Hacker News Reader

Comment by diego | Hacker News Reader

Well, they can sell the stock. If you don't believe in the CEO and can't fire him, you get out. Sounds like same shareholders are trying to stage a coup, good luck with that.

View on HN

If you have a 401K or other retirement vehicle, you very likely own FB shares as part of your S&P500 exposure. There really isn't an "S&P499" that includes everything but FB

EDIT: assumably the downvotes are from people who are unaware of the situation. https://us.spindices.com/indices/equity/sp-500 FB is the 4th largest exposure.

Also, in contrast to what some commenters believe, you cannot short FB from your retirement fund. https://www.irs.gov/publications/p590b is the relevant part from the IRS rules

Regarding S&P499: as soon as you exclude one company, you're probably going to want to exclude a whole lot more.

Read down the list, and it's "this company set back technology and grew by consistently backstabbing partners and customers alike... this company set back the country by taking billions of dollars and then didn't build the infrastructure the fees were for... these companies grew by secretly mass-spying on everyone in ways that were already illegal in other modalities... this company killed all those people through arguably criminal negligence, and walked away..."

(I'm a big proponent of passive index investing, and I don't mean to discourage it. Bogle-style US total-market or S&P 500, balanced with Barclay's US bond index. All the better that it's passive, so you're reminded less of how sausage is made, while you try to make sure you won't retire as a homeless street person.)

For that reason I'd want a really simple rule, such as "allows unprivileged shareholders real voting control." Except the S&P 500 has actually been enforcing that rule since 2017. Google and Facebook are grandfathered in, though.

https://www.dividend.com/news/2017/11/03/companies-multiple-...

Also, in contrast to what some commenters believe, you cannot short FB from your retirement fund.

One most certainly can, as most recently I sold calls from my Fidelity rollover IRA. Now can I literally short stocks from my IRA? I just tried it, and I'm not given the option (whereas I am on another account). Maybe that's a feature I don't have turned on, or maybe I can't literally do that from an IRA. But if I can trade options contracts, I could effectively do the same as shorting.

You are not permitted to use retirement funds for any margin trading, including short-selling. That is why you cannot short from your account:

https://www.irs.gov/publications/p590b

> Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

> The following are some examples of prohibited transactions with a traditional IRA.

> - Using it as security for a loan.

If your IRA let you sell calls, you likely own the underlying equity.

Surprising how many people aren't familiar with the rules and just downvote

You are not permitted to use retirement funds for any margin trading, including short-selling.

Ah, of course, borrowing the shares and all. Hadn't given it a lot of thought, frankly; short trading stays away from the IRA.

If your IRA let you sell calls, you likely own the underlying equity.

For sure, trying to get rid of the underlying stock that I didn't want anymore. I'd be shocked if one were allowed to use their IRA to trade, say, naked puts. But without looking to see if I've done it, I'll assume one can buy puts (with a trade for the underlying stock) because I buy calls all the time using the IRA.

You don’t need to own the underlying, you just need to define your risk by, for example, buying a far out of the money call. You would need to have funds to cover the buying power tied up but many options plays like this would be done over a short period so it can be viable.

If you own an index fund does the fund actually vote?

I wouldn't want my passive investment vehicle to be actively influencing the companies I am investing in.

Oh they do. Interesting.

https://about.vanguard.com/investment-stewardship/how-our-fu...

Not clear to me how they decided how to vote.

They have a department responsible for this, among other things.

https://about.vanguard.com/investment-stewardship/perspectiv...

I only opened up the "500 Index Fund" PDF but it was interesting to note that they voted against almost every proposal that was brought by shareholders

Yes, and they voted against the proposals mentioned in the article, except for equal share class voting rights.

They probably vote in the best interests of other people. They possibly even sell the votes... (Is that illegal?)

Yes, it is.

Of course it is, if it can. This is a consequence of putting an investment vehicle in charge of what it's investing in. The only alternative is having the investment vehicle potentially own a company and not get to control it, I suppose because it's an investment vehicle and not capable of directing a company appropriately.

Which makes sense to ME, but you can be sure your investment vehicle is actively directing everything you're investing in, towards whatever benefits the short-term value of whatever you think you're helping.

Possibly excepting certain arrogant companies like I dunno, Amazon, Uber: stuff that is essentially ungovernable, especially when you can't get controlling interest of the thing.

I vote every time my fund manager allows me to.

Someone has to vote as those shares are owned by someone.

Since you are not actively investing in FB or any individual company, you can’t vote (since you passively invested in an index). Seems fair to me.

For most of us who have exposure to the company through our S&P500 exposure in retirement accounts, there's no real alternative that gives broad market exposure but doesn't have FB.

They do, and it's arguably a big problem, since they aren't trained to make good managerial or investment decisions--just following a formula. And while no accusations have been laid directly, the economic consequences of the votes they have far outweigh their exposure to those decisions, so they're susceptible to corruption.

Huh. That sounds bad. That sounds like power collecting where it shouldn't for the wrong reasons. Bad enough that maybe it needs a legal or regulatory solution.

Why? How is Vanguard, an investment management firm which employees thousands of trained professionals, not qualified to cast votes on corporate governance? And in what sense is it "power collecting"?

Yes, this is an issue that is largely debated, and there are some very interesting conflicts of interest - just curious why you specifically think it's so bad.

My issue with it is that index funds don't compete on the quality of their contribution to governance. Many index funds are kind of fungible with similar low costs and performance relatively to the index they are supposed to track.

So how much money (and by extension votes) these index funds wield is not connected to the quality of their contribution to governance. It also seems to me like there isn't much accountability and visibility into how they are voting from the perspective of people deciding which index fund to invest in.

So you have people collecting massive amounts of clout, but no feedback loop ensuring that they lose that clout if they underperform at that particular task.

Also one of the talking points of passive investing is that the trained professionals aren't as qualified or smart as they think they are. Active management risk is something to be avoided. As some of these funds grow in size they wield significant power and introduce active management risk. You just don't see it because the fund still tracks the index.

I know that last bit is splitting hairs. Some active management always occurs otherwise how can companies function.

One question is why should a passive fund be treated differently from an active fund in terms of how they contribute to governance? One difference is some of these index funds are absolutely massive and wield more power then a typical active fund.

Yeah, definitely good points. Even with a department looking after voting, they're not nearly as "vested" in the results of their voting as something like an actively managed long value fund is.

They also have large conflicts of interest -- they don't just own a big chunk of a company, they own a big chunk of its competitors too.

Index funds are agents of their certificate owners, so no principal-agent problem. Seems fine to me.

It's not principal agent problem, it's a competition problem. Maybe Sprint can't buy T-Mobile, but if Vanguard owns both it amounts to the same thing.

John Bogle himself chiming in on it:

https://www.seattletimes.com/business/vanguard-founder-john-...

True, there isn't an S&P499. But:

1) There are mutual funds that do stick to "value" stocks i.e. low P/E ratios, which would exclude companies like FB.

2) If you really want to, you could take a short position that cancels the exposure to FB in an S&P index fund. (I don't know how legal that is in a retirement fund, but I know you can buy ETFs that have short positions in them, so it should be legal in principle.)

3) People hold actively managed funds in their 401ks (though I don't advise it myself), and those funds may decide against such stocks as FB.

Fair point that large-cap index funds will have notable exposure though.

The retirement vehicles are interesting. The bank managing my pension won't investing my pension in weapons manufacturing, because that would be immoral. Let's ignore the fact that if I show up with a million dollars they would certainly help me buy Raytheon stock, but what if I don't want my pension invested in Facebook. I can't tell them no, they decide what's moral and what isn't.

you can short the stock to reduce your exposure outside of your retirement fund

This right here. This is exactly why hedging options exist. If shorting isn't available, then you can make due with options short-call + long-put is roughly equivalent to a short stock.

In any case, the point of a S&P500 fund is to get exposure to ALL companies, roughly in order of their size. Facebook is a big company, so any fund should have a chunk of it.

I would note that some ESG ETFs in which I hold shares (i.e. where the portfolio make-up and allocations are informed, to some degree, by Environmental, Social, and Governance characteristics of the eligible corporations - basically a somewhat more ethical version of an S&P500 index fund) exclude Facebook while retaining stakes in Google and other major tech companies. (Can't recall with confidence but I think it's a BlackRock iShares fund)

Sure, but the entire point of owning the S&P500 (and indexes like this in general) is to acknowledge that you may be wrong about an individual company, so you protect yourself with exposure to many.

You also have no say in how any of those companies are run, so none of those people are the ones being talked about here.

Then don't buy the S&P 500. There are myriad investment options in this world.

Investors can still voice their displeasure, and sometimes it works (see: Uber)

The whole point of owning stock is being able to vote on who runs the company.

Not this stock. It's split into two classes, one of which grants vastly more voting power than the other. Zuckerberg still personally controls a majority of the votes.

"Stock" is just a way to split up ownership of a company, letting the owners vote on management.

Without this feature something isn't really a stock, at least not in spirit. It's more like the shittiest of trash-tier junk bonds.

A bond has a fixed return if held to maturity. Equity has unlimited upside and has no maturity. Stock is the residual claim on a company's assets after all other claims are settled. Equity isn't a junk bond, with or without voting rights.

Non-voting shares as an asset class are very much like junk bonds in that they give you no control of a company, and they are worse than junk bonds in that they are even lower than junior unsecured junk when it comes to recovery.

"Fixed return" isn't really relevant from a practical standpoint because shares and junk debt both have volatile prices, and price is what actually matters when it comes to securities like this.

> "Fixed return" isn't really relevant from a practical standpoint because shares and junk debt both have volatile prices...

It's absolutely relevant. Sometimes junior debt trades a little bit like equity but the point is that bonds mature whereas equity exists for the lifetime of a company.

>... price is what actually matters when it comes to securities like this.

Absolute return is what matters, not price. The return of a bond - junk or otherwise - is known on day one of a bond issuance in the absence of default. That makes fixed income a fundamentally different asset class to equity.

Even a junior perpetual junk bond is different to equity. The junk bond's coupons would be fixed, whereas dividends vary according to company profits.

What percentage of junk bonds are bought at issuance and held to maturity by investors? 0.5%? Maybe?

For literally everyone else, it is, in fact, price that matters.

> For literally everyone else, it is, in fact, price that matters.

I made the distinction between price and total return above because an asset's price can remain more or less constant while still being a profitable investment: for example a utility company with a high dividend yield.

Let me try another tack. Would you rather own non-voting equity or junior debt in a company that is about to strike a deal that will make them wildly profitable?

"junk stock"

And yet people keep buying FB stock, and IPOs with this same dual-class scheme (and no intent to ever pay dividends) still get hyped up. It's because the people buying them aren't long-term value investors, they're gamblers. They just hope to find another sucker to buy the stock at a higher price than they paid.

Maybe true, but they knew it going in. It’s not like it was a secret that he has the majority of the votes.

Yeah but it doesn't expire and the underlying asset can increase in value. And the interest rate can fluctuate. Not really comparable to a junk bond

That's not the _whole_ point. You also can have financial benefits.

I'd argue that's the main benefit. At least that's what I gleaned from the Financial Markets course taught my Robert Shiller. You own stock so you can get paid dividends. That's what provides its inherent value which underpins a lot of how the stock market works (at least at a theoretical level).

Roughly 40% of global stocks don't even pay dividends [0], so that's pretty clearly not the only reason to own stocks.

[0] https://money.usnews.com/money/blogs/the-smarter-mutual-fund... (from 2014, but the number likely hasn't changed substantially)

A stock only has value (theoretically) because it offers cash flow to owners. that cash flow is created by eg distributions (dividends) or as a result of an acquisition. If a stock will never create cash flow for the owner it theoretically has no value.

In theory, the price of a stock reflects the market's expectation of future dividends. In practice, the market expects lots of things that aren't true.

I've come around to the idea that stocks have an intrinsic value as collateral/store of value.

I saw that with a family that owned a condemned property. They couldn't rent it but they sure could borrow against the land price (ever rising) minus the cost of demo'ing the old building.

I also think stocks tend to keep up with/beat inflation and thus are better than cash as a store of value.

Bingo.

So long as asset value inflates, it's good for cash via loans. The moreso if asset inflation > nominal interest rates.

The expectation doesn't have to be a certainty for this to make sense.

If there is an 0.01% chance of paying $10,000 dividend, or 100% chance of paying $1 dividend, the expected payout is the same.

I don't have any data handy, but intuitively I would argue the majority of people owning stock never do anything to control the management of the company, neither they want to. They want the part of the revenue stream that is produced either by dividends or by stock appreciation, that's it. Of course, there are activist investors, but saying all of them are such sounds wrong.

Almost. From what I've observed, the main reason to own stock is to flip it to the next sucker for more than you bought it for. I don't often see people caring about dividends directly. I guess that's a job for index funds?

Reply on news.ycombinator.com