The original revolution

Issue #21

Feb 21, 2021

Revolutionary👊 Fool here with another polemical rant:

Unless you’ve been living in Tajikistan, Burkina Faso, or in a cave, you’d have read at least something about the insane drama surrounding GameStop and all the craziness on WallStreetBets (WSB) subreddit.

People on the WSB subreddit looking for entertainment in life decided to “teach” all the hedge funds who were short on GameStop a lesson. They banded together and started buying up shares and call options in GameStop to cause a short squeeze which was heavily shorted to begin with.

This started pushing up the price of the stock as other people joined the party. The stock skyrocketed, forcing some hedge funds and others short on the stock to cover their shorts and book heavy losses.

Before you close the tab, this isn’t another post explaining what went down; everybody and their grandmothers have done that. What’s interesting to me is how stories were spun around this episode.

Initially, everyone thought people on WSB Reddit were lunatics. But when they started moving stocks, other people and the media started to take notice. But during the GameStop saga, they became revolutionaries.

Eddie Redmayne Revolution GIF by NETFLIX

Commentators, jobless billionaires, and the media started painting these thrill-seekers as renegades and modern-day Robinhoods who were stealing from the rich and thieving hedge funds and teaching them a lesson.

Look at some of the asinine headlines👇

The narratives didn’t quite end there. It was taken to an extreme where this whole saga was painted as a reaction to the rising income inequality around the world and a populist uprising against Wall Street, a crusade even. 🤦‍♀️

Just pause for a second and think about these narratives for a second.

Ghanta🔔 revolution!

I know the financial media long stopped being about financial news, and it’s mostly cheap entertainment today. But even by their pathetically low standards, the way they covered this and poured gasoline on the bonfire just to get some clicks and make a buck was utterly disgusting. If anything, this episode showed just how hollowed out the mainstream financial media is and just how close it is to going out of business.

How the hell is a bunch of bored unhinged lunatics acting together to cause a short squeeze, willingly or unwittingly a revolution? Look, I don’t know what motivated these people. It might have been boredom, thrillseeking or genuine hatred against Wall Street and hedge funds. It could be all of those things. After all, there are 90 lakh users on the Reddit sub and they’ll all have their own motivations.

But one thing is for sure this was no bloody revolution. After all, what happened to the hedge funds that lost their money? They’ll be absolutely fine, it’s the investors like filthy rich people, institutional investors, and pensions in the hedge funds that lost money. The guys who run the hedge funds will find new investors and continue to make their 2% and 20%.

In this entire charade, the people who lost the most amount of money were the dumb retail investors. From the peak, the stonk is down 90%. Maybe losing all your money is a small price to pay for starting a 5-day revolution, in which case this all perfectly rational. In fact, for every hedge fund that lost money, several hedge funds made a killing. Not to forget the market makes like Citadel and Virtu who made millions providing liquidity.

This wasn’t a revolution. This was the moment investing became a meme, and pump and dump went mainstream. There’s no putting this genie back in the bottle. This will have far more ripple effects than we’ve all probably thought of. And this playbook will surely be used by other people on social media platforms to move other stocks without a doubt. The revolution won’t be on the streets but in the twaddling thumbs of bored millennials.

Still, this is a remarkable moment. It’s as if a bunch of couch potatoes watching a Los Angeles Lakers basketball game on TV belted down their beer and nachos, barged onto the court—and proceeded to block LeBron James’s shots and mercilessly dunk on Anthony Davis. - Jason Zweig

The original revolution

A lot of smart people rightly pointed this out as this drama was playing out that calling this a revolution was an insult to the word. The real revolution started nearly 45 years ago when the head of a troubled mutual fund was fired, and it seemed like that fellow’s Wall Street career was over. That fellow’s name was Jack Bogle, the founder of the Vanguard Group and the creator of the world’s first retail index fund.

The creation of the index fund was the real revolution that shook Wall Street. We had written about the unbelievable story of how Jack launched the index fund, and I highly recommend you read it. It wasn’t just a US revolution, and the indexing revolution has spread across the world today.

The scope of the revolution that Jack Bogle unleashed on the greedy fat cats in Wall Street and rent-seeking active asset managers across the world is mind-boggling.

Here are some numbers:

The shift from costly, useless active funds to low-cost index funds isn’t just limited to the United States, It’s a global phenomenon.

Trillions have flown out of costly, useless active funds into low-cost index funds. The sheer scale of the shift is hard to wrap your head around. The humble index fund has been an unmitigated good for the common folk saving a part of their paycheck every month.

Source: FT

Today, the world’s largest mutual fund is the Vanguard Total Stock Market Index Fund. The AUM of the fund is now an astounding $1 trillion+. Not just this, most of the 10 largest funds globally today are low-cost index funds.
The humble boring index fund has helped investors save more than $300 billion in fees and counting. The shift into low-cost index funds isn’t anywhere near close to slowing down. In India, it hasn’t even started.
India’s largest mutual fund, the SBI Nifty 50 ETF with over Rs 89,000 crores in AUM, is an index fund. This is mostly money invested by the Employees' Provident Fund Organisation (EPFO), but nonetheless. Today, an active large-cap fund charges ~1.5%, but the expense ratio of the SBI Nifty 50 ETF is just 0.07%. Last year alone, the EPFO would have saved roughly Rs 800-1000+ crores it otherwise would have paid if it had invested in an actively managed large-cap mutual fund.
The total AUM of actively managed Indian large-funds is Rs 1.7 lakh crores. And hardly 5-10 funds of the 32 large-cap funds beat Nifty 50. Indian investors are paying between Rs 2000- 2500 crores in commissions every year for not beating the benchmarks, whattay fantastic deal! Add to this the fact that most multi-cap funds (now flexi-cap funds) are essentially closet large-cap funds. That’s nearly 3 lakh cores of AUM that underperforms a Nifty 50 index fund that charges just 0.1%.

Indian investors are paying nearly Rs 4000-5000 crores in commissions to “star fund managers” who can’t even keep up with Nifty 50, let alone beat it. In some cases, they can’t even keep up with a fixed deposit. 🤦‍♀️It’s daylight robbery masquerading as asset management.
Index funds aren’t just a US phenomenon. Indian investors are saving 1000s of crores in commissions by investing in index funds and ETFs. All Indian index funds investors owe Jack Bogle a huge thanks.

These are all billions and thousands of crores that would’ve otherwise gone to the greedy rent-seeking asset managers. All that money from useless, costly underperforming active funds would’ve enriched the shareholders of those AMCs but left the investors poorer.

That’s the original bloody revolution!

The best way to stick to the suits

The other narrative that came out of this circus was that these retail revolutionaries were sticking it to the suits by buying GameStop. Again, it’s just narrative stupidity. The biggest losers of this GameStop saga are the dumb revolutionaries.

One of the tragedies of this charade was how idiotic billionaires, corporate suits and influencers on business channels and social media encouraged these jokers and fanned the flames. But the billionaires, their yachts, and the suits will be alright.

But let’s run with this narrative stupidity for a second. To stick it to someone, the party on the receiving end of the sticking has to lose money. But in this whole farce, the people who tried to stick it were the biggest losers. The retail revolutionaries lost their retirement savings and their underwear. The parties who got the sticking will be perfectly alright, 2&20 baby!

But anyway, the real way you stick it to the suits and the greedy asset managers is by making them poorer. And old man Jack Bogle was the genius at sticking it to them and showed us all how to do it. Like I mentioned earlier, he stuck it to the greedy asset managers so good that they lost more than $300 billion in fees.

Not just that, he singlehandedly forced asset managers to slash their expense ratios, launch low-cost funds and, in the process, made them bleed their fat margins. The AUM of Vanguard today is about $6 trillion. In a world with no index funds, the suits and helpers would’ve milked that AUM for all it’s worth. What he did in the US had ripple effects across the world.

Common retail investors like you and me can today stick it to the greedy rent-seeking asset managers who offer overpriced useless active funds by investing in low-cost index funds and depriving them of new money into their costly useless active funds.

The only way to stick it to Wall Street is through low cost index investing, preferably through Vanguard (the only mutually-owned mutual fund company) where you give Wall Street literally nothing but get all the gains of the stock market. You people know this, right? - Bogleheads

The stock market doesn’t give a shit about your opinions and feelings

This is the other thing that annoyed me and is something of a pet peeve. The role of the stock market is to facilitate capital allocation. For us, plebians, the stock market is a place to channel our savings in the hope of fulfilling our goals like our children’s education, our retirement etc. It’s not a place to pass moral judgements or express outrage at something that “you” deem wrong.

A lot of people have been saying this for a long time, but the stock market is the worst place to agitate for change. When you buy a stock, it’s just an exchange between the buyer and the seller. The companies and other market participants don’t really care why you bought or sold a stock. They’re busy making money!

If you’re one of those people thinking that you can make a difference with your investments, it’s time to let go of that notion. The stock market couldn’t care less about your moral outrage. This is essentially what ESG is and this is precisely why I think it is stupid.

Ironically, what these jackasses don’t realize is that shorting a scammy stock is a much better way to teach the suits a lesson. If all the WSB maniacs banded together, shorted a fraudulent stock to zero, now that’s teaching the greedy suits a lesson. Causing a short squeeze in a troubled company to teach hedge funds a lesson is a bit like buying Reliance Communications to teach Anil Ambani a lesson.

If you really want to make a change with your investments, stage a hunger strike at a company’s AGM, run into the company’s head offices naked with a protest sign, record a song about how bad a company is and post it Tik-Tok. These things have a much better shot at change.