Is it really passive index if S&P actively excludes Tesla?

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nisiprius
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by nisiprius »

The biggest criticism I have of the S&P 500 is that they are pretending their secret sauce matters, when it simply hasn't. It's just a miracle ingredient that serves no function but to bolster their brand identity.

Source

Image

Sixteen years of real-world history with real money in real funds.

Blue, VLACX, Vanguard Large-Cap Index Fund. Index founded 2011, based strictly on capitalization size, intended to include 85% of the total market cap rather than some specific number of stocks, jiggered to foil front-running.

Orange, IWB, iShares Russell 1000 Index ETF, index funded 1984, intended to include the 1,000 largest stocks.

Green, VFIAX, Vanguard 500 Index Fund, the shamefully active 1957 S&P 500 index. Also, Yellow, the S&P 500 index itself.

No air between them anywhere. And less than 0.7% difference in average return between the three of 'em. Large-caps are large-caps.
Last edited by nisiprius on Sat Sep 05, 2020 9:09 am, edited 3 times in total.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Dottie57 »

TNWoods wrote: Fri Sep 04, 2020 8:29 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm
Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm
SB1234 wrote: Fri Sep 04, 2020 7:37 pm
Actin wrote: Fri Sep 04, 2020 7:24 pm.They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed.
I'm not advocating any side, but i think how a company makes money is not material.
It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
+1
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Whakamole »

I heard a lot of people lost money buying Tesla and expecting a bump when the inclusion into the S&P 500 was announced.

That this didn't happen and the speculators lost money is none of my concern.

If anything, I am more likely to invest in the S&P 500. Though I do question Etsy.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by WoodSpinner »

SB1234 wrote: Fri Sep 04, 2020 10:21 pm
WoodSpinner wrote: Fri Sep 04, 2020 9:05 pm
SB1234 wrote: Fri Sep 04, 2020 8:35 pm
nisiprius wrote: Fri Sep 04, 2020 8:34 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
OMG I am having a flashback to 1999, Wired magazine, the New Economy, and oldsters who just didn't "get" New Economy companies like Webvan, pets.com, boo.com, etc.
Are you saying that how a company makes money is material?
Of course it’s material! Why would you think otherwise?

Lots of companies have cooked the books or taken advantage of one time financial loopholes to appear profitable.

Fortunately, I own VTI so I own a piece of Tesla. Just as fortunately, I don’t care if they are ever in the S&P 500.

WoodSpinner
In the land of 'nobody knows nothing', saying that it is somehow relevant how a business makes profits is tantamount to saying "i know something". Once you are okay to believe that you can somehow know better than the market there is really nothing between that position and some other talking heads position that this metric or that metric is also important.

The only position consistent with 'nobody knows nothing' is just that. Nothing else.

In this case how would you know that financial loopholes were used, or that they were one time.
Well, I don’t claim any investment foresight I also read and consume news. Plus, I have seen a few of these financial engineering (e.g. Self-created EBITDA) in action.
The company’s profit was also made possible by the sales of $428 million in emissions credits to other automakers who need them to meet regulatory standards. That’s nearly four times as many credits as it sold in the same quarter a year earlier.
https://www.nytimes.com/2020/07/22/busi ... -musk.html

As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.

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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Grt2bOutdoors »

bloom2708 wrote: Fri Sep 04, 2020 7:04 pm If Tesla can meet the profitability criteria, they would likely be added. Until then, no S&P 500.

To be added to the S&P 500, the following criteria must be met:

It must be a U.S. company.
The market cap must be $5.3 billion or more.
The public float must consist of at least 50% of outstanding shares.
It must have positive reported earnings in the most recent quarter, as well as over the four most recent quarters.
The stock must have an active market and must trade for a reasonable share price.
And there you have it! It does not trade for a reasonable share price. What’s the p/e on the stock? Enough said.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by oldcomputerguy »

The S&P 500 is not a passive index, it's actively managed.

https://www.spglobal.com/spdji/en/docum ... ndices.pdf
Constituent Selection. Constituent selection is at the discretion of the Index Committee and is based on
the eligibility criteria. The [S&P 500, 400, and 600] indices have a fixed constituent company count of 500, 400, and 600,
respectively. Sector balance, as measured by a comparison of each GICS sector’s weight in an index
with its weight in the S&P Total Market Index, in the relevant market capitalization range, is also
considered in the selection of companies for the indices.
That being said, there are many mutual funds and ETFs that are passively managed which simply invest in the holdings of their respective index. The funds themselves are passively managed, their index is not.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Call_Me_Op »

xraygoggles wrote: Fri Sep 04, 2020 7:01 pm Let me start by saying I'm a Tesla fanboy and own stock (and options). I also think it's inevitable that Tesla will be added to S&P at some point (although not today).

However, that got me thinking: let's say the S&P decides to not include it in their index at all for the rest of this year and maybe next year, for whatever reason(s) they decide on. Is that really passive indexing then?
Yes. What do you expect, an index with no inclusion criteria?

Of course, as Niki points out, stock picking doesn't really matter much. What matters is what asset categories one invests in - large cap blend, small cap value, etc. The S&P 500 is a large cap blend index that tends to lean toward growth.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by arf30 »

I hold total market but I can understand the decision to exclude Tesla from S&P until it stabilizes - they're looking to prevent speculators from from manipulating the index at the expense of passive investors (SoftBank, DAX Wirecard, etc).
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by MotoTrojan »

xraygoggles wrote: Fri Sep 04, 2020 8:36 pm

I would argue it's more likely (>50%; meaning in the range of 50.00001% to 99.99999%) that Tesla's stock will (at least) double in value within the next 5-10 years vs lose half its value. Of course, all the bears are on the opposite side.
Let's rewind a year to when Tesla was $200 pre-split. Would you say there is a >50% chance that in the next 6-11 years Tesla will go up 20x rather than only go up 5x?

Price matters.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by hagridshut »

TNWoods wrote: Fri Sep 04, 2020 8:37 pm
SB1234 wrote: Fri Sep 04, 2020 8:33 pm
TNWoods wrote: Fri Sep 04, 2020 8:29 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm
Buy_N_Hold wrote: Fri Sep 04, 2020 8:04 pm

It certainly seems material to me. There is a big difference between receiving government handouts and having profitable business operations. With a P/E above 1,200 recently, it was smart of the committee to pass. Only one way for the stock to go in the short run (down) and the millions of passive investors would get the short end of that deal.
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
Yes way.
SB1234 wrote: Fri Sep 04, 2020 8:39 pm :beer
TNWoods wrote: Fri Sep 04, 2020 8:37 pm
SB1234 wrote: Fri Sep 04, 2020 8:33 pm
TNWoods wrote: Fri Sep 04, 2020 8:29 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
Yes way.
Okay :beer :beer
I cannot remember any stock before TSLA that made so many people upset, on all sides. A majority of the Tesla threads here at Bogleheads are people suffering emotional distress, sometimes severe, because of TSLA.

Some people are upset that S&P hasn't yet included TSLA in the 500 Index.

Other people are upset that TSLA stock is up so much, and don't understand why or think it is morally justified.

What would Jack Bogle say?

I think he'd say to buy VTSAX and worry about something else.

TSLA will just harm you. I advise most people to just ignore it if they don't understand it.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Whakamole »

hagridshut wrote: Sat Sep 05, 2020 10:25 am I cannot remember any stock before TSLA that made so many people upset, on all sides. A majority of the Tesla threads here at Bogleheads are people suffering emotional distress, sometimes severe, because of TSLA.

Some people are upset that S&P hasn't yet included TSLA in the 500 Index.

Other people are upset that TSLA stock is up so much, and don't understand why or think it is morally justified.

What would Jack Bogle say?

I think he'd say to buy VTSAX and worry about something else.

TSLA will just harm you. I advise most people to just ignore it if they don't understand it.
I will repeat this, the only reason to be upset and suffer distress that TSLA wasn't included in the S&P 500 is if someone bought the stock (or options) betting that it would be included in the index and funds would have to buy it, and now find themselves losing money (or at least not gaining as much.)

Otherwise it simply doesn't matter.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Impatience »

There is no such thing as a truly “passive” index. Every single index is made by humans who decide which criteria to use to determine the contents of the index. Whether it’s the DOW or NASDAQ or S&P or some niche proprietary index they all reflect the choices and biases of their makers. The products you buy that are based on those indices may be passively MANAGED ... but they’re not passive.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Nysoz »

Actin wrote: Fri Sep 04, 2020 7:24 pm One of the requirements for being in the S&P is four profitable quarters, all of which Tesla only made money by selling tax credits. They only meet that requirement with a big asterisk next to it, which is probably the reason the committee passed. The company still loses money on every vehicle they sell.
Do you have a source for them losing money on every vehicle they sell? With the MiC model 3, they're supposedly getting 35-40% gross margins. They are selling tax credits, but it's still a source of income and they would be silly to not take advantage of it while it's available. Also they're a profitable company while building 2 new giga factories in Austin and Berlin while expanding their Shanghai factory as well as growing in other areas.

Tesla might be richly valued but they know how to play the game. Once the regulatory credits aren't available anymore, that means all the other OEMs are losing money making their EVs. At that time, if Tesla wants to show a profit on the books, they'll just spend less on growth if needed.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Ragnoth »

I don’t own individual TSLA stock, and I use the total stock market for most of my US equity allocation. But as somebody that does not hold an S&P fund, I think the notion that that investing in an S&P 500 index fund is “active” because they are dragging their feet on a single company is pretty ridiculous on its face.

I feel that this is mostly coming from people feeling “burned” by some TSLA trade that didn’t pan out the way they planned. There are many reasons for buying an individual stock, but speculating that the price will pop due to inclusion on some index is a pretty poor one.

More generally, I assume Tesla will be around a long time and I wish them the best. I wouldn’t have a lot of conviction in the present valuations (i.e., I think there a lot of assumptions baked in when the market is saying that you have the same value as Toyota, Volkswagen, GM, and Ford combined). But I don’t play that game personally, and to each their own.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by NoRegret »

xraygoggles wrote: Fri Sep 04, 2020 7:01 pm Let me start by saying I'm a Tesla fanboy and own stock (and options). I also think it's inevitable that Tesla will be added to S&P at some point (although not today).

However, that got me thinking: let's say the S&P decides to not include it in their index at all for the rest of this year and maybe next year, for whatever reason(s) they decide on. Is that really passive indexing then?

Assuming it's market cap stays around 300-400B, how does one justify excluding one of the top 10 largest companies in the world (by market cap) in the index that includes the 500 largest US companies?! Seems like they would be actively choosing certain companies to leave out...
Non-zero probability the inclusion of TSLA would have crashed SPX due to how much others would have to be sold to make room. Dodged a bullet here.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Ciel »

Whakamole wrote: Sat Sep 05, 2020 11:26 am
hagridshut wrote: Sat Sep 05, 2020 10:25 am I cannot remember any stock before TSLA that made so many people upset, on all sides. A majority of the Tesla threads here at Bogleheads are people suffering emotional distress, sometimes severe, because of TSLA.

Some people are upset that S&P hasn't yet included TSLA in the 500 Index.

Other people are upset that TSLA stock is up so much, and don't understand why or think it is morally justified.

What would Jack Bogle say?

I think he'd say to buy VTSAX and worry about something else.

TSLA will just harm you. I advise most people to just ignore it if they don't understand it.
I will repeat this, the only reason to be upset and suffer distress that TSLA wasn't included in the S&P 500 is if someone bought the stock (or options) betting that it would be included in the index and funds would have to buy it, and now find themselves losing money (or at least not gaining as much.)

Otherwise it simply doesn't matter.
Agreed. I think Tesla has a very bright future as a company but S&P absolutely made the best decision here.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by stocknoob4111 »

I hope they aren't included as including a bubble stock will make the index more volatile. In my view TSLA with a TTM PE of 1024 is one of the biggest bubbles in all of human history and it will burst as spectacularly as it's run up. In the end valuations do matter.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

hagridshut wrote: Sat Sep 05, 2020 10:25 am
TNWoods wrote: Fri Sep 04, 2020 8:37 pm
SB1234 wrote: Fri Sep 04, 2020 8:33 pm
TNWoods wrote: Fri Sep 04, 2020 8:29 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm
You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
Yes way.
SB1234 wrote: Fri Sep 04, 2020 8:39 pm :beer
TNWoods wrote: Fri Sep 04, 2020 8:37 pm
SB1234 wrote: Fri Sep 04, 2020 8:33 pm
TNWoods wrote: Fri Sep 04, 2020 8:29 pm

We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
Yes way.
Okay :beer :beer
I cannot remember any stock before TSLA that made so many people upset, on all sides. A majority of the Tesla threads here at Bogleheads are people suffering emotional distress, sometimes severe, because of TSLA.

Some people are upset that S&P hasn't yet included TSLA in the 500 Index.

Other people are upset that TSLA stock is up so much, and don't understand why or think it is morally justified.

What would Jack Bogle say?

I think he'd say to buy VTSAX and worry about something else.

TSLA will just harm you. I advise most people to just ignore it if they don't understand it.
I don't really care what happens with the stock. But one of the argument made by some members alludes to the sale of carbon credits. And just from a theoretical stand point, I am just trying to show that the supposed relevance of any particular business model to indexing is illogical.
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by NoRegret »

SB1234 wrote: Sat Sep 05, 2020 1:28 pm
hagridshut wrote: Sat Sep 05, 2020 10:25 am
TNWoods wrote: Fri Sep 04, 2020 8:37 pm
SB1234 wrote: Fri Sep 04, 2020 8:33 pm
TNWoods wrote: Fri Sep 04, 2020 8:29 pm

We do understand this one, and it is invalid, and it is material.

TNWoods
No way.
Yes way.
SB1234 wrote: Fri Sep 04, 2020 8:39 pm :beer
TNWoods wrote: Fri Sep 04, 2020 8:37 pm
SB1234 wrote: Fri Sep 04, 2020 8:33 pm

No way.
Yes way.
Okay :beer :beer
I cannot remember any stock before TSLA that made so many people upset, on all sides. A majority of the Tesla threads here at Bogleheads are people suffering emotional distress, sometimes severe, because of TSLA.

Some people are upset that S&P hasn't yet included TSLA in the 500 Index.

Other people are upset that TSLA stock is up so much, and don't understand why or think it is morally justified.

What would Jack Bogle say?

I think he'd say to buy VTSAX and worry about something else.

TSLA will just harm you. I advise most people to just ignore it if they don't understand it.
I don't really care what happens with the stock. But one of the argument made by some members alludes to the sale of carbon credits. And just from a theoretical stand point, I am just trying to show that the supposed relevance of any particular business model to indexing is illogical.
FYI, the credit is non recurring and accelerated recognition to make the last quarter.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Buy_N_Hold »

Ragnoth wrote: Sat Sep 05, 2020 1:03 pm I don’t own individual TSLA stock, and I use the total stock market for most of my US equity allocation. But as somebody that does not hold an S&P fund, I think the notion that that investing in an S&P 500 index fund is “active” because they are dragging their feet on a single company is pretty ridiculous on its face.

I feel that this is mostly coming from people feeling “burned” by some TSLA trade that didn’t pan out the way they planned. There are many reasons for buying an individual stock, but speculating that the price will pop due to inclusion on some index is a pretty poor one.

More generally, I assume Tesla will be around a long time and I wish them the best. I wouldn’t have a lot of conviction in the present valuations (i.e., I think there a lot of assumptions baked in when the market is saying that you have the same value as Toyota, Volkswagen, GM, and Ford combined). But I don’t play that game personally, and to each their own.
Very well said!!
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by columbia »

Impatience wrote: Sat Sep 05, 2020 12:06 pm There is no such thing as a truly “passive” index. Every single index is made by humans who decide which criteria to use to determine the contents of the index. Whether it’s the DOW or NASDAQ or S&P or some niche proprietary index they all reflect the choices and biases of their makers. The products you buy that are based on those indices may be passively MANAGED ... but they’re not passive.
An additional layer is all asset allocations are themselves a result of active decisions. Even if you limit that to the equity portion of the portfolio, there's no such thing as a neutral choice.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by NoRegret »

xraygoggles wrote: Fri Sep 04, 2020 8:36 pm
000 wrote: Fri Sep 04, 2020 8:12 pm
petulant wrote: Fri Sep 04, 2020 7:21 pm As someone with large holdings in S&P 500 index funds, I appreciate them not acting mechanically. I hope they wait out the wild rides.
What if it keeps going up and the committee decides to buy in even higher?

The whole point of indexing is to avoid needing to make decisions such as this.
Agree with above.

I would argue it's more likely (>50%; meaning in the range of 50.00001% to 99.99999%) that Tesla's stock will (at least) double in value within the next 5-10 years vs lose half its value. Of course, all the bears are on the opposite side.

But the point is, choosing to leave it out of the index when it is one of the most heavily traded stock/options and one of the biggest companies in the US is akin to actively picking winners & losers (vis-a-vis S&P inclusion, that is).
Maybe maybe not.

Two things I can’t get past Tesla’s autonomous driving:
1) if they are using data from the millions of miles driven where is the cloud infrastructure that entails.
2) refusal to use lidar. I have to think some of the “cloth line” type accidents could have been prevented. Actual human lives have been lost.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Jefferson »

Adding Tesla to the SP500 would be a major market-moving event. And the impact would be even more significant if it could be timed in advance.

I’m guessing that the ideal scenario for the committee is to add companies to the list when they are much smaller (in market cap). Tesla taking this long to reach a major requirement of inclusion (profitability) presents a problem. Massive funds buying and selling that many shares to account for adding it would have unknown effects.

At the very least, the committee might have concluded that the timing of the event should be less anticipated.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by coachd50 »

SB1234 wrote: Sat Sep 05, 2020 1:01 pm
WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
Because Tesla is an electric car and clean energy products manufacturer. That is their business. Selling credits is not. The revenue generated from those "sales"(tax credit sales) are dependent on the tax code, which I believe Forbes reported have changed. Without those credits would Tesla's business have generated income or a loss? Will the sale of such credits continue?
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

coachd50 wrote: Sat Sep 05, 2020 2:28 pm
SB1234 wrote: Sat Sep 05, 2020 1:01 pm
WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
Because Tesla is an electric car and clean energy products manufacturer. That is their business. Selling credits is not. The revenue generated from those "sales"(tax credit sales) are dependent on the tax code, which I believe Forbes reported have changed. Without those credits would Tesla's business have generated income or a loss? Will the sale of such credits continue?
Companies pivot all the time. Amazon is a prime example. No pun intended. New business opportunities will come up that we cannot even fathom today.
As indexers it's stupid to reflect on why a company makes money and how.
anecdotes are not data
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by bottlecap »

nisiprius wrote: Fri Sep 04, 2020 8:34 pm
SB1234 wrote: Fri Sep 04, 2020 8:25 pm You are missing the main point, that there are numerous ways a company is profitable. Business models that are not even in existence today, will someday be a huge part of the economy. Just because we don't understand it today doesn't mean a particular business model is less valid.
OMG I am having a flashback to 1999, Wired magazine, the New Economy, and oldsters who just didn't "get" New Economy companies like Webvan, pets.com, boo.com, etc.
Yep, me too. This thread, thinking about Tesla, thinking about 1999's economy, with the Covid cherry on top has me seriously worried. Although, honestly we all know the party is going to end, so worried is not the right word. Time to close my eyes and not market time...

JT
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by coachd50 »

SB1234 wrote: Sat Sep 05, 2020 2:45 pm
coachd50 wrote: Sat Sep 05, 2020 2:28 pm
SB1234 wrote: Sat Sep 05, 2020 1:01 pm
WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
Because Tesla is an electric car and clean energy products manufacturer. That is their business. Selling credits is not. The revenue generated from those "sales"(tax credit sales) are dependent on the tax code, which I believe Forbes reported have changed. Without those credits would Tesla's business have generated income or a loss? Will the sale of such credits continue?
Companies pivot all the time. Amazon is a prime example. No pun intended. New business opportunities will come up that we cannot even fathom today.
As indexers it's stupid to reflect on why a company makes money and how.
What does a personal investment strategy of investing in Index funds mean one can not be concerned with how a company makes money? Do you mean that as an index investor, you are not picking any individual stocks, and therefore who cares?
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

coachd50 wrote: Sat Sep 05, 2020 2:53 pm
SB1234 wrote: Sat Sep 05, 2020 2:45 pm
coachd50 wrote: Sat Sep 05, 2020 2:28 pm
SB1234 wrote: Sat Sep 05, 2020 1:01 pm
WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
Because Tesla is an electric car and clean energy products manufacturer. That is their business. Selling credits is not. The revenue generated from those "sales"(tax credit sales) are dependent on the tax code, which I believe Forbes reported have changed. Without those credits would Tesla's business have generated income or a loss? Will the sale of such credits continue?
Companies pivot all the time. Amazon is a prime example. No pun intended. New business opportunities will come up that we cannot even fathom today.
As indexers it's stupid to reflect on why a company makes money and how.
What does a personal investment strategy of investing in Index funds mean one can not be concerned with how a company makes money? Do you mean that as an index investor, you are not picking any individual stocks, and therefore who cares?
Yes, that is a characteristic of indexing of course. You buy the haystack, including the unsavory bits.
Indexing with buy and hold is driven by two main concepts
1. Average returns (by the haystack)
Average returns is justified by 'nobody knows nothing' because we don't know which company will succeed in the future.

2. Time in the market. (Instead of timing the market)

Time in the market is also justified by 'nobody knows nothing'. Because if we could know something then we could keep trading in and out of indexes and only get the positive returns.

So the indexing for investments really rests on 'nobody knows nothing' concept.

Basically for a boglehead to now say that a particular method of business is important is totally antithetical to 'nobody knows nothing'. My question to them is then why are they indexing in the first place.
anecdotes are not data
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Leif
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Leif »

coachd50 wrote: Sat Sep 05, 2020 2:28 pm Because Tesla is an electric car and clean energy products manufacturer. That is their business. Selling credits is not. The revenue generated from those "sales"(tax credit sales) are dependent on the tax code, which I believe Forbes reported have changed. Without those credits would Tesla's business have generated income or a loss?
Loss
coachd50 wrote: Sat Sep 05, 2020 2:28 pm Will the sale of such credits continue?
Yes

I'm sure they would love to be in the 500. But they are growing fast. Trying to maintain a profit is difficult when you need to make major spends, such as new factories (Texas and Germany), and expanding elsewhere (California and China).
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by WoodSpinner »

SB1234 wrote: Sat Sep 05, 2020 1:01 pm
WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
The justification is pretty clear....

- Is it repeatable?
- Is it legal
-Is it real or financial accounting
- Can I depend on it?

WoodSpinner
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Normchad »

Whether you like how Tesla makes money or not, what are you actually going to do about it? Will you divest from indexes that include it? Or exclude it?

Are you going to scrutinize every company in your favorite index the same way?

If you are, just admit you’re not a passive indexer and ignore what S&P does when deciding these things.

The average investor gets below average returns precisely because they think they are smarter than the market and zig when they should zag.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Jefferson »

Normchad wrote: Sat Sep 05, 2020 8:35 pm Whether you like how Tesla makes money or not, what are you actually going to do about it? Will you divest from indexes that include it? Or exclude it?

Are you going to scrutinize every company in your favorite index the same way?

If you are, just admit you’re not a passive indexer and ignore what S&P does when deciding these things.

The average investor gets below average returns precisely because they think they are smarter than the market and zig when they should zag.
I think there’s a difference between making investment decisions on individual companies, and being okay with the SP500 committee selectively making its own decisions. I’m fine with them deciding not to include Tesla. That doesn’t mean I want to start buying individual stocks.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by SB1234 »

WoodSpinner wrote: Sat Sep 05, 2020 7:34 pm
SB1234 wrote: Sat Sep 05, 2020 1:01 pm
WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
The justification is pretty clear....

- Is it repeatable?
- Is it legal
-Is it real or financial accounting
- Can I depend on it?

WoodSpinner
At best this is a framework for fundamental analysis. It really has no meaning when you are passively investing using index funds.
anecdotes are not data
000
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by 000 »

SB1234 wrote: Sat Sep 05, 2020 10:24 pm At best this is a framework for fundamental analysis. It really has no meaning when you are passively investing using index funds.
I agree. Not sure why the framework is being thrown out to avoid buying Tesla "high".

All the more reason to use an actual total market fund. The consequences of an entry/exit being gamed are negligible.

Apparently it's not negligible for the S&P 500, or the committee wouldn't be delaying.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by IndexCore »

When numerous tech companies changed categories, MSCI actually use a "transition index" so ETFs that track MSCI categories would not need to buy and sell huge volumes of stocks. A transition index allows ETFs to slowly buy the new stocks while slowly selling the old stocks.

This has been a volatile year, with the S&P 500 delaying one update owing to the number of companies that dropped below their criteria because of Covid-19. During a recovery, most of those same stocks will likely return to the S&P 500, so the S&P 500 faces more volatility ahead.

Couldn't a similar transition index be used for the S&P 500, allowing Tesla to slowly become part of it?

That's a reasonable approach given the future volatility, and the precedent already set by MSCI. And it would ruin the "bump" many people expect from all S&P 500 funds together buying Tesla shares.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by JoMoney »

IndexCore wrote: Sat Sep 05, 2020 11:28 pm...
Couldn't a similar transition index be used for the S&P 500, allowing Tesla to slowly become part of it?

That's a reasonable approach given the future volatility, and the precedent already set by MSCI. And it would ruin the "bump" many people expect from all S&P 500 funds together buying Tesla shares.
They could, or it could simply not be added to the index... Tesla barely meets the criteria of S&P's methodology. This is why all indices have committees, other "total market" index issues typically will revolve around things like whether or not a company with headquarters outside the U.S. will be in a U.S. index... the S&P has more selective criteria, that include things like "financial viability" of the business, and liquidity.

S&P's methodology guide has an explicit statement, "S&P Dow Jones Indices believes turnover in index membership should be avoided when possible. ", with regard to removing stocks that may appear to violate other criteria if it's determined by the committee to be a temporary situation. A similar situation could easily be presented with regard to Tesla's profitability being a temporary accounting situation that could more likely add unnecessary turnover.

If it were just based on size, there are something like 100+ other stocks that could be in the S&P 500 that instead are in the "Extended Market/Completion index". Tesla is just one of them. It might be the biggest currently, but relatively speaking there were bigger stocks excluded in the past.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by yatesd »

OK, I'll throw in a few comments:

- S&P 500 not 100% passive...interesting, I am not seeing the intentional exclusion of particular companies. I would be more concerned if they decided to exclude certain companies for political correctness, or some non-financial criteria. Seems like Tesla may be added soon.

- I personally don't care about the S&P 500 since I invest in Total Stock Market and own some Tesla. I agree that Tesla seems like a great company, very innovative, but I also believe they are overpriced. Too many fans, and valuation is ridiculous.

- I do think it is relevant for how a company makes money. Especially if you are judging the merits of an individual company's performance. Conversations about Enron, Tesla, WireCard, etc are allowed and should exist within the passive investor community as we make decisions related to risk. These may not generate major changes as a passive investor, but certainly remind me to not let my stock allocation float too high beyond my intended target.

My last point, these (3) points seem to be intermingled within this thread and yet they are all separate and independent concepts.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by guyinlaw »

Active managers have made billions by front running Russell indexes that are truly dumb.

https://www.google.com/amp/s/amp.ft.com ... db721f996
Time is your friend; impulse is your enemy. - John C. Bogle
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by WoodSpinner »

SB1234 wrote: Sat Sep 05, 2020 10:24 pm
WoodSpinner wrote: Sat Sep 05, 2020 7:34 pm
SB1234 wrote: Sat Sep 05, 2020 1:01 pm
WoodSpinner wrote: Sat Sep 05, 2020 8:27 am As I said earlier, how a company makes money is vital information—that said, I don’t own individual stocks.
WoodSpinner
You keep saying that but you do not offer any rationale or justification. Just saying it in vacuum is useless.
The justification is pretty clear....

- Is it repeatable?
- Is it legal
-Is it real or financial accounting
- Can I depend on it?

WoodSpinner
At best this is a framework for fundamental analysis. It really has no meaning when you are passively investing using index funds.
We seem to be in agreement — buy the haystack and tune out the noise.

That said, this thread has been about how to manage an active Index, the S&P 500.

It is not focused on buying a passive index that uses it as a benchmark.

WoodSpinner
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by JoMoney »

whereskyle wrote: Sat Sep 05, 2020 5:20 am...
Buy total-market index funds.
Buy whichever suits you. Keep your costs low, and include a modest amount of diversification. The Dow Jones Industrial Average has done just fine.
I think some people in this thread have put the term "passive" up on some pedestal that's undeserved. The benefits of "passive" are things like keeping costs and taxes low. The S&P 500 index achieves that. So does a basket of 30 large stocks that aren't actively traded. An average assortment of stocks with similar risk profiles tends towards about the average returns, and there's very little one could predictably say about the future returns of one "passive" (not traded) assortment of stocks over another. The choosiness/selectivity of a portfolio hasn't shown to add anything, but it's also not the case that being less-choosy has added anything. "Diversification" does have benefits, so does being a bit judgmental/selective about risk. Even the "efficient market" theorists believe they can distinguish different risk profiles, although the relationship to returns hasn't followed their attempts to model a "risk premium".
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
anoop
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by anoop »

bloom2708 wrote: Fri Sep 04, 2020 7:04 pm The stock must have an active market and must trade for a reasonable share price.
Tesla fails this one. The stock price is unreasonably high. haha
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by rockstar »

Ultimately, the S&P index is created by stock pickers. It's actively managed in the sense that those that maintain the index decide what stays in it and what leaves it. These stock pickers have a pretty good track record.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by reln »

xraygoggles wrote: Fri Sep 04, 2020 7:01 pm Let me start by saying I'm a Tesla fanboy and own stock (and options). I also think it's inevitable that Tesla will be added to S&P at some point (although not today).

However, that got me thinking: let's say the S&P decides to not include it in their index at all for the rest of this year and maybe next year, for whatever reason(s) they decide on. Is that really passive indexing then?

Assuming it's market cap stays around 300-400B, how does one justify excluding one of the top 10 largest companies in the world (by market cap) in the index that includes the 500 largest US companies?! Seems like they would be actively choosing certain companies to leave out...
Sp500 isn't a passive index.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Big Dog »

TSLA meets the criteria, but so did Facebook and it took them three quarters to get in...
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by JoMoney »

Big Dog wrote: Sun Sep 06, 2020 2:55 pm TSLA meets the criteria, but so did Facebook and it took them three quarters to get in...
Facebook was a profitable company, hugely... their advertising revenue is incredible, but it was an IPO so it did not meet the seasoning requirements to be in the S&P 500... but it was added once it did.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by finite_difference »

If you’re a purist, I think you should go with VTSAX.

And if you’re truly a purist, Vanguard Total World (VTWAX).
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by retiredjg »

xraygoggles wrote: Fri Sep 04, 2020 7:01 pm However, that got me thinking: let's say the S&P decides to not include it in their index at all for the rest of this year and maybe next year, for whatever reason(s) they decide on. Is that really passive indexing then?
I'll admit I didn't read the other 97 answers, so I don't know if this comment has been made. :shock:

Yes, of course it is still passive indexing.

Passively following an index has nothing to do with what is in or not in the index. It is not about having the biggest companies included in the index. It is not about having market weights in the index. It is not about the index at all.

Passive indexing is about a mutual fund following the index, whatever is in there. What is in the index is irrelevant to your question. Not necessarily irrelevant to other things though.
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by IndexCore »

One risk to the S&P 500 is if it trails the market enough that investors notice. Year to date, the 582 stocks in Vanguard Large Cap ETF gained +8.88% versus Vanguard S&P 500 ETF gaining +7.48%, so the performance gap is still a small, at 1.4%. Tesla's +400% gain is probably most of the reason for the gap, but I imagine that won't happen very often. They probably don't lose that many investors by excluding Tesla.

Taken to the extreme of excluding all tech stocks, there's a risk of trailing the market. Berkshire beat the S&P 500 for years, then as tech stocks became common, no longer could. Buffet didn't understand tech stocks then, and excluded them from Berkshire's investments.
Over the years, he must have became convinced Berkshire had to own tech stocks. Now Berkshire is closer to market weight, with $90 billion (20%) invested in Apple stock.

JoMoney wrote: Sun Sep 06, 2020 7:50 am ...
If it were just based on size, there are something like 100+ other stocks that could be in the S&P 500 that instead are in the "Extended Market/Completion index". Tesla is just one of them. It might be the biggest currently, but relatively speaking there were bigger stocks excluded in the past.
I don't follow the S&P 500 / extended index dynamic, so this was news to me. In case others were equally curious, the Vanguard Extended Market ETF (VXF) does have some familiar names at the top:
4.0% Tesla
0.9% Square
0.7% Lululemon
https://investor.vanguard.com/etf/profi ... d-holdings
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Re: Is it really passive index if S&P actively excludes Tesla?

Post by Northern Flicker »

rockstar wrote: Sun Sep 06, 2020 2:42 pm Ultimately, the S&P index is created by stock pickers. It's actively managed in the sense that those that maintain the index decide what stays in it and what leaves it. These stock pickers have a pretty good track record.
This is not accurate. It never deviates very far from just holding the largest 500 companies. The inclusion process is operating at the margins. Tesla will be included at some point.

Individuals would generally do well by avoiding trying to front-run the index changes actively. You can hold VLCAX/VV which tracks the CRSP large-cap index if you want a passive fund that generally acquires stocks before they are added to the S&P500.
Risk is not a guarantor of return.
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