The reason why is that people are performance chasing and consensus-forming. Let me tell you something: I am a relatively young investor, and I remember the first time I started learning about the stock market, I could not understand why everyone talked about the stock market to mean the S&P500. People would talk about the stock market being overvalued (that's 5 years ago) and I thought: are they talking about US equities or about all stocks? if markets are so efficient, how can US equities continue to outperform for decades? it didn't make sense for me. Logic tells you that at some point, the price should catch up. Perhaps I saw it that way because I was looking at things from a fresh perspective. I learned that the market can stay irrational for very long.
Fast forward to today, and it all makes sense in my mind. The consensus is that US equities are superior, passive investing is the only efficient way to invest, you should buy every dip, not try to time the market, if you think you can do better than the benchmark you are delusional, etc. This is how you end up with so much concentration: passive flows into ETFs end up in mega caps because those mega caps are in a lot of indexes. But this creates opportunities for active investors. You know what is funny? The hedge fund from Bill Ackman (Pershing Square Holdings) trades at a 33% discount relative to NAV. So you can basically buy a high quality portfolio from a guy that has beaten the stock market for the last 20 years, with access to 20% cheap leverage and other many advantages retail does not have, that is even actively involved with management of those companies to make the stocks appear in indices, all of that at a discount. It's really crazy. That is consensus... do not bother beating the market, passive is so superior to active. Why bother?
Thanks Brian. A great article, and I agree 100% with you.
I live in Malaysia, but for me personally my markets are both China and Singapore.
For those who disagree and say China is uninvestable, my usual response is go and have a look.
Visit China, believe me it will rock your socks!
Thank you Jeffrey, glad you enjoyed the read.
Agree - I have been collecting EM names for a few years now. And the potential is enormous.
The reason why is that people are performance chasing and consensus-forming. Let me tell you something: I am a relatively young investor, and I remember the first time I started learning about the stock market, I could not understand why everyone talked about the stock market to mean the S&P500. People would talk about the stock market being overvalued (that's 5 years ago) and I thought: are they talking about US equities or about all stocks? if markets are so efficient, how can US equities continue to outperform for decades? it didn't make sense for me. Logic tells you that at some point, the price should catch up. Perhaps I saw it that way because I was looking at things from a fresh perspective. I learned that the market can stay irrational for very long.
Fast forward to today, and it all makes sense in my mind. The consensus is that US equities are superior, passive investing is the only efficient way to invest, you should buy every dip, not try to time the market, if you think you can do better than the benchmark you are delusional, etc. This is how you end up with so much concentration: passive flows into ETFs end up in mega caps because those mega caps are in a lot of indexes. But this creates opportunities for active investors. You know what is funny? The hedge fund from Bill Ackman (Pershing Square Holdings) trades at a 33% discount relative to NAV. So you can basically buy a high quality portfolio from a guy that has beaten the stock market for the last 20 years, with access to 20% cheap leverage and other many advantages retail does not have, that is even actively involved with management of those companies to make the stocks appear in indices, all of that at a discount. It's really crazy. That is consensus... do not bother beating the market, passive is so superior to active. Why bother?
Fantastic post. Very interesting stuff here, thanks.
Thank you Joel! Glad you enjoyed it
Imo is an error.
To avoid to take action and just wait years (you wrote 2) until the scenario gets better, is a waste of opportunities.
One system that works in every condition is the solution