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(The1960sand1990sbullmarketssawfadsforinvestment
clubs,orslow-motionsubreddits.)Thatdemandhelpspush
upprices,investorsbecomemoreconfident,andevenmore
peoplepayevenmoreattentiontothemarket.Andsoon.
Themediais a bigpartofthis,Shillerhasnoted,andit’snot
justRedditorsandpeoplelikeDavePortnoy,theinexplicably
influentialfounderofBarstoolSports,eggingondaytraders,
butnormiejournalistswhocan’thelpbutcovertheGameStop
story.Tellingyoutosticktoindexfundsandnottogetyour
headturnedbythe1,745%gainswejusttoldyouaboutis like
tellingyounottothinkofa purplehippo.Onceyourattention
is captured,you’reinthefeedbackloop.
GameStopmayhaveleftshort-sellinghedgefundswheez-
ing.(Nosympathy:Thisisthebusinesstheychose.)Butin
generalthepopularizationofmarketsworksbeautifullyfor
thefinancialindustry.Theseriousmoneyinfinancecomes
fromtheoppositeofshorting—the“long”betsthatpriceswill
keepgoingup.Investors’willingnesstogolongis whatreally
fuelstheprofitsthatinvestmentbanksearnhelpingcompa-
niesselltheirstocks.It’sthelongbetthatsellsmutualfunds
andETFsandcryptocurrencytradingapps.Andit’sthethrill
ofthelongbetthathelpsseparateeverydayinvestorsfrom
theirmoneyandrakeit intothepocketsofWallStreet’shorde
ofintermediaries.
Lookaround,andyou’llseea floweringofproductsand
complicatedfinancialstructuresdesignedtohelpyougolong.
Forexample,therearespecialpurposeacquisitioncompa-
nies,orSPACs,whichraisedmoremoneyfrominvestorsin
2020 thaninallpreviousyearscombined.Alsoknownasblank
checks,they’republiccompanieswithnobusinessexcept
tobuyanotherbusiness.Sometimestheyfindonethat’shot
enough,likeVirginGalacticHoldingsInc.orDraftKingsInc.,
thatthepriceshootstothemoon.TheSPACmaestrobehind
theVirgindeal,ChamathPalihapitiya,hasbeenoutspokenin
hissupportoftheRedditors.“Insteadofhaving‘ideadinners’
orquietwhisperedconversationsamongsthedgefundsinthe
Hamptons,thesekidshavethecouragetodoit transparently
ina forum,”hesaidonCNBC.
Blank-checkdealsarecomplex,andit’snoteasytofig-
ureoutwhatanordinaryshareholdergetsoutofthem.
That’soneofthehallmarksofexuberanttimes:Newinvest-
mentsdemandincreasinglysteeplearningcurves,because
increasinglyconfidentandcuriousinvestorsarewillingto
endurethedifficulties—oratleastoverlookthem.OnSPACs,
sufficeit tosaythis:They’reverygooddealsforthepeo-
plewhostartthem,whocomeawaywitha lotofcheaply
acquiredstockina publiccompany.Theytendtoworkout
lesswellforinvestorswhobuyinaftertheSPAC’sinitial
public offering and hang on after a merger. On average, those
investors have lost money, according to a working paper by
law professors Michael Klausner and Michael Ohlrogge and
consultant Emily Ruan.
Sure, some SPAC promoters might be very adept at finding
great deals and helping the companies they acquire grow. ButSPAC combinations are likely to get less and less attractive as
the bull market stampedes on. WeWork, whose IPO flamed
out spectacularly last year, is now looking at going public via
a merger with a SPAC, according to Bloomberg News.ow consider something more mundane: the return
of active fund management. In the 1990s stock-
pickerswho filled their portfolios with tech companies regu-
larly found themselves on the cover of magazines. I can recall
going to an art show in Brooklyn and seeing portraits of man-
agers from the Janus funds—a joke of some kind, but one that
banked on familiarity. Very few of the stars of that era lasted,
because very few stars ever do.
According to the S&P Dow Jones Indices, most U.S. stock
funds that ranked in the top half of returns from June 2010
to June 2015 failed to replicate that feat in the following five
years. In fact, a fund was more likely to close or change its
investment style—likely a sign of defeat—than it was to remain
in the top half.
Those long odds persuaded a lot of people to stick to index
funds, which tend to beat active managers and have gotten so
cheap you have to squint to see the expense ratio. For years
this passive money was the main source of asset inflows in
the fund industry. Yet now stars are back, this time led by
Cathie Wood, who’s invested her Ark exchange-traded funds in
Tesla Inc., internet stocks, and even some Bitcoin. You can buy
T-shirts with her picture and the words “In Cathie We Trust” on
Etsy. Compared with the old days of active-fund dominance,
her funds are less expensive—about 0.75% of assets per year—
but they’re still many times more costly than indexing can be.
Wood is doing incredibly well, and basically has been since- (Over the past five years her main fund has beaten the
mighty S&P 500 by an annualized 40 percentage points.) But
in her wake is a new wave of actively managed ETFs, as well
as thematic funds, which are technically indexes but are so
tailored to their creators’ investment theses that they might
aswellbeactive.Whoknowswhichofthesefundswillprove
tobewinnersinthefiveyearsahead?
Crypto’srisehasbenefitedfromsomeofthesamefaddish
dynamics.A numberofwell-knownadvocatesofBitcoinand
othercryptocurrencieshavebeentweetingtheirsolidarity
with the Redditors against Wall Street. That’s a bit rich.
Professional money managers going on television to praise the
virtues of the Bitcoin they just bought are now a familiar sight.
The denizens of WSB are upfront enough to actually say that
they’re “pumping” their favorite stocks. On Wall Street this
kind of behavior is more politely known as “talking your book.”
Take the complexity of SPACs and multiply that by 100 and
you have cryptocurrency markets. Yes, the blockchain means
that in some sense everything about Bitcoin is out in the open.
But first, enjoy learning what a blockchain is. Go read about
Satoshi Nakamoto, Bitcoin mining, the halving, and the forks.
Again, there’s plenty of appetite now for learning/overlooking
these novel financial concepts. Still, you could spend weeks
“It’s not David vs. Goliath. It’s Goliath vs. Goliath, with David as a fig leaf”
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