Market Ethos - August 14th, 2017

Behaving Irrationally

 

The essence of money management can be encapsulated in searching for investments that are trading below their intrinsic value. Buying these companies low, and as the market comes around to realize their intrinsic value, the price moves higher. This is the activity of price discovery and makes for a healthy market as participants buy and sell in the attempt to profit from the return to intrinsic value. But there is a new big player in the market that doesn’t care about price discovery, the Exchange Traded Fund (ETF) or other passive index investment strategies. A passive ETF is price agnostic. They need to buy the shares of the underlying basket of stocks that comprise the index, regardless of the price of those stocks. Their mandate is not to buy low, sell high; it is to buy quickly, minimizing tracking error, giving investors the exact exposure they are looking for. Most indices are based on market weight, and do not discriminate for liquidity.