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  • Writer's pictureIshfaaq Peerally


Great start of September despite the American markets being closed for Labor Day with our European stocks doing great. $DGE.L and $ALV.DE are respectively 2.80% and 0.80% up. Those latest investments in Diageo are already paying off. They are about 4% (with dividends included) up since the investments a few weeks ago.


I'm sure you have watched the movie The Big Short or at least read the book. If you didn't, I highly recommend it. One of the characters of that movie is Michael Burry. The movie is based on a real life story. Michael Burry was one of the first person to discover the bubble in the housing market and shorted it. Recently, Michael Burry said that there is another bubble, this time in passive investing.

What is passive investing? If you are a passive investor, it means you are not actively looking for stocks to invest but instead only investing through index funds or ETFs. Index funds and ETFs are two of the most important inventions in finance. They facilitated the democratization of finance. But the problem with those index index funds and ETFs is that too many people are investing in them.

Let's say you buy a Vanguard Index Fund which follows the S&P 500 $SPX500 . What you are actually doing is buying a share of that index fund from Vanguard. Now Vanguard has to buy the individual companies. If you buy the Nasdaq 100 $NSDQ100 , 10% of that index is Apple $AAPL . You don't actually own any share of Apple. Vanguard buys the shares and own them. Today, the three largest ETFs/mutual fund managers Vanguard Group, Blackrock $BLK and State Street $STT have respectively $5.3 trillion, $6.8 trillion and $2.5 trillion. They own about 40% of the S&P 500 combined.

If you look at Apple, for example, the four top holders are:

1. Vanguard Group 7.42%

2. Blackrock 6.23%

3. Berkshire Hathaway $BRK.B 5.52%

4. State Street 4.24%

You see the problem with that. Three of the top four owners of Apple are passive investors. Passive investors don't vote, so on average 40% of the shares of any big American company are useless. They have financial value but nobody is exercising the voting rights. Now those passive investors, the more they invest in the indices or ETFs, the more companies such as Vanguard Group are going to buy the shares and keep pushing the prices higher. Now if there is a bear market, those passive investors are going to sell the indices/ETFs, Vanguard also has to sell, otherwise they lose money. This selling triggers algorithmic trading computers to sell more. That's why last year when the market was down, the big companies such as Apple $AAPL , Google $GOOG , Facebook $FB and Amazon $AMZN were down the most and they are back to near all time high in less than a year as if nothing happened.

The best thing to do according to Michael Burry is to buy small companies. That's also something I've been telling you. I know that the top three companies in my portfolio are Apple, Facebook and JPMorgan Chase(actually, now Diageo is number 3). I own these companies because I bought them a long time ago but as the bull market continues to ages, it will be time to start trimming some of these positions. It is not because I don't believe in these companies. It is because, there is too much volatility with them. I've been investing in smaller companies recently such as Parsley Energy $PE , Concho Resources $CXO and Skyworks Solutions $SWKS . Smaller companies also have bigger growth prospect. The larger a company is, the more difficult is it to grow.

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