If I had a rock band, I would be tempted to name it “Tracking Error.”
There are so many good names for rock bands. The sheer magnitude of data casts uncertainty on what I’d call it. I used to keep a list. “Parking Lot Campers” is a great name. It came to me driving by some people in RVs camped in a parking lot.
Casting certainty into doubt is the definition of “tracking error.”
We’ll be seeing our beloved Band of Horses next month at the Denver Botanic Park. In Steamboat later come The Wallflowers helmed by Bob Dylan’s wildly talented son Jakob. Back in Denver, Soccer Mommy. I would not have picked that name.
Forget music for a moment.
Let’s say you’re an investor-relations officer, a c-suite officer, for a public company. Your job is to create shareholder value. How do you do it?
Well, you tell the story to investors who recognize your unique value proposition.
You target those who get the total addressable market and how you plan to win market-share. They like your CEO and his previous experience. Your CFO is a rock star. Your chief technology officer invented the whatchamacallit that’s patented.
How much money does that audience have to spend? Do you know?
There’s a big space between that audience and the Blackrocks of the world following models.
I talked to the global head of trading for Russell yesterday. The people behind the index rebalances that’ll culminate June 26, after the S&P rebalance June 18 (the stock market is closed Friday June 19).
He runs trading, not indexes. But he was talking about “tracking errors.” How much error is permissible versus a benchmark when accommodating, say, the exclusion of carbon?
“Tracking error” means deviation from a measure. Say you’re driving down the highway. Do you keep it between the lines. What’s your tracking error?
I described how public companies visualize driving shareholder value. Story. Targeting. Execution.
Look, I love all that! It’s business. What’s our unique value proposition? Who do we target? Now, execute on the business plan and drive growth and financial returns.
It’s my life. It’s what I do.
But it’s not how a stock market built on tracking errors works, nor how you drive shareholder value in that market.
What market? The one where 20 stocks are 55% of market cap. What’s the market cap of the Russell 1000? Do you know?
More importantly, how much of the trading volume in the Russell 1000 is “Active?”
Don’t know? Ask us. We are the source of vital data for public companies. Traders buy proprietary feeds from exchanges to know what you don’t. Well, we have proprietary data that’ll tell you what they don’t know.
(Investors, same for you. If you’re not trading Demand/Supply imbalances, you’re trading like a cave man. Demand it from your broker!).
The Russell 1000 is 96% of market cap. You need $6.8 billion currently to get into it, issuers. Why does that matter? Because it’s where the money is. You need a formula to get into that group and move up the ranks. Go where the money is.
And the money is motivated by whether your shares prevent or cause tracking errors.
When you report earnings, do your shares gyrate? If so, you need to fix that. It’s a tracking error. We can help you.
Passive money buys a SpaceX IPO every month. The money you’re targeting with your story sells half a SpaceX IPO every month. Not because it wants to. Investors shift out of Active funds to leveraged ETFs and options, and Passives.
So have a SECOND strategy for the stuff that you can’t target. Be a product. Try to deliver a stock with low tracking errors. Because Blackrock and its Passive brethren buy $75 billion a month. You win a piece of that not on story but on tracking errors.
We know how to do it.
Let’s wrap with this: Kevin Warsh will hold his first press conference as Federal Reserve chair today (can’t say I know him but I have traded emails over the years). And for the first time, I’m older than the Fed chair.
He might change everything. I wish the value of our money was the most important consideration. Janet Yellen was the first to suggest we should devalue it. Ben Bernanke was the first to set an inflation target cementing what Keynes described as the secret confiscation of your wealth. We trade our time for money, which inflation steals.
Maybe Kevin Warsh can fix it. That’s a lot to ask of one person. But imagine if we could as investors stop relying on the stock market. And companies, you might use it again to raise capital instead of prediction bets.
And everything might be good again. We can get there. It’s the space between that concerns me.
