December 24, 2018
What We’re Reading This Week
Get it? Bit-con? Is that a “dad joke?” Probably. Anyway, I usually write about things I’m reading throughout the week. This particular note is here specifically because I’m NOT reading much about bitcoin right now. As devout readers will remember, I am not a fan of bitcoin. All the things I said before are still true today – it’s very hard to assign a value to something that has no intrinsic value. I also postulated that bitcoin’s only real value was its ability to allow for anonymous transactions, i.e., crime. Is it a coincidence that bitcoin prices have fallen over 60% since U.S. regulators subpoenaed one of the world’s largest bitcoin exchanges in January? Eh, maybe.
Certainly, some things are worth more than their intrinsic value. Take Amazon, for instance. The online retailer is currently trading at over 90 times its earnings. Could Amazon be scrapped for parts totaling $811 billion? I doubt it. Is it worth $811 billion as a company? A lot of people seem to think so. It’s just that bitcoin has absolutely no intrinsic value whatsoever. This is where investing starts to look like speculating.
I mention this as the market is roughly flat over the past 12 months. Many other asset classes are severely down, and some suffered double-digit losses. For Gainplan, as a firm that specializes in risk management, this is an interesting landscape to be in. Likewise, as clients of a firm that specializes in risk management, you are also in a unique position. When the market runs up, it’s very easy to quantify how much growth you captured, but how do you measure the loss you didn’t suffer? It was roughly one year ago that I was receiving calls from clients about bitcoin. What is it worth to receive advice to not buy bitcoin? The cryptocurrency has lost almost 80% over the last year.
It’s easy to benchmark performance against a hypothetical index that you can’t buy. For investors that want to compare their portfolio to the S&P, I would argue that is a pointless comparison as most people would never invest 100% of their money in the S&P. That being said, how do measure yourself against investments you didn’t make?
As always, if you like bitcoin, please don’t email me about why you like bitcoin.
Index Funds Are Bad
There has been some talk over the past few years about whether or not index funds are bad for markets and by proxy, capitalism. Specifically, that index funds create a Marxist structure whereby ownership and influence is taken away from the people.
Indeed, even “Father Index Funds” himself, Jack Bogle, suggests passive investing could pose a problem for capital markets. Bogle wrote in The Journal last month:
“It seems only a matter of time until index mutual funds cross the 50% mark. If that were to happen, the ‘Big Three’ might own 30% or more of the U.S. stock market—effective control. I do not believe that such concentration would serve the national interest.”
I’ve written about this here before. For funds purporting to replicate an index, there is no choice about ownership. An S&P 500 fund must buy the components of the S&P in order to be an S&P index fund. As more and more investors choose to put money into those funds, the fund companies are forced to buy more and more shares. To Bogle’s point, at current rates, eventually the three largest fund companies would hold enough shares to seriously impact corporate governance. Why? Because these same funds companies have the right to vote their shares. There is no guarantee that such votes would align with the public’s interest or even the interest of the companies themselves.
Bogle’s article goes on to mention several different solutions, which range from fairly benign to extremely radical. Most recently, the FTC convened to discuss the anti-competitive risk of index funds on the market. The slides can be found here.
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