Sending the reading out early for obvious reasons. Keeping it shorter than usual too. Have a happy, healthy, and safe Thanksgiving everyone.
The Greatest Story Ever Sold - Mike Green
NOTE: Just a reminder (full disclosure below) that all posts are included here for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments.
Passive Investing is traditionally presented as a clear and unquestioned ‘good’ for investors because it reduces costs and improves access. But what is the long-term impact?
There are plenty of thought pieces about the failures and weaknesses of passive investing. I have not seen anything that comes close to the degree of depth, detail, and quantification as this video by Mike Green. It is an incredibly detailed analysis. Please take your time and go through it carefully. Slowly digging through this video is a productive way to spend the Friday after Thanksgiving!
- “The arguments behind passive investing are built on assumptions of how markets behave which are just not correct.”
- “44% of total market cap in the US equity markets is tied to passive strategies.”
- On the XIV reverse volatility ETF…“The strategy itself had become so crowded that we were seeing evidence that it was creating its own feedback loop… XIV and related products accounted for about 70% of the trading volume on any normal day within the VIX futures market.”
- Passive flows impact markets in the following ways
- Increased correlation between securities
- Higher valuations for securities, regardless of fundamentals
- ETF flows represent a perpetual, price agnostic bid for all securities.
- Markets with active managers will exhibit mean-reversion. When passive takes over mean-reversion breaks down.
- Reduced market elasticity which increases the risk of extraordinary price movements
- AMC, GME and the meme stocks are the obvious example of this.
- AMC is currently the largest holding in the Russell 2000 Value Index. ETF juggernauts Vanguard, Blackrock and State Street account for over 17% of all AMC shares held.
- Increases market concentration/momentum bias. In other words, ETF flows help the biggest stocks get bigger.
- AMC, GME and the meme stocks are the obvious example of this.
- His commentary connecting futures weighting and the tech-bubble (~22:00) is completely unique and thought provoking.
- “If we look at the current market structure today, all the money that is coming in is passive. And the money that is going out is active. So on a flows basis, the marginal behavior is no longer fundamental in nature. The vast majority of activity no longer has a fundamental signal to it.”
- “What we’re seeing in markets is not a fundamental economic signal. It’s not telling you something about the economic prospects of the United States. This is a byproduct of a mechanical change in market structure. And more frightening, are policy makers, like the Federal Reserve, are increasingly relying on the signals from our markets to drive policy decisions.”
In total, the message behind this one is pretty shocking. I’m still mulling over the long-term potential impacts of what he is saying.
Amazon Aggregators
- Interesting thing to look out for as you do your Christmas shopping. How many of the top brands in the search results are third-party private label?
- I realize Amazon is huge and supports many other business and industries that exist in and around its ecosystem but I had no idea how huge some of these third-party sellers have become. Thrasio, the largest acquirer of third party private labels is on track to earn $1 bil in revenue this year.
- After initial successes, competition intensifies, margins contract, and supply chain complexity increases. At this point, most third-party sellers stall out and become a target for these acquirers.
- By bringing supply chain expertise and cost-saves, these third-party brand aggregators are able to consolidate tiny players.
- Leveraging Amazon has several advantages.
- Amazon, as a platform, is where many internet buyers begin their search. This removes the risk that the brands are not ‘discovered’ by the consumer.
- Amazon’s plug-and-play approach where AMZN hosts the data, manages fulfillment etc means that these acquisitions are highly standardized. This means many aggregators can close within 30 days!
- This is also a pretty under-the-radar part of the market. Multiples don’t seem that high… But if the business is half as good as this article suggests, multiples won’t stay low!
It's the Little Things
Woke up to our first snow this morning (pretty late in the season by Rochester standards). The girls couldn’t wait and went out to play before breakfast. It’s the little things.
