The True Cost Of Ignoring True Cost
WeWork’s failed IPO has led to several notable commentators in America highlighting the folly of private markets and pointing to the broader house of cards constructed by venture capitalists in Silicon Valley. The most famous of these pieces has come from veteran commentator, Jason Zweig (see https://jasonzweig.com/how-we-should-bust-an-investing-myth/> ). The responses to Zweig’s piece are actually very interesting and vary from people saying that nobody apart from Softbank is crazy enough to buy the overvalued assets in which Softbank has invested in to people saying that Zweig is making too much of a single data point (i.e. WeWork). This piece from Seeking Alpha takes Zweig’s piece and makes an equally valid point about public markets.
The point is this: more money in the US stockmarket is managed by passive funds than active funds. The author, Jesse Felder, says that in the month ending August 2019, for the first time funds that track broad US indices hit US$4.3 trillion (that’s almost twice India’s GDP!). Given this glut of money flooding into index trackers, Felder says that we need to view the valuation of listed equities with a degree of scepticism: “With the shift in perception towards these private market behemoths, epitomized by the WeCompany fiasco, it’s inevitable we will see a very similar shift in the public market. Investors will soon come to realize once again that equities, private or public, are not the easy path to riches they have seemed to be over the past decade; they are worth nothing more than the discounted value of their future cash flows (and not discounted at today’s “risk-free” rates but at a more historically appropriate rate). And that true value is far lower than current prices.”