Ritholtz and Brown are impresarios of the Twitterverse and presiding geniuses behind Ritholtz’s fast-growing Wealth Management. In a recent conversation with Barron’s, they talked about their views on the market and the charm of direct indexing. Here, in an edited excerpt of the interview, the two discuss attraction
Bitcoin, and special purpose acquisition companies (SPACs).
Barron’s: In a wild year, some wild investments caught the imagination of investors. Tesla (TSLA) has shot up 731% so far this year; Bitcoin reached a record high of more than $ 23,000, and SPACs – shell companies created to go public in order to acquire a private company, became M&A’s hottest mechanism. What’s happening?
Brown:Jack Bogle [founder of Vanguard and inventor of the index fund] has done more for the asset management profession and individual investors than Warren Buffett, but one of the things that worried me about his acolytes and the puritanical movement around indexing in general, is how he doesn’t allow the idea that sometimes people just feel like guessing, because they want to. It’s their money. It’s their life. We of course want to play around with Tesla. So I think that stuff has a place in portfolios.
Let’s start with your thoughts on Bitcoin.
Brown: Whether or not Bitcoin is gaining prominence among institutional investors and then throwing into individuals’ wealth management accounts, remains to be seen. I can totally compile it. Bitcoin may be the next generation version of gold, but that part of the story is not so interesting, and we are not building jobs in Bitcoin [based on] that. Financial advisers are currently intimidated to add cryptocurrencies, because no one wants to be the first one to be sued for blowing up a client account with Bitcoin.
A SPACs? These shell companies were reappearing as a way to take private companies public without going through the traditional vetting that an initial public offering requires. SPACs don’t have a reputation – are they as dangerous as they used to be?
Brown: They are extremely conservative. They are basically piles of cash. So hedge funds can buy them and [say] they are invested. But they are not invested. They own cash with an option to invest. They can flip it a announced deal day, or even vote against the deal. So it’s a clever way for managers who are expected to put money to work, but don’t have ideas or don’t want to take as much risk. SPACs are speculative if you hold them past the point that they acquire them, because then you’re investing in a business that was essentially vetted by one investor, rather than a traditional IPO roadshow. After
(NKLA) tried to go public as a traditional IPO, it never would have done.
Ritholtz: Why should SPACs follow any different type of performance classification than mutual funds or ETFs or hedge funds? Ninety percent of everything is junk.
Brown: Their historical performance is appalling. This is because the type of company that made the SPAC historically not good enough to warrant their own traditional idea. Now, I’m a bit sympathetic to the idea that SPAC is professionalizing. But not all of them.
Ritholtz: They compete with each other for the same handful of things.
What are your thoughts on Tesla, which just joined the S&P 500?
Ritholtz: Everyone is looking at Tesla wrong. Tesla has already shifted the pattern. They’ve already won. Whatever happens with Tesla’s stock price is almost irrelevant. I did an analysis recently that looked at the 10 most valuable car manufacturers. About half their value comes from the side of the electric car. Traditional automakers think “we’re not going to let Elon Musk do what Jeff Bezos has done for booksellers and retailers.”
Tesla and Bitoin represented completely different things. In essence, Tesla is a recognition that the world, no matter what the president says, is moving towards renewable and green energy. Look at the price of coal under an anti-green president. Look at the price of oil. The market has already decided that this new technology is the future. Ultimately, it will be Mercedes (DAI.Germany),
(TM) is going to be the world’s leading electric car manufacturer.
Brown: I find it funny that a huge swath of the industry thinks it’s more conservative to have been held
(XOM) over the last 10 years, [which is essentially] deliberately denying climate science – and actively trying to tackle climate science [via Tesla], that’s the speculative drama. As we’ve learned, Exxon is now a shell of its former self. The idea that it could hang on oil forever was more speculative than the idea that we could build batteries.
Thank you, ladies.