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> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.”

by kds3 7y ago

> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding. > She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An investor who holds both, on the other hand, would prefer that Coke and Pepsi avoid price wars. So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution.

ellisv 7y ago
> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. This just isn't practical. What if I'm invested in Big Bank and Big Tech Co. but then Big Tech Co. creates a wallet app and credit card -- do I have to sell my ownership in one of these companies? As an investor I definitely want to own companies that compete because I don't know which one is going to prevail. Owning just one of the companies doesn't really fix the problem either -- if I own only Pepsi does that mean I would want them to get into a price war with Coke?
- kds3 7y ago
  > do I have to sell my ownership in one of these companies? No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another. > As an investor I definitely want to own companies that compete because I don't know which one is going to prevail. That's the problem article describes! Such behavior reduces competition and hurts customers: >> This line of research began with a 2014 paper about competition among U.S. airlines that quietly shook the fund industry and the antitrust world. José Azar, an economist at the University of Navarra in Barcelona, along with Martin Schmalz and Isabel Tecu, showed that airline ticket prices were 3% to 7% higher because big funds owned stakes in so many airlines.
  - ellisv 7y ago
    > No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example. > That's the problem article describes! Such behavior reduces competition and hurts customers. Hedging shouldn't be illegal though. Let me buy both cows and chickens -- even though I don't know which people will want to eat later.
    - kds3 7y ago
      > This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example. So happened with Standard Oil and others after antitrust laws were introduced. Was their split bad? Or impractical? Don't you as a customer want Google and other companies to be splitted to AdWords, GoogleSearch, YouTube, Android, Waymo companies?
      - dodobirdlord 7y ago
        No, it's actually pretty much the selling point that Apple the phone manufacturer is also Apple the security chip manufacturer, Apple the OS development company, Apple the financial services company, and Apple the company that supplies the wallet app. This means that I only have to trust one entity to use Apple Pay to buy things with my phone. This largely collapses if Apple can't at the same time be a manufacturer of chips, a seller of phones, a developer of operating systems, a provider of applications, and a handler of financial transactions.
  - riddlemethat 7y ago
    Every company today is basically a tech company or transitioning into one. Does that mean you can now own only one stock?
    - wutbrodo 7y ago
      This is sort of meaningless use of the term, like saying every company is an electricity company or a paper company. Every company's _inputs_ are growing to include tech, but their outputs aren't: a company making tractor wheels or cans of soda is by no measure a tech company in the context of this conversation.
pfortuny 7y ago
No because that is essential for hedging, and hedging is good.
- ellisv 7y ago
  I absolutely agree. If you could only invest in one tech company, who would have invested in Apple/Amazon/Google instead of IBM? These are now large, successful companies that were able to succeed because investors were able to hedge and invest in an entire sector.
  - kds3 7y ago
    > If you could only invest in one tech company, who would have invested in Apple/Amazon/Google instead of IBM? IMHO there shouldn't be Apple/Amazon/Google/IBM companies as they are today. I want Google and other companies be splitted to AdWords, GoogleSearch, YouTube, Android, Waymo companies. And they should not use their dominant/monopolistic position in search/ads areas to get unfair advantage in other areas. So you would have to choose your investment between Android/Apple/WinMobile OS, AdWords/AdMob ads, Waymo/Cruise cars, Google/Yahoo/DuckDuckGo search, YouTube/Vimeo videos.
    - dodobirdlord 7y ago
      Including DuckDuckGo in your list of search companies exposes one of core issues that makes this idea unworkable. DuckDuckGo is basically just a skin that shells out to Bing, Yandex, or Google.
- kds3 7y ago
  > hedging is good. Is it? Article says that it can be bad for customers: >> José Azar, an economist at the University of Navarra in Barcelona, along with Martin Schmalz and Isabel Tecu, showed that airline ticket prices were 3% to 7% higher because big funds owned stakes in so many airlines.
doctorpangloss 7y ago
> She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An investor who holds both, on the other hand, would prefer that Coke and Pepsi avoid price wars. > So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. Nobody cares about Pepsi and Coca-Cola. Coca-Cola and Apple aren't competing, so if Coca-Cola can somehow be in the same index as Apple, and Apple gets 2x the return as Coca-Cola (which it does), which is what really makes the index look good against an average active picker (who doesn't pick Apple), it's a moot point who's allowed to own which shares in competing companies. There are two real stories about indices. The first is [1] -- sorting the huge individual winners into different indices so that crappy companies, like Comcast and AT&T, can ride up on the demand for the index they are part of. Then there's [2] -- that most demand for individual stocks is the corporations themselves. When you buy an individual stock versus an index with that stock, you're really making two bets: (1) a bet that there are an excess of individual stock pickers for this stock than for the indices it is part of, and (2) a bet on how much cash a company can get from consumers (even if it is a B2B company) to spend on buybacks in the long term. When you buy the index, you are betting that an industry or corporate class (e.g. large cap companies) are going to sort winners into the index more favorably and claim large amounts of consumer cash from outside that industry / low camp & mid cap stocks. [3] There are negative trending industries! See S&P Oil and Gas Exploration. The article is talking about Coca-Cola and Pepsi, which do not create new products, they are marketing companies, it isn't about prices at all for them, it is such an utterly dumb example. She should be talking about two fracking companies, whose stock performance is extremely sensitive to oil prices. The opposite of what the article thinks is happening: people are exiting common ownership of the companies (e.g. the S&P Oil and Gas Exploration index) that, as common owners, they have the most to gain from anti-trust (e.g. agreeing on a price for gas and oil). [1] https://en.wikipedia.org/wiki/Communication_services_sector_reshuffle https://en.wikipedia.org/wiki/Communication_services_sector_... [2] https://thesoundingline.com/sp-500-buybacks-now-outpace-all-rd-spending-in-the-us/ https://thesoundingline.com/sp-500-buybacks-now-outpace-all-... [3] there are low and mid cap indices, but nobody ever talks about those outside of trade journals
fredophile 7y ago
What if I believe that the overall market for cola beverages will increase but don't want to place a bet on a specific company? In that case it makes sense to buy both Coke and Pepsi.
ravenstine 7y ago
> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. Your suggestion is for people to take big risks and put all their eggs in a few baskets. Not only is this totally opposed to why people make multiple investments, but doing so could make the market more volatile because any fluctuation or current event could encourage people to suddenly "switch sides".

by kds3 7y ago

ellisv 7y ago

> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. This just isn't practical. What if I'm invested in Big Bank and Big Tech Co. but then Big Tech Co. creates a wallet app and credit card -- do I have to sell my ownership in one of these companies? As an investor I definitely want to own companies that compete because I don't know which one is going to prevail. Owning just one of the companies doesn't really fix the problem either -- if I own only Pepsi does that mean I would want them to get into a price war with Coke?

kds3 7y ago
> do I have to sell my ownership in one of these companies? No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another. > As an investor I definitely want to own companies that compete because I don't know which one is going to prevail. That's the problem article describes! Such behavior reduces competition and hurts customers: >> This line of research began with a 2014 paper about competition among U.S. airlines that quietly shook the fund industry and the antitrust world. José Azar, an economist at the University of Navarra in Barcelona, along with Martin Schmalz and Isabel Tecu, showed that airline ticket prices were 3% to 7% higher because big funds owned stakes in so many airlines.
- ellisv 7y ago
  > No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example. > That's the problem article describes! Such behavior reduces competition and hurts customers. Hedging shouldn't be illegal though. Let me buy both cows and chickens -- even though I don't know which people will want to eat later.
  - kds3 7y ago
    > This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example. So happened with Standard Oil and others after antitrust laws were introduced. Was their split bad? Or impractical? Don't you as a customer want Google and other companies to be splitted to AdWords, GoogleSearch, YouTube, Android, Waymo companies?
    - dodobirdlord 7y ago
      No, it's actually pretty much the selling point that Apple the phone manufacturer is also Apple the security chip manufacturer, Apple the OS development company, Apple the financial services company, and Apple the company that supplies the wallet app. This means that I only have to trust one entity to use Apple Pay to buy things with my phone. This largely collapses if Apple can't at the same time be a manufacturer of chips, a seller of phones, a developer of operating systems, a provider of applications, and a handler of financial transactions.
- riddlemethat 7y ago
  Every company today is basically a tech company or transitioning into one. Does that mean you can now own only one stock?
  - wutbrodo 7y ago
    This is sort of meaningless use of the term, like saying every company is an electricity company or a paper company. Every company's _inputs_ are growing to include tech, but their outputs aren't: a company making tractor wheels or cans of soda is by no measure a tech company in the context of this conversation.

pfortuny 7y ago

No because that is essential for hedging, and hedging is good.

ellisv 7y ago
I absolutely agree. If you could only invest in one tech company, who would have invested in Apple/Amazon/Google instead of IBM? These are now large, successful companies that were able to succeed because investors were able to hedge and invest in an entire sector.
- kds3 7y ago
  > If you could only invest in one tech company, who would have invested in Apple/Amazon/Google instead of IBM? IMHO there shouldn't be Apple/Amazon/Google/IBM companies as they are today. I want Google and other companies be splitted to AdWords, GoogleSearch, YouTube, Android, Waymo companies. And they should not use their dominant/monopolistic position in search/ads areas to get unfair advantage in other areas. So you would have to choose your investment between Android/Apple/WinMobile OS, AdWords/AdMob ads, Waymo/Cruise cars, Google/Yahoo/DuckDuckGo search, YouTube/Vimeo videos.
  - dodobirdlord 7y ago
    Including DuckDuckGo in your list of search companies exposes one of core issues that makes this idea unworkable. DuckDuckGo is basically just a skin that shells out to Bing, Yandex, or Google.
kds3 7y ago
> hedging is good. Is it? Article says that it can be bad for customers: >> José Azar, an economist at the University of Navarra in Barcelona, along with Martin Schmalz and Isabel Tecu, showed that airline ticket prices were 3% to 7% higher because big funds owned stakes in so many airlines.

doctorpangloss 7y ago

> She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An investor who holds both, on the other hand, would prefer that Coke and Pepsi avoid price wars. > So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. Nobody cares about Pepsi and Coca-Cola. Coca-Cola and Apple aren't competing, so if Coca-Cola can somehow be in the same index as Apple, and Apple gets 2x the return as Coca-Cola (which it does), which is what really makes the index look good against an average active picker (who doesn't pick Apple), it's a moot point who's allowed to own which shares in competing companies. There are two real stories about indices. The first is [1] -- sorting the huge individual winners into different indices so that crappy companies, like Comcast and AT&T, can ride up on the demand for the index they are part of. Then there's [2] -- that most demand for individual stocks is the corporations themselves. When you buy an individual stock versus an index with that stock, you're really making two bets: (1) a bet that there are an excess of individual stock pickers for this stock than for the indices it is part of, and (2) a bet on how much cash a company can get from consumers (even if it is a B2B company) to spend on buybacks in the long term. When you buy the index, you are betting that an industry or corporate class (e.g. large cap companies) are going to sort winners into the index more favorably and claim large amounts of consumer cash from outside that industry / low camp & mid cap stocks. [3] There are negative trending industries! See S&P Oil and Gas Exploration. The article is talking about Coca-Cola and Pepsi, which do not create new products, they are marketing companies, it isn't about prices at all for them, it is such an utterly dumb example. She should be talking about two fracking companies, whose stock performance is extremely sensitive to oil prices. The opposite of what the article thinks is happening: people are exiting common ownership of the companies (e.g. the S&P Oil and Gas Exploration index) that, as common owners, they have the most to gain from anti-trust (e.g. agreeing on a price for gas and oil). [1] https://en.wikipedia.org/wiki/Communication_services_sector_reshuffle https://en.wikipedia.org/wiki/Communication_services_sector_... [2] https://thesoundingline.com/sp-500-buybacks-now-outpace-all-rd-spending-in-the-us/ https://thesoundingline.com/sp-500-buybacks-now-outpace-all-... [3] there are low and mid cap indices, but nobody ever talks about those outside of trade journals

fredophile 7y ago

What if I believe that the overall market for cola beverages will increase but don't want to place a bet on a specific company? In that case it makes sense to buy both Coke and Pepsi.

ravenstine 7y ago

> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. Your suggestion is for people to take big risks and put all their eggs in a few baskets. Not only is this totally opposed to why people make multiple investments, but doing so could make the market more volatile because any fluctuation or current event could encourage people to suddenly "switch sides".