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PaperclipPerfector  27d ago (text post)   2278 thread views

Small-Scale Question Sunday for December 22, 2024

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

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It's VC/investor capital.

For example, in its existence as a company, Door Dash has lost over $5 billion.

Nevertheless, their stock is valued at $70 billion (as compared to $7 billion for U.S. Steel) and is up 70% year to date. So clearly someone thinks that, any moment now, they are going to turn the corner and become profitable.

I think they're wrong, but what do I know?

Note: $DASH can actually lose money for eternity and be fine as long as they continue to find new suckers index fund investors to keep buying their stock. In the last 3 years, they've increased their share count by around 20%. They can sell stock and recoup more than the losses from their businesses. It's kinda a ponzi.

Isn't watering down stock illegal?

No. Most companies do it. Some to extreme levels.

I've been seriously looking at my index funds and trying to find a way to avoid taking a bath in the next crash. It's going to be incredibly ugly.

I use something called the Golden Butterfly portfolio which is a prosperity-tilted allocation of the Permanent Portfolio. I chose this because I have no idea what I’m doing.

If you really want to avoid one specific company, short-sell it in proportion to the index fund. For example, if you have 100,000 in an index fund, and Door Dash is 5% of the index, short Door Dash for 5000. This sets up a hedge which effectively strips out Door Dash from the rest of the index. You don't gain when Door Dash goes up, but you also don't lose money when Door Dash goes down.

DoorDash constitutes less than 0.1 percent of Vanguard's "Total [US] Stock Market Index Fund", and is not even large enough to appear in its "[S&P] 500 Index Fund". So it isn't worth worrying about in the end.

The struggle between not wanting to miss out on the rally, but not wanting to be left holding the bag.

I wonder what an "S&P 500, but weighted by profit rather than by market capitalization" index fund would look like.

It probably wouldn't look too different. Most of the megacap tech companies are very profitable. And the S&P 500 already has a profitability filter that keeps out the worst garbage.

On the other hand, something like 40% of the Russell 2000 companies (ranked #1001–3000 by market cap) are unprofitable. A significant percent are essentially zombies, kept afloat by cheap debt and shareholder dilution.

In the last 20 years, stock market breadth has been decimated by software eating the world. I wouldn't be surprised if software has captured >100% of the increase in corporate profits in the last 20 years, with non-software being in a deep depression.

It probably wouldn't look too different.

Actually, according to this (not-very-trustworthy-looking) website, it would look quite different.

Very lazy assessment of the 28 companies that are in the top twenty of either capitalization or profit

Some notable differences:

  • Apple: 12.9 % of capitalization, 6.5 % of profit (6.4-% decrease)

  • Nvidia: 11.2 % of capitalization, 4.0 % of profit (7.3-% decrease)

  • Microsoft: 10.9 % of capitalization, 6.0 % of profit (4.9-% decrease)

  • Amazon: 7.9 % of capitalization, 3.4 % of profit (4.6-% decrease)

  • Saudi Aramco: 6.0 % of capitalization, 12.0 % of profit (6.0-% increase)

  • Berkshire Hathaway: 3.3 % of capitalization, 7.6 % of profit (4.4-% increase)

  • CEMIG: 0.0 % of capitalization, 14.2 % of profit (14.2-% increase)

  • Toyota: 0.8 % of capitalization, 2.3 % of profit (1.5-% increase)

If you pick the most extreme companies by any two metrics, even highly correlated ones, they'll exhibit that kind of divergence, because the tails come apart (you'll also select for anomalies like data entry errors or fraud).

No, this isn't accurate.

Saudi Aramco, CEMIG?, and Toyota are not members of the S&P 500.

Also, the numbers for CEMIG defy logic and are likely the result of some sort of currency translation or data entry error.

Sincerely and Bah Humbug! -Ebeneezer Scrooge

They're called value ETFs (perhaps not exactly but they're an approximation of what you want)

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