Our portfolio is not doing that great either with our $gold miner Polymetal $POLY.L down by 2.8% after being downgraded by some analyst. I don't really listen to what analysts have to say since they have a very short term focus. In the long-term, I still believe that Polymetal is a great company which has the potential to be one of the largest gold miner in the world. It is already the third largest $Silver miner in the world. Besides, the low valuations of Russian $RSX stocks gives us another good reason to invest in this company now. With $OIL prices down, $CXO and $PE are down too. The best performance today in our portfolio comes from Allianz $ALV.DE and Diageo $DGE.L .
INDEX FUND/ETF BUBBLE Explained 🚨
Michael Burry announced in August that there is a bubble in passive investing. Michael Burry was one of the investors who predicted a bubble in the housing market in 2008 and shorted it. He is famous for being portrayed in the movie The Big Short. Index funds and ETFs have been the two most important inventions in the democratization of finance. It gave the opportunity for everyone to win from the stock market even if you didn't have much money. In August this year, the capital inflow in passive funds exceeded that of active funds and this spread is growing more and more every day. Passive investing is becoming very big and there's always the fear that there is a bubble, like it happened during the dotcom bubble $NSDQ100 in 2000 and Bitcoin $BTC in 2018. The bubble here is not in the ETF or index funds, it is somewhere else.
Let's see how these ETFs and index funds work. If you buy the SPDR SPY ETF $SPY which tracks the S&P 500 $SPX500 . It means this company SPDR(part of State Street $STT ) has to buy shares of each of the 500 components of the index in order to back the ETF. If you invest $10 000 in $SPY , $430 will be used to buy Apple $AAPL as it represents 4.30% of the S&P 500. Today, 60% of US public companies have at least one of the top ETF companies as their largest shareholder. These three ETF companies are $STT , iShares (part of BlackRock $BLK ), and Vanguard Group. For example, the top holders of Apple are:
1. Vanguard Group 7.42%
2. Blackrock 6.23%
3. Berkshire Hathaway $BRK.B 5.52%
4. State Street 4.14%
Only Berkshire Hathaway is an active investor here. It is not just in the stock market but also in bond market and gold $GOLD market. SPDR owns 750 tons of gold through the $GLD ETF. That's more gold than Japan has in reserve. The problem here is that passive investors don't exercise their voting rights and incompetence in management is left unpunished. The bubble is not in the ETF or index funds, it is in the big companies which are mostly owned by passive investors(ghosts). Last year, the S&P500 was down by 20% while Apple and Facebook $FB each lost more than 40% of market value. When people heard that there was going to be a correction, they began selling ETFs and index funds, the companies owning these ETF sell the underlying assets. Algorithmic trading trigger more selling. That's how big companies crashed last year. There are problems in some smaller companies too for example the top companies in the Russell 2000 index $IWM . Trading volumes of these companies are higher than usual as there are billions of dollars linked to them although they have market caps of only a few hundred millions. This creates a lot of volatility.
There are bigger problems especially in leveraged and inverse ETFs. The $SQQQ ETF shorts the $NSDQ100 by 3 times. There's a lot of borrowed money in that ETF and it is backed by derivatives. The Junior gold miners $GDXJ ETF is supposed to have only small gold miners but since they have exceeded the maximum amount that they can owned of these companies and people are still buying the ETF, they are now buying even the big gold miners making it similar to $GDX .
If you are a passive investor, the best thing to do is to ignore all the volatility and invest using dollar cost averaging for the long-term. If you are an active investor who invests in ETFs, make sure you understand what you are buying before buying it. If you are someone who picks stocks, it is preferable to buy stocks with low ownership from passive investors. You don't want ghosts as business partners. If you treat investing in stocks as a business, you won't make the mistake of having ghosts as business partners.
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