YouSaid · the spoken record

Steven Bregman

lines on the record: 132
first: 2021-12-28
most recent: 2021-12-28
sittings or episodes: 1
sources: podcast

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“Okay, so I really like this game and a full disclosure. I looked at this because you sent it about an hour before we started, but I do not, I honestly, you know, I do not actually remember it. And while you were talking, I was resisting the urge to do it. But like you said, I've been studying markets and interviewing. So let's see. I know 2000-2008 net net was pretty much a push, but 2009 to now has been so good. So, I think it's been pretty good. 12%”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Basically, that's a benefit too. So that's the background, and it helps you understand why we now have record high, and we think unsustainable, profit margins to the S&P 500s companies. So now that is the background, if you hadn't looked, and if you didn't know, because this is what you do for a living, what does someone think the iShares, I use the iShares because they have a consistent methodology across all of their funds and they have the whole range of funds and they were the earliest so they're a natural place to go. I'm not picking on them, they're actually a resource. The ISHAR's core SP 500 ETF, it's been around for 21.4 years. It started in May 2000. What do you think the annualized return has been?”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Very good. And by the workplace efficiencies that would have been enabled by all the information technology companies, data processing apps, cloud services, and think of the decade, give or take, of declining commodity costs, meaning declining raw material costs for businesses in the S&P 500, all the consumer products companies. So just take Coca-Cola as one example. It benefited over 10 years from lower sugar costs for its syrup, lower aluminum costs for its cans, lower diesel costs for its vast fleet of delivery trucks. And in fact, the cost of delivery trucks has been a benefit to Coca-Cola and or its bottlers because between 2000 at the beginning of this era, we'll call it, and 2020, I understand the average inflation rate of new car and trucks rose by an annualized 0.18% a year.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Got the consistent ongoing decline in 10 year treasury yields from 6% in mid-2000 to about 1.4% today. And that's beneficent not just for valuations like PE ratios, those going up, but it contributed to net profit margin expansion because companies could continually refinance their higher cost debt, replaced with lower cost debt. Think of the tremendous amount of share repurchase activity that's been written about so much in recent years. Think of all those manufacturing efficiencies that was vanguarded in a sense by Apple's global supply chain development. They were like the first and the best at it. And by the workplace.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“For stocks. Okay, so if we go through it, if you think about it, the first iShares ETS came out in mid 2000, year 2000. And what do we have in this last 20 years? We have, amongst other things, a 10-year-plus bull market from March 2009 to January 2000. And if you might decide it's okay not to count the 10-month pandemic drop, because the S&P fully recovered between January of 2020 and November, then it's a 12 and a half-year bull market. You have the rise of mega-cap companies like Facebook and Amazon and so forth. You have the rise of the information technology and social media companies, which are the most profitable, margin-wise, as well as in pure dollar volume of any large companies in history.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“The debate over whether they are much, much better than active management or not, that question's been answered if you think 20 years, two decades is sufficient time. So don't show this slide yet, because maybe the audiences will... GIS along with us. I don't know, or maybe it'll just be irritating to them. So let me just describe, before we look at, we ask for annualized return figures last 20 years for a variety of different classes of ETF sectors. Consider just how good. Just how good the last 20 years has been for”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And more or less, we've gotten down to these artificially low near zero rates. And that's been happening worldwide. So that's another reason that returns have converged. But in terms of the debate about, I'm going to play a little game with you. It's not a fair game. It's fixed. The audience knows it's fixed. I originally wanted to do this with you without showing you the exhibit first. And I was going to ask you to guess. And I would have told you, look, there are no wrong answers. Just take a guess. Even though you're pretty well studied, you probably would have gotten some right. But I was going to ask you to guess. Now that there have been 20 years of index returns, ETF returns.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Have been converging over time. That's not the only reason. Probably a more important reason, or at least as important reason, is that interest rate policies by the world central banks have also been converging in the last 10 and 20 years. And differences in monetary policy dictated a lot of the differences people saw between economies. So Spain was going up while Italy was going down, while Germany was flat and America was doing something else. But the whole world is, in terms of the major economies, all the central banks are doing the same thing. And they've brought interest rates lower and lower and lower. 20 years ago at the beginning of the modern indexation boom, starting with the first ETFs, iShares rolled out the whole bunch of the first ETFs. 20 years ago, interest rates were 10-year treasury and it was 6%.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Than has ever been the case in its history. There's actually been a crowding out effect. Actually, before I get there, before I get there, just to go back one second to the whole weight of money of all these inflows into the indexes and the idea that the indexes, they're just simple rule sets. Money comes in, they buy more of what they got, period. So, if that's the case, and they're all buying the same kinds of companies. What's happened is. Not only because of this factor, but it's one factor among others, is that the returns amongst different nations in terms of different sectors geographically?”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So that's one aspect of diversification. Another one is sector diversification. Can you talk about what the S&P 500 or other indices looked like in terms of their, you know, a percentage was utilities, a percentage was technology, a percentage was energies, and how it has evolved over time. In particular, you've noted that the composition of the S&P 500 of energy stocks as well as gold miners is extremely small. And of course, both of those stocks to some degree in a rough sense, you know, benefit from inflation. So if we have a huge run-up in inflation, then the S&P 500 might be poorly poised to handle that.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Yes, it's basically relatively indistinguishable from all the other global multinational companies. So in this fund, a lot of people have it in this 401k is the MSCI EFA index. It's the major international index and the various ETFs that mimic it or mirror it. Coca-Cola is a top 10 holding in it. And Coca-Cola and Pepsi together are right next to each other among the top 10 holdings. And Nestle's is the largest holding in the MSCI index. But they're pretty much the same. Not really being diversified. It's only semantic diversification. So the problem is that people might think they have diversification against risk or that Europe will go up while US is going down. And it's not really so.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Right, when portfolio managers or asset allocators buy a Germany fund, they're saying, okay, X percentage of total holdings are allocated to Germany. So that's corresponding to the economy of Germany. So when the German economy is running hot, Daimler should do well. But you're saying if only a small fraction of the sales are in Germany, demand ultimately is what matters. So it is extremely dependent on the economic conditions in other countries. So it is nowhere near as diversified as it appears.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“You know what? It turns out that Nestle has got some more of its revenues from the United States and Coca-Cola does. So you've just increased your exposure to Nestle's. Because Nestle's is not really a Swiss company other than by virtue of where it's incorporated. It's really a global multinational. And I dare say if Nestle somehow committed some kind of corporate crime or malfeasance that the Swiss government really didn't like, it forbade them from ever selling another chocolate bar or tub of infant formula in Sweden, I mean in Switzerland. I don't even think it would be a rounding error. On their income statement, because what's the population of Switzerland compared to the world? It's around her.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“But if the index had to buy, let's say, a half percent position or a quarter percent position or a tenth percent position in them, it might overwhelm them. They might become the largest shareholder of some of those companies. So they can only afford to own something huge. Basically, what are these? They really have something in common, which is that they can all be characterized as... Large cap or mega cap global multinational companies. That's what they are. And in a sense, if you think about it, how much different is buying Than buying Merck, or how much different is buying Daimler-Benz than Ford? For instance, what if you were to decide as a U.S. portfolio manager, I would like to have more in outside the United States. So I'm going to sell some of my Coca-Cola and I'll buy some Nestle's.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“The sales of all of these companies come from outside of Germany. Now, isn't that something? So you want to invest in Germany and you're actually investing in not Germany. Why is that? These very, very large companies, and there's so much money in ETFs and index funds that they really can't afford to, if they try to buy some of the, probably many interesting local companies in Germany that get substantially all of their earnings from Germany, could be very interesting. They might be very cheap.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“You want to have some international diversification, generally speaking, and maybe Germany was particularly inexpensive. I don't know. But if you look at the Germany ETF, I just took that one. And you actually knew what the results would be. So, the 10 largest holdings are 64% of the fund. So, first of all, it's not actually diversified. That's what indexation is supposed to give you. The original S&P 500 mutual fund was pretty representative of the broad diversification of industrial profits by sector throughout the economy. So, this is pretty concentrated. But now look at the total sales of each of these top 10 companies that come from outside of Germany. And basically, something like 80%.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And I looked at the five largest fund holdings. They're all index funds. And I knew pretty much immediately what was in them. But for this person's benefit so that he could understand it, I made a couple of charts for him to show him this difference. He had the Schwab strategic large cap fund, which is pretty much the S&P 500. He had the Schwab US dividend equity fund, which is more higher dividend paying blue chip kind of companies. He had a financial sector fund. He had the core MSCI EFA ETF. That's the major international ETF. EFA stands for Europe Asian Far East. And for some reason, they also had a German ETF. And I presume the... Idea is that”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Take a look at it and see if I had anything interesting to say about it for the person. And it's fairly large account. And it had what would be considered a pretty standard diversification plan. And no doubt any person reviewed it would think it's probably pretty rational.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“That determine the price. And if the last hundred shares was a buyer paying more, the price went up. So for the last 20 years since indexation really started, but certainly the last 10 when it got bigger, the marginal trade every single year in the sense has been a net buyer by the indexes. And money has been coming out every single year from active managers, active managed mutual funds and other individual account managers. And so they've been net sellers. So, the kinds of stocks that active manager zone have been subject to constant sales. The popular stocks, the ones at the top of the indexes, which the indexes own and buy more of because more money is coming in, they've been the marginal buyer. Now this very month, meaning a couple a week ago, week and a half ago, I was asked to review somebody's 401k.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Been flowing into them every single year bar none, even when the total stock market went down. How did that happen? Because money has been flowing out of actively managed funds and going into these. So in terms of prices being made on the margin, there's an idea, and it's a true one, which is that it's the marginal trade. Could be a million shares traded of a certain stock during the course of the day, but it's the last hundred shares.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“They have the same total market value as the bottom 400 plus companies. So what happens is people think the index is a diversified exposure to the broad economy. That's what it was originally intended to do. But today you've got this crowding out effect of the largest, these so-called mega cap companies, we'll call them the trillion dollar club, where they have trillion dollar market values. So the top 10 have the same total market value as the bottom 418 stocks in the S&P 500. So the S&P 500 is not really diversified anymore. It's not giving diversification. In fact, I give you some very, very interesting examples of how people are inadvertently misled. That's just the annual inflows, net inflows, into ETFs. And basically money...”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“I think in 2020, which was a new record, there might have been $500 billion of net new funds going into indexes. And this year to date, I think we're over $800 billion. So that's constant flow of money. And ultimately, there can be some problems. There are already some interesting distortions that have occurred. Not least of which Is that And this is a subtle thing. There's so much money in indexes now that. They can't actually They're too big to buy and transact in any but the largest companies with the most trading liquidity where you can buy millions of shares a day. And therefore Let's call it the number of securities they can buy has trunk and trunk and trunk. The top, I think the top 10 or so Largest companies in the SP 500, as weird as this might seem.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Passive by definition, but in practice is actually being more active than active managers pushing the stock up. Weird, isn't it? And on the other side of things, what if the stock falls and gets cheaper all of a sudden? Let's say they had some kind of kerfuffle at headquarters. Someone went on vacation and never came back in the finance department. But it might be a passing. But the point is because it's lower, the index now has to sell it. Can help push it down. Again, it wouldn't matter if the index were $1 out of a billion dollars, but now it's over 50% of the total. And indeed, if one looks at the year by year flow of funds into ETFs, they've been getting bigger every year for 20 years pretty much. And this year to date is an all-time record by just a huge degree.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“If a stock is the largest Component of the index. Let's say it's got a 5% weight. Therefore, money comes in, you're going to put 5% of the money into that, and you're only going to put like one-tenth of 1% of the money into the smallest member of the index. So you're putting more money into the largest position. Your buying power now because you've more than 50% of the market. Maybe there are fewer and fewer shares of that company available. What if you're buying as an ETF, as an index, as a passive investor actually pushes the stock up a bit? It's more expensive. So as it becomes more expensive, you then, when more money comes in, you have to buy yet more of it because now it's a 5.5% position or a 6% position. It can become kind of a self-reinforcing cycle where the index itself”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Keep in mind that It's like too much of a good thing, right? So again, if when we first started writing about ETFs and their potential impact on the market, I'm going back probably 15 years. At the time, I recall our first review of it. During that period of time, maybe ETFs accounted for about two or three percent. Of all equity, AUM, as we say, assets under management. Just a couple years ago, they passed 50%. That's been a long experiment. If you just 3% of the marketplace and you're buying a few extra shares of various stocks because they come into an SP 500 ETF and it has to promptly, meaning that day, buy them. Okay, you're not really changing anything. But what if you're now over 50% of all the assets under management and you buy some more money comes into the ETF and you're buying those stocks? Here's a weird thing.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Right. So, passive vehicles do have benefits, they can be low fees, and they offer people an easy way to access the market without having to monitor and manage all of their positions themselves. And, you know, likewise, human beings have emotional foibles, so they'll get into some very popular stock at the top and sell at the bottom. So they have those advantages, but you just said that they create structural imbalances. Can you talk about in particular the indiscriminate buying that when you buy, let's say, one share of SPY, that goes into everything and it's not really thinking. How does that, can you just go into some detail on how that creates the market dislocations and to what degree, as you mentioned, is it in the process of sort of creating a bubble?”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“The price of the index not being determined by the marketplace, kind of the clearing price between buyers and sellers, all having different ideas if it's being mediated by the index itself, in other words by index funds, and they don't pay attention to valuation. Money comes in, they just buy. Can you get distortions? What are you really buying? That's been a great debate. I think that debate's kind of... it hasn't really ended but we think it has we think we think the debate has ended we think that that indexation has gotten so big yeah it's it's distorted the marketplace it's dangerous that has bubbled like characteristics that's that's been our concern for some time”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“If there's a making up a number, if there's a billion dollars of stocks out there and you put your $1 in there, you're not changing anything, you're just participating, and you'll take what the market gives you. And the advantage was you could pay a lower fee because there's not that much activity is going on. That was the original idea. And what you're really asking me about, I think, Jack, is that indexation has gotten so big, so much money has come into it. The question started to become Is the index. Indexation or the ETFs? Is there so much money in them? Are they actually changing the prices? You're supposed to just participate in the flow without changing anything. But what if you're buying so much of all the stocks out there that you're actually changing the prices? So, in that sense”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“In proportion to their market values, the relative sizes. And at the time, people didn't even think that was possible. We didn't have the kind of computing power we did now. They asked, could you even do that? Can you have price that every day and have it work out? And he did. But the animating idea behind that was that you don't need to do better than the stock market does, than the index itself. That's what Active Managers presumably strive to do. Well, that's not necessarily their job, but it's presumed to be. You just want to participate. You don't need to do better. You just want to participate in the results over time of the index.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“The passive index, the ETF algorithm, simply buys exactly in their precise proportions all 500 stocks that are in there. And it doesn't care about valuation, it doesn't care about management quality. It's just a very simple rule set. So you just want to participate. The idea is just to participate in the market. And one last thing I'll say about it, the The animating idea behind indexation. Through a fund was actually put in place by Jack Bogle, the founder of Vanguard. And what you did at a certain point many decades ago was Get together a fund that would buy all 500 stocks in the SP 500.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Certain weightings, the largest companies in the index like Microsoft might have a 3% weighting or 4% weighting or 5% weighting and the smallest might have, believe it or not, one hundredth of one percent weighting. And it's just a fixed number. And it's just an algorithm. So if more money comes into the fund, instead of an active manager selecting, you know what, I like that little 0.1% weighting company. I think it's a little cheap. I don't think enough people know about it. I think it's an up-and-comer. I'm going to buy some more of that.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Well Active vehicle just means an individual account or a A fund like a mutual fund like your granddad had or your dad, which is someone or some team is individually selecting stocks on the basis of some variety of combinations that Valuation or growth or management quality, whatever they happen to think makes a good investment. They're active managers. They're making so-called fundamental decisions based on various facts at hand having to do with business quality and valuation. Passive investing is Your current model, the preferred mode of investing. It's the way most investing is done now, which is a fund that doesn't make any active decisions whatsoever other than A very simple rule set that's established at the beginning via a certain index. So the SP 500, for instance, is the most well-known index. It's 500 stocks, and they have”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT