorrect, and while I have little sympathy with those betting based on the Help Desk's word rather than on understanding the market rules, this should not have happened.

While talking about Matthew, he left a comment back in July on this US Election post saying:   

"The always excellent The Economist" This is presumably an exaggeration and I don't believe even The Economist themselves would claim to be always excellent. In fact I would suggest that "always" when applied to excellency is a tough standard to meet for any entity. I was particularly disappointed at the last general election that the publication suggested that all readers who had the same values as it should vote for the Liberal Democrats. When voting in a first past the post environment willfully throwing away a vote in this fashion is completely meaningless. If general elections were conducted in the not always excellent but more excellent than FPP way of proportional representation and single transferable vote then the advice might of held merit. The most important thing when voting is that your vote carry positive expected value much like in betting. The more optimal way of voting when dissatisfied with the status quo is to vote for the most popular non incumbent party. Even if you do not agree with that party’s policies the most important thing in politics is invariably to, as cricket commentators are want to say about bowling to a batsmen, “keep ‘em honest”. Safe seats become less safe and marginal seats are often lost. Only when the constant threat of change is embraced can we hope to see progress. To use another cricket metaphor politicians must be forced to constantly play balls in the “corridor of uncertainty” otherwise they might develop a taste for leaving too many deliveries altogether or even worse start slogging with no regard for the team effort.

A good comment and of course the use of 'always' in this context was an exaggeration - my way of saying that this is a publication I enjoy. Excellence is a hard status to maintain, and is in any case subjective.

Also on the US Election, G wrote:

With little rationale and certainly no evidence to date I do see Biden somehow dropping out [on set dementia the most likely reason at this point]. I then see Clinton stepping in as the Democratic nominee. Could be pure fantasy by I’ve had a reasonable nibble at long odds on her being the next President. Time will tell off course but I just don’t see Biden carrying the Dems all the way to victory.

If any candidate was showing signs of dementia, I wouldn't have said it was Biden. Both candidates are up there in years, but Trump's decline over the past four years was the more notable. Fortunately G's fantasy was just that, and with no evidence was always likely to be. The more people betting with no evidence and little rationale, the better.

Finally, at least for now, and in this post I mentioned that:

1892-93 was a season that previously famous for being Bootle's only season in the league.

No prizes, but name the only other club to have played just one season in the league, and I'm not counting Salford City as I expect them to return next season!

"Unknown" guessed New Brighton, but that club played a full 21 seasons before dropping out in 1951. Salford City did play a second season, and the answer isn't Harrogate Town either! 

Overdone

It's not often that I get something right, but I did say yesterday regarding the proposed increase in capital gains taxes over $1m that:

"I suspect the resulting drop in the markets was an overreaction"

And sure enough, the S&P rose by more than 1% to close near its all-time high.

Charles Schwab's chief fixed income strategist Kathy Jones may be a reader of this blog, as she commented:

"I think the immediate reaction was probably a bit overdone."

Just a bit. She did go on to make the point that with the index close to a high:

"I think at the moment, when you have very high valuations in the market, anything that is bad news can spark a bit of a sell-off."

She thinks a lot, which is good, but sometimes you can overthink these things. 

With just five trading days to go this month, April is currently my third best month ever with $TSLA back above $725 and despite my Bitcoin investment being rather poorly timed. Its day will come, and if anything, the recent pullback presents a buying opportunity.

As for sports investing, April has been excellent for the NHL System which is currently on a six game winning streak and a 29-10 record for the month and an ROI for the season now at 18.6%.

The NBA Overs System has had no selections for the past two days, but with six winners from the last seven, this too is having a positive month with a 13-7 record and a season long ROI of 24.9%.

In other news, I mentioned that I uncovered a few years worth of unpublished comments recently. While many were spam and have been deleted and others were time sensitive and thus pointless to address now, I do plan to trawl back through them and post where it seems appropriate to do so. 
   

Wayward Comments

While the FTSE 100 is once again above its price at the start of this millennium (£100 is now worth £100.12), in the US "stocks turned lower following reports that US president Joe Biden planned to raise capital gains tax for wealthy individuals. The S&P 500 index gave up morning increases and closed the trading day down 0.9 per cent following a Bloomberg report stating that people earning more than $1m would pay a capital gains rate of 39.6 per cent, up from 20 per cent."

The above lede in the Financial Times is a little misleading as the 39.6% mentioned would be the marginal rate for gains in excess of a million dollars, not something that would be a concern to most people. The thing with news like this is that for the media, it's a far bigger story if they say the rate is almost doubling, than if they say that hardly anyone will be impacted by it.

I suspect the resulting drop in the markets was an overreaction, but reading comments on Twitter about it are quite revealing about how people don't understand the basics of how the taxes work. Some outlets compounded the confusion or misinformation by adding in the Federal Tax Rate on incomes over $1m resulting in this kind of nonsense:

Well there's a reason why it doesn't make sense, which is that it is nonsense. The announcement also shouldn't have come as a surprise, but as we all know, markets aren't always efficient as illustrated by the story of the Bombay Oxygen company in India, where there is currently a shortage of oxygen for the treatment of COVID-19 victims. 

It appears that the company were once involved in manufacturing industrial gases but stopped in August 2019. Someone hasn't been reading the small, but important, print.

A few weeks ago, thanks to @BeigeMartin, I realised that the reason no one was commenting any more wasn't because they weren't commenting any more, but because I was no longer getting emails telling me that there was a comment to approve. This misunderstanding has resulted in many missed comments, but now I know I shall try to keep on top of them.

Unfortunately many comments were time sensitive and there's no point commenting on them now, but some of them look interesting and as I've said in the past, comments are a good source of inspiration for future posts.

BeigeMartin's comment was on my March Wrap post a few days ago and he said:

You might consider adjusting your S&P return to GBP, or at least ensuring they are in the same currency, for comparability.

I'm not actually sure what he means by this, since the returns of the S&P 500 versus FTSE 100 were compared to a 100 unit starting amount, and no currency was mentioned. The point was that the US index has grown that 100 units to 280 units while 100 units invested in the UK index hasn't grown at all.

Wayward Lad, whose blog I have mentioned in the past, commented a while ago:

Great to read your blog today. I must confess that I'm not a regular visitor, but being a blogger myself, I know the time and effort to keep it going year-in-year-out is tremendous. Good luck in 2021, and I promise the visit and read more often.

More recently, i.e. just this month, Wayward Lad commented on my Worse Than Marxism post:

An interesting post Cassini, and one that's close to me. After decades (I'm giving my age away now) of indifferent pension performance, I took control of my pension in 2012 and opened a SIPP. Thirty years of pension contribution amounted to just £51,684 in the pension pot - not much to write home about. I've bought individual stocks, and Investment Trusts, dabbled in AIM companies and had some success, some failure and (worst) sold out of big winners when they were only just starting to climb the mountain of success (why-oh-why did I sell out of Ashtead at 675 in 2013 after doubling my money?). Recently, I've been drawn into the ETF web on the advice of my banker son-in-law and my eldest son (works at Goldman Sachs), but I still enjoy the euphoria of the individual company purchase. It's the euphoria that we chase: be it in sport, sex, gambling or the stock markets - euphoria proves that you are alive!

I can confirm that being alive is indeed a very good feeling! Wayward Lad sums up in that comment just how difficult trading is. Whatever you do is almost certainly not going to turn out to be perfect, but when it comes to investing, whether it be in sports or more traditional markets, the aphorism that perfect is the enemy of good, or more literally the best is the enemy of the good, is never truer. 

@IanCassel tweeted recently that:

One of the hardest parts of being a full time investor is over complicating things because you have time to over complicate things.

We make decisions to buy and sell based on our knowledge and influences at the time. It's all too easy to second guess why we sold a stock after it doubled, but there could have been many reasons and looking back and saying "if only" isn't helpful.

"Until you can manage your emotions, don't expect to manage money."-Warren Buffett

We tend to remember the bad decisions and forget the good ones. Probably an evolutionary strategy to reduce the chances of us making poor decisions in future, but who remembers cutting a losing trade short before it went on to tank even further, or selling at a profit shortly before a bad earning call negatively impacted the share price?

ETFs are great as I have written before - there's no second guessing yourself with these, and most of my money is tied up in tracking indexes, but as Wayward Lad says, there's a thrill to picking an individual stock that goes on to do well, (have I mentioned Tesla?), and there's a thrill to making money on sports that far exceeds that of a gain from the stock market which, in real terms, dwarfs the sports bet winner but is rather boring.

It's a bit like being married. Chasing individual stocks is the bachelor in us looking for a little excitement outside the routine and security of marriage / index funds. My best single day in total was one where I "made" just over six figures, and while that might sound impressive, it's simply the result of old age and compounding and a rebounding stock market. (If you invest just £200 a month from when you turn 21, and increase that amount by 5% a year, you'll almost certainly be worth a million by the time you turn 60). 

The point is though that I enjoy sports betting wins, even if they are much smaller in sum, far more than I should and similarly I get more upset about losing £500 on a sports bet than I do dropping ten times that amount in stock market losses. Perhaps part of the reason is that those stock "losses" aren't actually losses, nor "wins" gains until the underlying security is sold but it's also a factor that I feel a personal satisfaction in identifying a value bet in sports.

The table on the left shows the number of all-time highs hit for the S&P 500 since 2005, courtesy of CompoundAdvisors.com 

Making money in a bull market isn't very satisfying, and it's easy to get carried away and we've been running with the bulls for a few years now. In Wayward Lad's most recent post, he writes:

The SIPP is looking tremendous. The value is at a record high and I think there's a long way to go this year. My target for the year-end is £300,000 and at one stage this year (early March) I was getting a bit worried that I was likely to fall well short of that target - but my, what a rally in recent weeks!

Since my "birthday blog" on 8th November 2020 (long-term plan is to "retire" on the day before my 67th birthday in 2026) the SIPP has gained £29,500 of which £6,000 is contributions; so that's £23,500 gain, equivalent to just under 10% - if this keeps up the £300,000 for 31st December could be hit a bit earlier.

While a rising tide lifts all boats, I'd caution that there's a hurricane somewhere in the future. Batten down the hatches. These "if this keeps up" thoughts can be dangerous. 

Almost Perfect

“I don't care what you have to do – if it means walking everywhere and not eating anything that wasn't purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.” - Charlie Munger

With teams having completed somewhere between 12 and 18 games out of 162, the 2021 MLB season is still very much in its infancy but the futility of blindly backing Home teams in the early stages of a season continues to be evident.

With data going back 17 seasons, a strategy of backing all Home teams during the first 30 games of a season has an ROI of -3.3% over 7,644 games, and while 'hot favourites' are profitable (especially in National League matches), it's Away teams offer more value.

Backing big underdogs in baseball isn't a good idea, but backing Small Dogs on the road in the first 30 games of a season has an ROI of 4.4% in National League games. The 2020 season saw this strategy take a loss, but we can blame the now abandoned Designated Hitter rule change for that. This season, the strategy currently has an ROI of 9.9% on the Money Line with three probable selections tonight. 

I mentioned a few days ago that the San Diego Padres, in their 52 year history, were the only team in MLB never to throw a no-hitter, but that fun fact did not age well as locally born Joe Musgrove threw one on April 9th. He was just a hit batter away from the even rarer perfect game.

The NBA Overs System for this season now has an ROI of 18.8% after 83 selections with April so far having a 10-6 record. 

The Basic NHL System has now passed 200 selections for this season and continues to pay dividends, currently up 48.43 points with an ROI of 17.6%. Here are the results for this system for the last 10 seasons:

$TSLA

In the financial markets, April was a good month until this week, when gains have been trimmed a little, but with just eight trading days to go, I'm hopeful for a sixth consecutive positive month, but of course anything can happen. My Bitcoin investment has lost 6.76% in its early days, but Tesla's current gain means I can sleep easy at night.

In a sure sign that I have too much time on my hands, I decided to rewrite the history of English football and strip the "Big" 6 of their trophies, awarding them to the highest placed non-Big 6 club. The good news is that Crystal Palace have now won the league, a couple of FA Cups, and doubled their tally of Full Members' Cup wins.

Leading trophy winners in English domestic competitions are now:

 

Worse Than Marxism?

This month's The Atlantic magazine has a very interesting article about passive investing with the eye-catching title:

Could Index Funds Be ‘Worse Than Marxism’?

Economists and policy makers are worried that the Vanguard model of passive investment is hurting markets.

It's written by Annie Lowrey and well worth a read although I disagree with the basic premise and conclusion as well as some of the content, but we can't just read articles we completely agree with or we'd never learn anything. 

Readers of this blog will be well aware of my thoughts about active versus passive investing and have hopefully acted on them rather than act like failsons and ignored me! And Tesla gets a mention too. 

The original article with links to related items of interest is here.  

The stock market has had quite a year. Plenty of cash is sloshing around, the pandemic recession notwithstanding, thanks to loose monetary policy, rampant inequality, crypto-speculation, and helicopter drops of cash. Plenty of bored people are reading market rumors on the internet, pumping and dumping penny stocks, riding GameStop to the moon, and bidding up the price of esoteric currencies and digital artworks. The markets are swooning and hitting new highs as kitchen-table investing—laptop-on-the-couch investing, really—is having a heyday not seen since the late 1990s.

Yet economists, policy makers, and investors are worried that American markets have become inert—the product of a decades-long trend, not a months-long one. For millions of Americans, getting into the market no longer means picking stocks or hiring a portfolio manager to pick them for you. It means pushing money into an index fund, as offered by financial giants such as Vanguard, BlackRock, and State Street, otherwise known as the Big Three.

With index funds, nobody’s behind the scenes, dumping bad investments and selecting good ones. Nobody’s making a bet on shorting Tesla or going long on Apple. Nobody’s hedging Europe and plowing money into Vietnam. Nobody is doing much of anything at all. These funds are “passively managed,” in investor-speak. They generally buy and sell stocks when those stocks enter or exit indices, such as the S&P 500, and size their holdings according to metrics such as market value. Index funds mirror the market, in other words, rather than trying to pick winners and losers within it.

Thanks to their ultralow fees and stellar long-term performance, these investment vehicles have soaked up more and more money since being developed by Vanguard’s Jack Bogle in the 1970s. At first, Wall Street was skeptical that investors would accept making what the market made rather than betting on a market-beating return. But as of 2016, investors worldwide were pulling more than $300 billion a year out of actively managed funds and pushing more than $500 billion a year into index funds. Some $11 trillion is now invested in index funds, up from $2 trillion a decade ago. And as of 2019, more money is invested in passive funds than in active funds in the United States.

Indexing has gone big, very big. For nine in 10 companies on the S&P 500, their largest single shareholder is one of the Big Three. For many, the big indexers control 20 percent or more of their shares. Index funds now control 20 to 30 percent of the American equities market, if not more.

Indexing has also gone small, very small. Although many financial institutions offer index funds to their clients, the Big Three control 80 or 90 percent of the market. The Harvard Law professor John Coates has argued that in the near future, just 12 management professionals—meaning a dozen people, not a dozen management committees or firms, mind you—will likely have “practical power over the majority of U.S. public companies.”

This financial revolution has been unquestionably good for the people lucky enough to have money to invest: They’ve gotten better returns for lower fees, as index funds shunt billions of dollars away from financial middlemen and toward regular families. Yet it has also moved the country toward a peculiar kind of financial oligarchy, one that might not be good for the economy as a whole.

The problem in American finance right now is not that the public markets are overrun with failsons picking up stock tips on Reddit, investors gambling on art tokens, and rich people flooding cash into Special Purpose Acquisition Companies, or SPACs. The problem is that the public markets have been cornered by a group of investment managers small enough to fit at a lunch counter, dedicated to quiescence and inertia.

Before index funds, if you wanted to get into the stock market, you had a few choices. You could pick stocks yourself, using a broker to buy and sell them. (Nowadays, you can easily buy and sell on your own.) Or you could buy into a mutual fund—a collection of investments selected by a vetted manager, promising solid returns in exchange for an annual fee.

Then Bogle, the head of a mutual-fund company, turned on the industry. He argued that mutual-fund fees were exorbitant, that mutual funds generally failed to beat the market, and that fund employees had an obvious conflict of interest: Was their priority to maximize returns for the people who bought into the mutual fund, or to make money for the company? He set up a company called Vanguard offering a new kind of mutual fund, one that would buy and hold every stock or bond on a major index and that would devote itself to driving fees as low as possible. Other companies, including Fidelity, State Street, and BlackRock, soon mimicked this strategy, later adding exchange-traded options, or ETFs.

The strategy sounds implausible. But it works. Passively managed investment options do not just outperform actively managed ones in terms of both better returns and lower fees. They eat their lunch.

Let’s imagine that a decade ago you invested $100 in an index fund charging a 0.04 percent fee and $100 in a traditional mutual fund charging a 1.5 percent fee. Let’s also imagine that the index fund tracked the S&P 500, and that the mutual fund ended up returning what the S&P 500 returned. Your passively invested $100 would have turned into $356.66 in 10 years. Your traditionally invested $100 would have turned into $313.37.

Actively managed investment options could make up for their higher fees with higher returns. And some do, some of the time. Yet scores of industry and academic studies stretching over decades show that trying to beat the market tends to result in lower returns than just buying the market. Only a quarter of actively managed mutual funds exceeded the returns of their passively managed cousins in the decade leading up to 2019, according to research by Morningstar. That joke about meditation applies to money management too: Don’t just do something; sit there.

Compelled by the math, millions of investors have decided to do less to make more. Competition among the firms offering index funds has driven fees to scratch—some funds charge no fees at all—versus 1.5 percent or more, sometimes much more, for actively managed options. Cash has poured in. Now passive is bigger than active.

While that shift has redounded to the benefit of the Vanguards of the world, it has also redounded to the benefit of retail investors. Index funds mean less money for mutual-fund managers and more money for Mom and Dad: According to Morningstar, investors saved $6 billion in fees by switching to passive management in 2019 alone. “This is on-net positive for society,” Jonathan Brogaard, a finance professor at the University of Utah’s David Eccles School of Business, told me. “You are getting the same exposure to the markets for a tenth of a cost. It’s a no-brainer.”

What might be good for retail investors might not be good for the financial markets, public companies, or the American economy writ large, and the passive revolution’s scope has raised all sorts of hand-wringing and red-flagging. Analysts at Bernstein have called passive investing “worse than Marxism.” The investor Michael Burry, of The Big Short fame, has called it a “bubble,” and a co-head of Goldman Sachs’s investment-management division has warned about froth too. Shortly before his death in 2019, Bogle himself warned that index funds’ dominance might not “serve the national interest.”

One primary concern comes from the analysts at Bernstein: “A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active, market-led capital management.” The point of their research note, if rendered a touch inscrutable with references to Hayek and the Gossnab, is about market signals and capital allocation.

Active managers direct investment dollars to companies on the basis of those companies’ research-and-development prospects, human capital, regulatory outlook, and so on. They take new information and price it into a company’s stock when buying and selling shares. If Company A’s stock price tanks when it announces a major scandal, that’s because active investors are selling. If Company B’s shares soar when it announces it’s entering a new market, that’s because active investors are buying.

Passive investors, by contrast, ignore annual reports and market rumors. They do nothing with trading-floor gossip. They make no attempt to research what to invest in and what to skip. Whether holding international or domestic assets, holding stocks or bonds, or using a mutual-fund structure or an ETF structure, they just mirror the market. Big U.S.-stock index funds buy big U.S. stocks just because they’re big U.S. stocks.

That commitment to inertia worries the Bernstein analysts, who point out that in a world with exclusively passive investors, capital will get allocated only to the big companies and not necessarily to good, promising, or efficient companies. A gravitational, big-getting-bigger effect would dominate stock-price movements. At least in a Soviet-type centrally planned economy, apparatchiks would be making some attempt to allocate resources efficiently.

The world the Bernstein analysts fear has not arrived, at least not yet: Passive management is merely a giant phenomenon, not an all-encompassing one. Hundreds of actively managed mutual funds are still out there, as are legions of day traders, hedge funds, and private offices buying and selling and buying and selling. Stock prices still move around, sometimes dramatically, on the basis of new data and new ideas.

Still, passive investing may well be degrading the informational content of the markets, messing up price signals and making business decisions harder as a result. Brogaard and two co-authors, Matthew Ringgenberg, also of the University of Utah, and David Sovich, of the University of Kentucky, have shown as much in a recent paper. They start with a look at a somewhat different kind of index fund: a commodity-futures index fund, which tracks the expected price of things such as gold and copper rather than the current price of Raytheon and Apple shares. Companies large and small base billions of dollars in expenditures on commodity futures. A firm might hold off on buying copper or rush a purchase of gold based on where it expects prices to go.

When one of these commodities ends up on an index, the firms that use that commodity in their business see a 6 percent increase in costs and a 40 percent decrease in operating profits, relative to firms without exposure to the commodity, the academics found. Their theory is that ETF trading shifts prices in subtle ways, making it harder for businesses to know when to buy their gold and copper. Corporate executives “are being influenced by what happens in the futures market, and what happens in the futures market is being influenced by ETF trading,” Brogaard told me.

More broadly, the Bernstein analysts, among others, worry that index-linked investing is increasing correlation, whereby the prices of stocks, bonds, and other assets move up or down or sideways together. As the financial economist Jeffrey Wurgler has written, the price fluctuations of a newly indexed stock “magically and quickly” change. A firm’s shares begin to move “more closely with its 499 new neighbors and less closely with the rest of the market. It is as if it has joined a new school of fish.”

Afar bigger concern is that the rise of the indexers might be making American firms less competitive, through “common ownership,” in which the mega-asset managers control large stakes in multiple competitors in the same industry. The passive firms control big chunks of the airlines American, Delta, JetBlue, Southwest, and United, for instance, as well as big chunks of Bank of America, Citi, JPMorgan Chase, and Wells Fargo. Name an industry with a significant number of publicly traded firms—auto, retail, fast food, agribusiness, telecom—and the same is likely to be true.

The rise of common ownership might be perverting corporate behavior in weird ways, academics argue. Think about the incentives like this: Let’s imagine that you are a major shareholder in a public widget company. We’d expect you to desire—insist, even—that the company fight for market share and profits. But now imagine that you are a major shareholder in all the important widget companies. You would no longer really care which one succeeded, particularly not if one company doing better meant another company doing worse. You’d just care about the widget sector’s corporate profits, which would go up if the widget companies quit competing with one another and started raising prices to pad their bottom line.

The research on whether common ownership is in fact reducing competition is murky, contested, and sometimes contradictory. Still, one major paper showed that common ownership of airline stocks had the effect of raising ticket prices by 3 to 7 percent. A separate study showed that consumers are paying higher prices for prescription medicines because generic-drug makers have less incentive to compete with the companies making name-brand drugs. Yet another study showed that common ownership is leading retail banks to charge higher prices.

Asset managers have pushed back hard, describing this research as baseless and incoherent. “The economics literature purporting to link index funds and higher prices is based on fragile evidence and fundamental misconceptions,” one BlackRock white paper on the subject argues. “It does not provide a plausible causal explanation of how common ownership can lead to higher prices.”

Nobody is arguing that asset managers are facilitating corporate collusion or encouraging managers in rival firms to stop competing. New research suggests that common ownership could alter corporate executives’ financial incentives “without communication between shareholders and firms, coordination between firms, knowledge of shareholders’ incentives, or market-specific interventions by top managers.” Across firms, executive compensation seems to be more closely linked to a company’s performance when its shareholders are not invested in the company’s rivals, the study found. In other words, firms stop paying managers for performance when owned by the same people who own their rivals.

The market clout of the indexers raises other questions too. The actual owners of the stocks—not the index-fund managers but the people putting money into index funds—have little say over the companies they own. Vanguard, Fidelity, and State Street, not Mom and Dad, vote in shareholder elections. As John Coates, the Harvard professor, notes: “For the most valuable public company in the world, three individuals can in principle swing the vote of 17 percent of its shares. Generally, a significant fraction of shareholders do not vote, even if in contested battles. As a result, the 17 percent actually represents more like 25 percent or more of the likely votes in contested votes. That share of the vote will generally be pivotal.” In fact, the Big Three cast roughly 25 percent of the votes in S&P 500 companies.

Another worry is that these firms are too passive rather than too powerful. They are committed to being as lean and hands-off as possible, in order to reduce their fees. They do not tend to get involved in shareholder actions or small-bore corporate management, perhaps in part because any one company doing well against its peers is not of interest to the indexers, who want more assets under management and higher corporate profits.

It’s not easy being big.

Just last month, Senator Elizabeth Warren grilled Treasury Secretary Janet Yellen on whether BlackRock, with its $9 trillion in assets under management, is too big to fail. The Federal Trade Commission is contemplating whether the big index-fund families pose antitrust concerns. Government watchdogs have raised alarm bells about the revolving door, as the Biden administration continues to draw officials from the Big Three. In an interview with The Wall Street Journal, the chief executive officer of State Street said he thought it was “almost inevitable, when you see this kind of concentration, that it probably will make sense to do something about it.”

But figuring out what the appropriate restrictions are depends on determining just what the problem with the indexers is—are they distorting price signals, raising the cost of consumer goods, posing financial systemic risk, or do they just have the market cornered? Then, what to do about it? Common ownership is not a problem the government is used to handling.

Yet, thanks to the passive revolution, a broad variety and huge number of firms might have less incentive to compete. The effect on the real economy might look a lot like that of rising corporate concentration. And the two phenomena might be catalyzing one another, as index investing increases the number of mergers and makes them more lucrative.

In recent decades, the whole economy has gone on autopilot. Index-fund investment is hyper-concentrated. So is online retail. So are pharmaceuticals. So is broadband. Name an industry, and it is likely dominated by a handful of giant players. That has led to all sorts of deleterious downstream effects: suppressing workers’ wages, raising consumer prices, stifling innovation, stoking inequality, and suffocating business creation. The problem is not just the indexers. It is the public markets they reflect, where more chaos, more speculation, more risk, more innovation, and more competition are desperately needed.

The antidote lies not just in fixing passive investment, but in making markets be markets again. Perhaps we could all use a little more of that manic stock-picking energy, not less.

March Wrap and a Year to Remember

MLB isn't the only sport in the USA making changes with the NFL announcing today that the regular season will be increased from 16 games to 17, the first increase in scheduled games since 1978 when the league added two more to make the current 16.  

The plan for at least some of the future game 17s to be played at international sites is reminiscent of the FA's much discussed 'Game 39' plans which, at least so far, have come to naught. Whether these would be officially Neutral games or would nominally have a Home and Away team remains to be seen, but if the latter, in a sport with a short season such as NFL that extra Home game could prove crucial. It will be interesting to see how this bonus Home game is awarded. 

The next NFL season is a long way off however, and more pressing is the 2021 MLB Season which, as mentioned here previously, starts today with every club in action in the first of a planned 162 match regular season. 

For Opening Day games, one winning system over the years has been to back teams that are both the favourite and won fewer games last season than their opponent. Since last season was so very short at just 60 games, this metric may not be so reliable as that across a full season, so invest at your own risk. 

All-time (which for MLB means since 2005) the ROI on the Money Line is 22.7% while on the Run Line it is 53% but the sample size of 60 games is too small to draw any conclusions.

There is currently just the one qualifier for today, but odds can change and it looks like a few matches are missing probably due to doubts over the starting pitcher, e.g. the Boston Red Sox. There is also at least one game looking likely to be postponed for COVID reasons, something that doesn't augur well for the long season ahead.

The NHL System hasn't ended the month in the best of runs with a season high losing streak of six games before last night, which saw one win, one postponed due to COVID and one loss but at least it wasn't as bad a month or losing run as that of the Buffalo Sabres who lost 18 games straight (including two in overtime and one by shootout) to tie the record held by the Pittsburgh Penguins in 2003-04 which was prior to the shootout being introduced.

The ROI for March was a still respectable 5%, despite just the one win in the last eight. 

For the NBA Totals System, March's ROI from just 30 selections (due to the All-Star break) was 7.4%, or 2.23 units. 

The 24.4% ROI for the season is by some way the highest since the point totals started climbing a few years ago.

While making money from sports is fun, it's also relatively insignificant in monetary terms compared to the money to be made from more traditional investments. I mentioned the March 2020 dramas in the financial markets recently, and some year-on-year comparisons at the end of Q1 are interesting:

Unfortunately I was late to the Bitcoin ($BTC) party, but if you are not long Bitcoin then you are essentially short Bitcoin, and I'd rather be long and wrong than miss out as Bitcoin becomes more mainstream and broader adoption and acceptance  drives up the price. Tesla I have written about for a while now, but even the returns from some of the main indexes were excellent, although as readers will know, investing in the UK hasn't been recommended for a while now, continually falling short of the US markets. While 24% YOY might look great at first sight, in comparison with other choices, it's actually very disappointing with a high opportunity cost.

Small differences in return make a big difference over time, for example 100 units invested in the FTSE at the start of this century would now be worth just 96.88 units. Contrast this with the same investment in the S&P 500 which would now be worth 270.04 units.  Not that these differences are necessarily 'small', but even a fraction of a percent as in fees for managed funds versus index funds can make a difference. 

The S&P 500 broke the 4,000 level today for the first time, which is encouraging for the future.

It's also now been 50 trading days since Biden took office, and while he's fortunately nothing like his predecessor who would take credit for up days and stay silent on bad days, the S&P 500 increased by 4.6% during this time for Biden which is a better performance that Trump with 'his' 4.4%.

Good luck in April and Q2.