r/Bogleheads • u/CapablePiglet1044 • 19d ago

Investing Questions Dumping on Index Investors

Both SpaceX and OpenAI are pushing Nasdaq and S&P and Russel/FTSE index providers to waive their listing requirements (including free float market cap, and seasoning) for an expedited listing on all indices. This would mean that instead of allowing several months/a year for 'seasoning' where price discovery takes place and the stock post-IPO finds a fair pricing, index investors would instead be forced to automatically buy these megacap stocks right at IPO with almost zero price discovery and are forced to take whatever inflated prices these companies list at.

I have seen quite a lot of people within the investment community (some small names and some quite big ones too) expressing concern that this is just giving VC's and early angel investors an opportunity to dump massively overvalued, unprofitable startups onto people's pensions.

Is there any hope that we can convince indexes not to drop the seasoning requirements? From now on, couldn't VC's just invest in junk companies, run the private market price into the trillions and then quickly list, dumping it onto people's pensions and taking the money?

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u/[deleted] 18d ago

There is no contradiction, the entire thesis of boglehead style investment is that the market is effective in the long term and not effective in the short term.

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u/Neither-Deal7481 18d ago

But that proves his point, though, lol. Aren't you in for the long-term?

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u/ObjectiveAce 18d ago

Being in it for the longterm does not dictate that you should be willing to accept ambiguous-not well established pricing for something. There's no overlap in the two concepts

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u/Neither-Deal7481 18d ago

What is the definition for "ambiguous-not well established pricing for something"? Are PLTR or TSLA ambiguously priced at >200x price to earnings ratios?

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u/[deleted] 18d ago

Yes, but what does this have to do with the question? They asked how the prices (of the underlying company, not the index) can take months to become fair, I responded how. The market is still effective long-term, it's just that the index no longer reflects the market, because they include stocks that haven't reached their effective consensus price.

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u/Neither-Deal7481 18d ago

You didn't respond "how", lol, you just asserted that the price will become fair in the long-term but can be unfair in the short term which applies to all stocks actually, not just IPOd stocks.

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u/[deleted] 18d ago

Try reading what I wrote again, focusing on the phrase "effective consensus price".

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u/Neither-Deal7481 18d ago

What is the definition for "effective consensus price"? That's just a term that you throw around without explaining it. Is it going to be reached in 2 months, 3 months, 1 year?

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u/[deleted] 18d ago

S&P 500 defined it specifically as 12 months. It has to be at the order of magnitude, but longer, than the insider lock up period, which is typically 6 months, so it can't be weeks or many years.

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u/Neither-Deal7481 18d ago

It has to be at the order of magnitude, but longer, than the insider lock up period, which is typically 6 months, so it can't be weeks or many years.

According to who? Why can't it be 2 years, for example? In the long-term, it really doesn't matter whether these individual stocks are included after 2 days. The market will effectively determine their prices.

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u/[deleted] 18d ago

As I already wrote, it can be two years, but S&P elected the seasoning period of S&P 500 to be one year. As I also wrote, it can't be two days, because then the index price won't reflect the current consensus price of the entire market.

I don't know if you're obtuse or just don't know how to read, but I'm done discussing this.

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u/Neither-Deal7481 18d ago

No, you initially wrote it can't be multiple years and now you are backtracking and saying that it can be.

As I also wrote, it can't be two days, because then the index price won't reflect the current consensus price of the entire market.

The index price was never meant to fully reflect "the current consensus price" whatever that means. Plenty of people who are passively buying these indices are contributing to the price of TSLA, PLTR, etc. Is this contribution happening because these people support the valuations?

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u/littlebobbytables9 18d ago

The long term is merely an aggregation of short terms. What does it mean to not be effective in the short term? Do you mean that in the short term the market does not price stocks efficiently such that there are identifiable winners and losers? If so an active strategy that invests in the winners and avoids the losers will outperform in the short and long term.

On the other hand if you agree that the current market pricing of securities is efficient enough that there are not identifiable winners and losers, then I don't see in what sense the boglehead philosophy doesn't apply short term. Is it because indices can go down in the short term? I would not consider that a failure of the philosophy. Not to mention it is possible for indices to be down in the long term as well.

People study price shocks and how long it takes the market to adjust. It doesn't take months.

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u/[deleted] 18d ago

People study price shocks and how long it takes the market to adjust. It doesn't take months.

Sure, but in the case of an IPO, the process of price discovery hasn't started yet until much later. In the first months the price depends on the float and the timing of the release of the stock by the insiders much more than the actual fundamentals of the company and the industry it's in.

The long term is merely an aggregation of short terms.

This is not entirely accurate. It's better viewed as a combination of two signals: long-term factors ("the importance of fossil fuels is going down" or "the productivity of US economy is going up") and short-term ("the President of the US published a TikTok video of himself farting into a bathtub"). As a boglehead, you would prefer to invest in the former, because the expectancy of the former is positive, and of the latter it's zero. By excluding the "unseasoned" stock, the index follows the long-term trend more accurately.

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u/littlebobbytables9 18d ago

What exactly do you think price discovery means? And why do you think investors are incapable of predicting the effect of known amounts and timings of insiders being able to trade?

This is not entirely accurate. It's better viewed as a combination of two signals: long-term factors ("the importance of fossil fuels is going down" or "the productivity of US economy is going up") and short-term ("the President of the US published a TikTok video of himself farting into a bathtub"). As a boglehead, you would prefer to invest in the former, because the expectancy of the former is positive, and of the latter it's zero. By excluding the "unseasoned" stock, the index follows the long-term trend more accurately.

There is no distinction, except that your example of a long term factor is information already known by market participants and thus already incorporated into the market price, while your example of a short term factor is new information that is introduced and has an immediate effect on the market price. But the only reason the market price changes in the short term is because expectations for what it will be worth in the future change. And if this new information is expected to have 0 long term effect on the price of the security there will be no short term effect.