• Star Magnolia Capital

Another Day of Being Passive-Aggressive

Updated: Mar 30


By Shinya

From Singapore


More than two and half years ago, I wrote an article titled Days of Being Passive-Aggressive.  https://medium.com/@shinya.deguchi/days-of-being-passive-aggressive-8257f578379f

I was worried about increasing influence of passive investments, or ETFs. They were created as a vehicle to own assets, however, more and more people use ETFs as a tool to trade because it's very liquid. Historically, even on a very bad day, some stocks are up and other stocks are down, because as stock price goes down, value investors will step in. Today, investors pay less attention to the valuation of companies and want to trade the markets. Exhibit 4 from the article shows the trading volume of ETFs and VIX are highly correlated. So, you can say, ETFs are creating volatility.


In my view, the market is broken because there are not many fundamental investors. A good example is Tesla. The price movement looks very similar to bitcoin about 2.5 years ago. We now know they were speculations. 


I also remind you of my past article called "Thoughts on Catastrophic Losses and a Hidden Risk of Diversification" in Jun 2016 ( https://medium.com/@shinya.deguchi/thoughts-on-catastrophic-losses-and-a-hidden-risk-of-diversification-4cb5d6fd201b). The article was based on JP Morgan Asset Management's excellent research paper called "The Agony & Ecstasy - The Risks and Rewards of a Concentrated Stock Position." The paper concluded: 


We agree with the first two conclusions while we have a different view on the third. While diversification is an important tool to manage risks, excess diversification will also be harmful for long-term wealth creation. Our Endowment Approach suggests that we should diversify our portfolio by asset class and geography, but our managers should manage rather concentrated portfolios.

As we observe the bubble created by Softbank and excessively optimistic investors in tech is bursting, it is a good time for each of us to go back to the fundamental and think which company can generate a long-term superior return. Some tech names can come back sharply as ETFs buy up whatever the stocks are, but it doesn't mean these businesses are creating long-term values to shareholders. 




 

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