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Weekend reading: Terror of Tesla

What caught my eye this week.

Alas my co-blogger The Accumulator is too recumbent passive to bother with anything so energetic as sorting through the several hundred spam emails we get to Monevator each week in order to dig out reader messages.

That means the readers who asked for our thoughts on the upcoming inclusion of $470bn electric car maker Tesla into the S&P 500 don’t get his comfy and sanguine words.

Instead they get my snark.

Let me first stress then that we’re flattered when anyone asks our opinion.

Any snarkiness is just to liven up a dull autumn morning – as well as the potentially (whisper it) less than exhilarating subject of index investing.

Musky smell

Hold up: haven’t we often stressed that passive investors should have an understanding of what’s under the hood of their funds?

Superficially, then, doesn’t it seem logical to be alarmed that a controversial and apparently bonkers-overvalued outfit like Tesla would garner a share of your retirement pennies? That a portion of your passively invested pension could be under the sway of Elon Musk, some people’s idea of a Marvel super-villain?

Superficially logical, but in my view a misplaced concern.

I don’t just say that because I’m a big fan of Tesla and Musk.

Nor even because I first bought (a woeful few) Tesla shares around – cough – $30, or about $7 in today’s money.1 [1]

No, worrying about Tesla as a passive investor isn’t warranted, in my view, because passive investors should just be passive investing.

Why? Let me count the ways:

It doesn’t matter – Ben Carlson has done [2] the sort of deep dive some are probably looking for on Tesla’s inclusion in the S&P 500. Ben points out Tesla will likely make up about 1% of your S&P 500 holdings – and much less of your portfolio taking other regions into account.

You can’t put a price on Tesla – Why should a passive investor feel at all confident saying Tesla is overvalued? The theory behind passive investing is the market’s best guess – on average – is the one to go with. Your edge is you think Tesla shouldn’t be worth multiples of veteran car companies who make multiples more cars? Or that Elon Musk is a blowhard? People have been saying that for 10 years. Incidentally, you’re in good company – it’s nothing personal. I hope Ben doesn’t mind me mentioning that he and his sidekick Michael Batnick were laughing about the supposedly absurd valuation of Tesla since they began their Animal Spirits podcast. They’ve been wildly wrong.

Maybe Tesla is overvalued, but what are you going to do about it? – My faith in Tesla could be misplaced. I’ve been wrong about plenty else before and it is harder to be confident of decent returns from this high market cap. Maybe it is in a bubble. But what action will you take if it is? Short the stock? Abandon passive investing for active stockpicking? Even if you’re right about this one stock, are you going to be one of the few who is right about enough other stocks to beat the market? Have you got the time, passion, and energy to find out? No, no, no. Stick to index funds and enjoy a new series on Netflix.

You probably only care about Tesla because it’s famous – Maybe you’re a passive investor who has dug into hundreds of boring companies despite only buying index funds. But it’s likely you know about Tesla because it makes fancy cars and its founder is always in the news. You should understand there’s all kinds of shenanigans, crazy-seeming overvaluations and under-valuations, and things you wouldn’t think you’d want to touch with a bargepole whirling around the indices all the time. You just don’t know about them. For instance infamous hedge fund manager Bill Ackman has a closed-end trust that owns billions of dollars worth of his hedge fund alongside a ten-figure investment in a ‘blank cheque’ SPAC vehicle that is going to go and buy a totally undisclosed target. This trust is knocking on the door of FTSE 100 inclusion. Most passive investors would run for the hills if they looked at it, but they’ll never know about it. (Disclosure: I own a few shares in it.)

We’ve seen this before with Facebook – Same deal! Although it’s mostly forgotten now. Facebook’s valuation was said to be ludicrous. The profits were generated out of the thin air of the Internet economy. The CEO was a kid. The shares were in a bubble. Only they’re up about five-fold since it floated. Oops! (The Accumulator wrote a great post [3] on the fears around Facebook joining the market at the time.)

If you really want to fret, worry about why you didn’t own Tesla when it was 50-times cheaper – It’s very easy to fear what you own going down. But how many passive investors fretted about whether their index fund owned Tesla all the way up, and if not what gains did they miss out on? To their credit one of our querying readers noted they already owned Tesla via their choice of a very broad index fund, and rightly saw this as a demonstration of the value of wide diversification.

Again, I’m glad we are considered a resource worth directing such questions to. And I mean everything above in the spirit of tough love.

Sure I could go into the mechanics of Tesla’s inclusion (and hitherto exclusion) from the S&P 500, the free float impact on its weighting, or even the risk of hedge funds front-running this well-signposted index addition.

But I really don’t think any of that matters for 99% of readers.

The winner takes all

Nobody denies that some duds get into the indices. High-flyers that prove to be too expensive, too faddish, too crooked – who knows?

But passive investing isn’t the most successful way for most people to invest because it is a strategy that somehow sidesteps landmines in the market.

Passive investing is not, in other words, great at active investing.

Passive investing works because after fees, on average [4], the typical active fund won’t be great enough either to do better than a warts-and-all passive fund2 [5]. The passive fund will probably beat the active fund alternative, and even if it doesn’t it’ll deliver very near the market return.

Passive investors do better than most active investors not by being cleverer in their stock selection, but by being clever enough to know their limitations.

The crazy thing is it’s a ton less work and stress than active investing, too.

Why spoil a good thing by worrying about micro-details?

Have a great weekend all!

From Monevator

Our updated guide to help you find the best online broker – Monevator [6]

A coda to my mini-bond confession – Monevator [7]

From the archive-ator: Investing for beginners: Time value of money – Monevator [8]

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!3 [9]

Sunak faces backlash over public sector pay freeze – BBC [10]

Government announces 10-point plan for a ‘Green Industrial Revolution’ – UK Gov [11]

Rents in British cities fall by 15% in Covid exodus – Guardian [12]

Lump sum pension withdrawals leap 94% as households suffer income shocks from Covid-19 – ThisIsMoney [13]

The Sharpe ratio is much misused and misunderstood, and its successors don’t add much value – Institutional Investor [14]

Products and services

Nutmeg joins with JPMorgan to offer smart ethical tracker fund range – ThisIsMoney [15]

What the Government’s ‘Green Revolution’ means for our homes and cars – Guardian [16]

Fintech start-up Lanistar’s secure debit card promotion attracts the attention of the FCA – ThisIsMoney [17]

Do you need a good credit score to get a COVID-19 home test? – Which [18]

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade [19]

Virgin Money offers 15 bottles of wine and 2% interest on balances up to £1,000 – ThisIsMoney [20]

Corporate landlords are muscling into the residential lettings sector – ThisIsMoney [21]

There are now 24 crypto assets with a market cap of over $1bn – AVC [22]

Homes for sale in former vicarages, in pictures – Guardian [23]

Comment and opinion

Inkblots – Klement on Investing [24]

Early retirement: Boring – Finumus [25]

Wealth tax risks worsening defective CGT system [Search result]FT [26]

Getting comfortable with your ‘enough’ – The Evidence-based Investor [27]

Menopause: another reason to become financially independent – Quietly Saving [28]

The biggest stock market reversal in history – A Wealth of Common Sense [29]

Can active bond funds keep repelling the indexers? – Morningstar [30]

The lifecycle of investing factors – Valididea [31]

Naughty corner: Active antics

Merryn Somerset Webb: the coming commodities surge [Search result]FT [32]

The case against using CAPE for relative valuation across markets – EconomPic [33]

Bitcoin is gunning for a record and nobody is talking about it – Bloomberg via MSN [34]

Four things Warren Buffett does that most investors couldn’t or shouldn’t – Valididea [35]

US small caps experienced maximum pain in 2020 – The Irrelevant Investor [36]

Bright side to the virus mini-special

We have no idea what happens next – Morgan Housel [37]

Is the vaccine our One Giant Leap? – A Wealth of Common Sense [38]

COVID-19 pandemic and its positive impacts on environment: an updated review [Research]Springer [39]

Covid and politics

Note: Any comments on Covid should only go on our special thread [40], please.

Mass coronavirus testing in the UK: An unevaluated, under-designed, and costly mess – BMJ [41]

Oxford study: Covid reinfection highly unlikely for at least six months – CNBC [42]

Moderna’s vaccine looks extremely effective, reducing infection by 94.5% in trials – Stat [43]

New York is closing schools again, despite most evidence showing schools don’t drive infection spread – The Atlantic [44]

More from a US epidemiologist on reopening schools safely – Vox [45]

Spending splurge before lockdown reveals our true feelings [Or, a Guardian veteran finally understands people]Guardian [46]

Can daters trust an ‘antibody positive’ claim? – Scientific American [47]

Danish Covid mink variant very likely extinct – Guardian [48]

Pay people $1,000 each [!] to get vaccinated to achieve herd immunity, argues economist – Yahoo [49]

A fully reopened economy will require digital health passes – Abnormal Returns [50]

Mock Covid-proof cruise trials attract thousands of volunteers… – CNN [51]

…but elsewhere the first cruiseliner to return to the Carribbean just returned to port due to, ahem, Covid – Guardian [52]

Donald Trump’s potential criminal liability is the key to understanding his presidency – New York Times [53]

Kindle book bargains

You don’t have a Kindle? Get one [54] – they’re great and save a ton of space.

The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone – £0.99 on Kindle [55]

Putin’s People: How the KGB Took Back Russia and then Took on the West by Catherine Belton – £1.99 on Kindle [56]

Happy Money: The Japanese Art of Making Peace with Your Money by Ken Honda – £0.99 on Kindle [57]

The Finance Book: Understand the numbers by Stuart Warner – £4.19 on Kindle [58]

Off our beat

How to design the perfect day… – Rad Reads [59]

…versus the omnipresence of work – More To That [60]

And finally…

“Things that have never happened before happen all the time.”
– Morgan Housel, The Psychology of Money [61]

Like these links? Subscribe [62] to get them every Friday!

  1. Don’t worry, I botched my trading as I got jittery and dithered a few crucial months when defusing [65] the gains and moving it from outside to inside an ISA, so I didn’t enjoy all those crazy returns! [ [66]]
  2. Really the average pound invested, but that’s niggly for this post [ [67]]
  3. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [ [68]]