Vanguard founder Jack Bogle said to own the averages. Index funds.
That seed germinated into a tree that filled the investment world. Look at Blackrock. More on Larry Fink in a moment. Most of the top 25 owners of US stocks follow models.
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The constituency that hasn’t yet drawn the line from index-investing to how stocks are valued is public companies. We haven’t learned that being average is superior.
Let me explain. Do you know what Netflix, Electronic Arts, Disney and Google have in common?
They’re all Communications Services stocks?
True. They’re also all low-volatility stocks. Volatility is the bane of your existence, public companies.
Tell me about it, you say. I hate it when our stock drops 15% on earnings.
Exactly. But why does that happen? And what can you do? By the way, teaser: I’m organizing a panel for the NIRI Annual Conference on Rethinking Earnings for precisely this reason. Stay tuned.
Are you following me here? Vanguard et al buy the benchmark. It’s beta, not alpha. The performance of the market, not something intended to beat it.
Are you trying to beat the benchmark, public companies, or be it?
NFLX has risen from $346 October 18 last year to about $630 now. And during that rise, volatility dropped by half. Suddenly NFLX has volatility attractive to Passive money.
Wait. What? NFLX is owned by Passives the same as every other stock.
Sure. But now it’s a core equity that can be used by either Value or Growth money. Passive Large Cap Blend is the herd, the majority now of retirement equity assets.
NFLX has become the benchmark. When it was alpha, it could lose a third of its value in a week. That’s no good for Blackrock, or anyone else for that matter. But especially Blackrock needing the benchmark (beta isn’t volatility, it’s the market’s general performance).
NVDA’s volatility is nearly twice the level of the S&P 500 despite almost $3 trillion of market cap. Unless that changes, the herd will abandon it at some point.
Because volatility is boom or bust. AMD, SHOP, TSLA, also have excess volatility and a harder time finding staying power.
Heck, AAPL just joined that club. AAPL’s volatility now exceeds the market’s average, and that means it’s harder for arbitragers keeping stocks and ETFs aligned to use it as a proxy for the market.
Every CEO wants to be seen crushing expectations, creating growth, driving value. Earnings releases are peppered with “record” and “growth” and “momentum” and “gain.”
I get it.
It’s not that results don’t matter. Drawing attention to them, however, could have the reverse of the desired effect. Maybe it’s like skipping the celebratory dance in the endzone after the touchdown.
Larry Fink was out talking about how retirement for many is a problem. We need to give Larry Fink more money to solve it. Paraphrasing. I’m not knocking his point – that a secure retirement is increasingly elusive because people don’t save enough.
(The problem, though, isn’t that we don’t have enough money. The problem is the value of our money leaks away like sand in an hourglass because of the Federal Reserve’s inflation target and the government’s excessive spending. The only solution is money that isn’t an hourglass.)
If we give Blackrock more money, it’ll buy stocks as the benchmark. The benchmark is typified by the absence of volatility. The real money, the real size, the real whales, need stocks that are stable.
Similarly, economies need stable currencies if businesses are to accurately differentiate demand from supply. Currencies that devalue or gyrate lead to poor business decisions around deploying labor and capital.
And in the stock market, gyrating shares harm the herd.
Some volatility you can’t control. The market is fragile and fast-moving and it does bizarre things behind the scenes. Like the recent collapse in shorting in SPY, proxy for the S&P 500, and corresponding surge in Fast Trading, plunge in Passive flows. Impending volatility? Maybe.
Reporting earnings during expirations is bad. Expect volatility. You harm your holders. Don’t report when Jay Powell is speaking. Read the FOMC schedule. It’s not hard.
The other thing that creates volatility is what you report in machine-readable format. Give data to machines to use in split-seconds and you will be arbitraged, up or down. Give the market tables and statistics, and you’ve just dealt it a poker hand to bet on. Expect your stock to soar or plunge. Neither thing is good.
Public companies need to learn to do the opposite of what they used to do when all the money was actively managed. Rather than trying to be the outlier, become the platform, the plank, the standard, the core.
And shed volatility (we can help). That’s what money wants.
