How can 1 US company be worth more than the top 350 UK companies?

Hoenir

InvesterJones said:

Cus said:

masonic said:

Cus said:

GeoffTF said:

Cus said:

When the average Joe invests his regular monthly amount into a global passive index tracker fund as per the advice of many knowledgeable people, he doesn't care that he actually put more money into Tesla and Apple shares than the whole UK FTSE 100. He doesn't care about value, or company profits, heck, some of those huge companies don't even pay a  dividend, (to me its not that different to a zero sum game like gold but that's another thread..) He just follows the advice that he has no better chance than luck that he can pick better than fund managers, and the stats show that recently, and he just carries on with the passive index.  It's a self fulfilling process, the more that happens the more it will happen. But there must be a break point.

Market weight trackers simply hold a fixed percentage of every fund in the index. They do not trade. Price discovery takes place with the relatively small number of shares that do change hands. The number of shares changing hands has increased over the years despite the fact that a large proportion of the shares are not traded. Will we ever reach a time where everyone believes that trying to beat the market is a mugs game? More importantly, perhaps, will we ever reach a time where nobody is willing to invest in funds that have done very well (albeit by chance and often with very little money invested in them)?

I'm a little confused by your post.  I always assumed that if I invest say 100 in a global market cap weighted index tracker fund that has say 4000 equities in it, then they must go and buy 100 worth of equities, and if one equity has 5% of the whole market cap then 5 of my 100 goes to buy that equity.  So is that not buying so therefore trading?

Once the money is deployed initially, there is no trading. If a share falls 10%, then its market cap relative to the index changes. If another share rises 20% then likewise. No rebalancing needed because market cap weighting means the weighting and price movement cancel out. Trading is still required when companies enter or exit the index.

Price movement will occur from the actively managed share capital being traded, and net inflows and outflows, though the latter in relation to trackers will only affect the overall index, not the relative value of constituents.

Thanks, so my thought that the initial investment (deployed as you say) by the individual equates to the fund actually buying (trading) more equity shares in a cap weighted basis for that individual?

So if there is more and more passive investing like this, then consistently these funds are always net buying more and more of the equities in their funds (cap weighted) . Since price movement is determined by net buying and selling, then this amount of passive net buying influences the price (at the time of trade)

Perhaps the influence on overall price is no different to a scenario years ago when all these individuals invested the same amount but with an active fund who made decisions on what to buy for them, based on valuations rather than just a cap weighted simple calc, and maybe more active decisions to pull out of equity markets into something else happened more.

Overall it makes me think that a company like Apple's equity price will actually do better out of passive investing as the proportion of people assessing it's value versus the people just buying market cap based is less, so price movement is weighted towards more buyers?

It influences all prices by the same proportion, so has no effect on one company more than another, however it contributes to raising or lowering the market as a whole.

The purpose of markets is to raise capital. Demand for shares results in companies being able to new shares and raise fresh capital. US companies are not constrained by the same regulations as other markets, i.e it's far easier.  Bigger companies therefore have the momentum of more cash with which to quell any competitors to their own commercial markets. 

InvesterJones

Cus said:

InvesterJones said:

Cus said:

InvesterJones said:

Cus said:

masonic said:

Cus said:

GeoffTF said:

Cus said:

When the average Joe invests his regular monthly amount into a global passive index tracker fund as per the advice of many knowledgeable people, he doesn't care that he actually put more money into Tesla and Apple shares than the whole UK FTSE 100. He doesn't care about value, or company profits, heck, some of those huge companies don't even pay a  dividend, (to me its not that different to a zero sum game like gold but that's another thread..) He just follows the advice that he has no better chance than luck that he can pick better than fund managers, and the stats show that recently, and he just carries on with the passive index.  It's a self fulfilling process, the more that happens the more it will happen. But there must be a break point.

Market weight trackers simply hold a fixed percentage of every fund in the index. They do not trade. Price discovery takes place with the relatively small number of shares that do change hands. The number of shares changing hands has increased over the years despite the fact that a large proportion of the shares are not traded. Will we ever reach a time where everyone believes that trying to beat the market is a mugs game? More importantly, perhaps, will we ever reach a time where nobody is willing to invest in funds that have done very well (albeit by chance and often with very little money invested in them)?

I'm a little confused by your post.  I always assumed that if I invest say 100 in a global market cap weighted index tracker fund that has say 4000 equities in it, then they must go and buy 100 worth of equities, and if one equity has 5% of the whole market cap then 5 of my 100 goes to buy that equity.  So is that not buying so therefore trading?

Once the money is deployed initially, there is no trading. If a share falls 10%, then its market cap relative to the index changes. If another share rises 20% then likewise. No rebalancing needed because market cap weighting means the weighting and price movement cancel out. Trading is still required when companies enter or exit the index.

Price movement will occur from the actively managed share capital being traded, and net inflows and outflows, though the latter in relation to trackers will only affect the overall index, not the relative value of constituents.

Thanks, so my thought that the initial investment (deployed as you say) by the individual equates to the fund actually buying (trading) more equity shares in a cap weighted basis for that individual?

So if there is more and more passive investing like this, then consistently these funds are always net buying more and more of the equities in their funds (cap weighted) . Since price movement is determined by net buying and selling, then this amount of passive net buying influences the price (at the time of trade)

Perhaps the influence on overall price is no different to a scenario years ago when all these individuals invested the same amount but with an active fund who made decisions on what to buy for them, based on valuations rather than just a cap weighted simple calc, and maybe more active decisions to pull out of equity markets into something else happened more.

Overall it makes me think that a company like Apple's equity price will actually do better out of passive investing as the proportion of people assessing it's value versus the people just buying market cap based is less, so price movement is weighted towards more buyers?

It influences all prices by the same proportion, so has no effect on one company more than another, however it contributes to raising or lowering the market as a whole.

I agree.  But as there is less reliance of assessing individual companies actual value (not to say that big market caps are currently over valued or not but if less people are assessing it versus the others who assume that what it is today must be the right value) versus their current price, does that lead to less adjustment of the rankings of value in the index, and more concentration? 

Just leads to the same concentration as before. No more, no less.

Concentration based on market cap rather than opinion on value though

Edit to add: if we think to the extreme, and 100% of investing is passive market cap based without any individual value assesment, where does that lead us?  Can we really not think that the large changes in market caps of certain companies across different companies over the last number of years is only due to those companies being truly deserving of their current values? ( As per the op original question) and not influenced by other factors of the passive movement?
Not that in itself is wrong but where does it end..

Market cap is the same as opinion on (relative) value. People decide how much they're willing to pay for a share of a company. By buying a market cap weighted index tracker you're saying you will take the market consensus on relative valuations. 

If 100% of investing (and it's nothing close to that yet) was in a fully inclusive, global, market cap weighted index tracker, then all that would happen is the market as a whole would rise if there was net buying interest and fall if there was net selling. But it's human nature to think we might be able to do better than other people, so there will always be someone who isn't willing to settle for consensus.

And yes, of course changes in market caps of certain companies can be due to a change in opinion of how well they deserve that value - that's probably the primary mover of change that is seen (other things like issuance, buy backs, mergers, acquisitions, bankruptcies etc. also happen). It can also be influenced by other, non-market cap weighted, passive investing - say someone only goes for one region, or choses only companies with good cashflow, or technology etc. - suddenly that's not globally market cap weighting, and will tilt the outcome accordingly.

masonic

Cus said:

InvesterJones said:

Cus said:

InvesterJones said:

Cus said:

masonic said:

Cus said:

GeoffTF said:

Cus said:

When the average Joe invests his regular monthly amount into a global passive index tracker fund as per the advice of many knowledgeable people, he doesn't care that he actually put more money into Tesla and Apple shares than the whole UK FTSE 100. He doesn't care about value, or company profits, heck, some of those huge companies don't even pay a  dividend, (to me its not that different to a zero sum game like gold but that's another thread..) He just follows the advice that he has no better chance than luck that he can pick better than fund managers, and the stats show that recently, and he just carries on with the passive index.  It's a self fulfilling process, the more that happens the more it will happen. But there must be a break point.

Market weight trackers simply hold a fixed percentage of every fund in the index. They do not trade. Price discovery takes place with the relatively small number of shares that do change hands. The number of shares changing hands has increased over the years despite the fact that a large proportion of the shares are not traded. Will we ever reach a time where everyone believes that trying to beat the market is a mugs game? More importantly, perhaps, will we ever reach a time where nobody is willing to invest in funds that have done very well (albeit by chance and often with very little money invested in them)?

I'm a little confused by your post.  I always assumed that if I invest say 100 in a global market cap weighted index tracker fund that has say 4000 equities in it, then they must go and buy 100 worth of equities, and if one equity has 5% of the whole market cap then 5 of my 100 goes to buy that equity.  So is that not buying so therefore trading?

Once the money is deployed initially, there is no trading. If a share falls 10%, then its market cap relative to the index changes. If another share rises 20% then likewise. No rebalancing needed because market cap weighting means the weighting and price movement cancel out. Trading is still required when companies enter or exit the index.

Price movement will occur from the actively managed share capital being traded, and net inflows and outflows, though the latter in relation to trackers will only affect the overall index, not the relative value of constituents.

Thanks, so my thought that the initial investment (deployed as you say) by the individual equates to the fund actually buying (trading) more equity shares in a cap weighted basis for that individual?

So if there is more and more passive investing like this, then consistently these funds are always net buying more and more of the equities in their funds (cap weighted) . Since price movement is determined by net buying and selling, then this amount of passive net buying influences the price (at the time of trade)

Perhaps the influence on overall price is no different to a scenario years ago when all these individuals invested the same amount but with an active fund who made decisions on what to buy for them, based on valuations rather than just a cap weighted simple calc, and maybe more active decisions to pull out of equity markets into something else happened more.

Overall it makes me think that a company like Apple's equity price will actually do better out of passive investing as the proportion of people assessing it's value versus the people just buying market cap based is less, so price movement is weighted towards more buyers?

It influences all prices by the same proportion, so has no effect on one company more than another, however it contributes to raising or lowering the market as a whole.

I agree.  But as there is less reliance of assessing individual companies actual value (not to say that big market caps are currently over valued or not but if less people are assessing it versus the others who assume that what it is today must be the right value) versus their current price, does that lead to less adjustment of the rankings of value in the index, and more concentration? 

Just leads to the same concentration as before. No more, no less.

Concentration based on market cap rather than opinion on value though

Edit to add: if we think to the extreme, and 100% of investing is passive market cap based without any individual value assesment, where does that lead us?  Can we really not think that the large changes in market caps of certain companies across different companies over the last number of years is only due to those companies being truly deserving of their current values? ( As per the op original question) and not influenced by other factors of the passive movement?
Not that in itself is wrong but where does it end..

It would probably make more sense to think about passive capital as just that. It has very little influence on prices. A threshold amount of active capital is required for price discovery and efficiency, but we are nowhere near the point that so much capital is passive that markets are affected. Should we get there then the situation will be exploited for arbitrage and markets will correct.

US big tech didn't get where it is due to index investors. Though they have necessarily followed the lead of institutional and other active investors. I agree with you that there is some doubt over valuations, yet active funds and professional investors seem to think they know better. Index investors simply reject the opportunity to break away from the average active investor's valuation. Whereas most active private investors defer to their star manager of choice.

GeoffTF

Cus said:

Edit to add: if we think to the extreme, and 100% of investing is passive market cap based without any individual value assesment, where does that lead us?

That would never happen. If it did, the market caps would be forever frozen.

A completely passive investor will typically buy a global tracker and hold it for 50+ years. An active investor will typically hold a share for a few months. A typical active investor trades over a 100 times more than a completely passive investor. If the active investors were only 1% of the market, they will still do most of the trades. I do not believe that even that scenario will ever happen.

Hoenir

GeoffTF said:

Cus said:

Edit to add: if we think to the extreme, and 100% of investing is passive market cap based without any individual value assesment, where does that lead us?

A completely passive investor will typically buy a global tracker and hold it for 50+ years. 

The world of investing unfortunately holds no long term certainies. Section 899 of the Big Beautifull Bill. May well be another torpedo through complacent thinking. 

GeoffTF

Hoenir said:

GeoffTF said:

Cus said:

Edit to add: if we think to the extreme, and 100% of investing is passive market cap based without any individual value assesment, where does that lead us?

A completely passive investor will typically buy a global tracker and hold it for 50+ years. 

The world of investing unfortunately holds no long term certainies. Section 899 of the Big Beautifull Bill. May well be another torpedo through complacent thinking. 

Yes, as I said. It is an unrealistic scenario. Nonetheless, even if we are one of the countries that Trump detests the most, Section 899 would be about 0.3% off our total return for the US. Less than 0.2% for the world. ...and for how long? There are always bigger risks than that. Even money under the mattress may be of no use at all.

poseidon1

See below latest bevy of UK tech companies heading  across the pond by way of American acquisitions

https://www.cityam.com/three-tech-firms-bail-out-of-the-uk-in-a-single-day/

With Wise also currently heading across for a primary listing on the NYSE, perhaps the UK's persistent inability to hang on to its fledgling and mature growth businesses as eventual constiuents of the LSE, partially addresses the OP's opening question. 

Hoenir

GeoffTF said:

Hoenir said:

GeoffTF said:

Cus said:

Edit to add: if we think to the extreme, and 100% of investing is passive market cap based without any individual value assesment, where does that lead us?

A completely passive investor will typically buy a global tracker and hold it for 50+ years. 

The world of investing unfortunately holds no long term certainies. Section 899 of the Big Beautifull Bill. May well be another torpedo through complacent thinking. 

Yes, as I said. It is an unrealistic scenario. Nonetheless, even if we are one of the countries that Trump detests the most, Section 899 would be about 0.3% off our total return for the US. Less than 0.2% for the world. ...and for how long? There are always bigger risks than that. Even money under the mattress may be of no use at all.

Throw a pebble in the centre of a pond and the ripples spread far and wide. Causing collateral damage in the most unexpected of places.