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Comment by sokoloff | Hacker News Reader

The whole Nikola situation was fascinating to me at the time.

I shorted the shares and bought puts in the days to couple of months following the Hindenburg publication. I was surprised at how long the shares held up; they were still trading around $10/sh when I closed the last of my shorts at the end of 2021 (~15 months after the publication which was never substantially refuted and never substantially in doubt as far as I could tell).

I would have expected a much quicker and less orderly collapse of share prices and the absence of that made me question my understanding of the stock market entirely, specifically my previous belief that “all public information is quickly priced in.” (That is still not entirely resolved for me.)

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Part of the story is how passive index ETFs work. https://www.etf.com/stock/NKLA sort by # shares owned, you'll see the biggest owners of NKLA stock are ishares funds, vanguard etc. These funds buy based on market cap of the stock. Anyone with a retirement account that holds passive etfs (or things like target date retirement funds) is a stockholder in NKLA, a stock which no active fund manager would touch with a 10foot pole.

As passive accounts for more than half of the total market funds/flows, blatant frauds that somehow manage to be included in these funds have an easier time surviving (and the larger the market cap, the more inflows their shares receive). In the 2021 stock mania there were other factors at play too.

Are these ETFs, target date retirement funds, etc. protected against class action lawsuits from shareholders who end up holding the bag due to the inclusion of fraudulent stocks like this? Obviously waivers are signed about how performance is never guaranteed, but that's a bit different from a need to timely exit positions in fraudulent companies.

The whole point of passive investing is to not pick winners and losers, to leave that part of the job to professional speculators (including, yes, short sellers). Because you aren't going to do any better than them on average, even if they do on occasion pick some duds (like Nikola).

Imagine you invested in the index minus Nikola. This isn't improbable as several hours of due diligence would have raised concerns.

This shows that the choice of stocks included in an index is not arbitrary. You don't get "better on average" automatically just by buying the 500 stocks on a list someone sold to you.

The share of Nikola in a total-market index fund was so tiny as to be negligble. If one person invested $100K in a total market fund, and another put together thier own "total market minus nikola" fund, even with zero trading fees, the latter might be up maybe $10 or so over the former. After fees and slippage, they're almost certainly behind.

Sure, but I'm talking about when the professionals that you leave it to end up being negligent. Picking a dud occasionally isn't negligent, but I'm wondering if continuing to hold something fraudulent longer than reasonably necessary to ingest damning evidence and dump it might be.

This might be the case if you paid a professional manager to actively manage a portfolio - but not when you are paying the manager to track an index.

SPACs are such an obvious joke on the stock system.

This is quite fascinating. I hope you are able to provide more details on the machinations of these funds. I see the largest allocation is "Direxion Moonshot Innovators ETF" [1], [2].

What money is flowing into this? Why is "Direxion Moonshot Innovators ETF" owned by anyone?

For moments like this, I suspect this fund will liquidate its position? But I'm sure the market for NKLA shares is not that hot...

[1] https://www.etf.com/stock/NKLA [2] https://www.direxion.com/product/moonshot-innovators-etf

>>These funds buy based on market cap of the stock.

> I hope you are able to provide more details on the machinations of these funds.

there are no machinations, it's mechanical, it's betting on expected value while diversifying risk/standard deviation.

Nope - even boring S&P 500 index funds have analysis at their heart. That qualifies those stocks for the S&P 500.

Daily rebalancing is mechanical, and the criteria is coarse- but a decision was made and analysis is done.

And the fund managers do have some small discretion to deviate from the index they track

There is no analysis done to be included in the S&P500. It's 100% rules based. It's extremely unlikely that a stock like NKLA would ever qualify for the S&P500 but it was included in the Russel 2000 (also rules based), and by definition in any total stock market index fund.

Seeing if they follow the rules IS analysis. As is the work of coming up with the rules based on some dataset, which S&P did and does.

Or do you think they yolo’d that criteria out in a vacuum?

It just isn’t micromanaging type analysis. Rather a ‘we think this chunk is worthwhile’ type analysis.

Sure, but in the context of stocks “analysis” typically refers to “fundamental analysis” which means some sort of deep dive into the business model and financial statements of the company… the rules of the S&P are more like “it the market cap above X” and “did it make a profit in the last year”. This is by design as far away from discretionary/traditional “fundamental analysis” as can be.

The caps are set so that the right number of companies fit. Hence ‘500’ in this case. And change to ensure it all works with their goals.

There are many different types of strategies that you’re talking about - momentum, ‘value’, etc. that all set various rules, and are applied in similar ways too.

The analysis I’m talking about isn’t that different, and is still analysis based on fundamentals. It’s just used a bit differently and intentionally trying to be coarse and relatively transparent/mechanical. Private funds keep it opaque and ‘secret sauce’, and have the freedom to do whatever (within the limits of their charter).

Other indexes have more in depth rules that cover exactly the other elements you’re discussing (sector specific indexes, ‘green’ indexes, ‘good governance’ indexes, etc.).

They still use the same analysis tools though.

> Anyone with a retirement account that holds passive etfs

This is incorrect. Not all ETFs. These funds are sector focused (vehicles). A regular S&P500 ETF will not hold NKLA.

I was trying to be brief but you are correct. NKLA was not in the SP500, but it was in the Russel 2000. Also, target retirement date funds will hold total stock market index funds, which will contain NKLA.

Look: https://money.cnn.com/quote/shareholders/shareholders.html?s... Top ten holders are Vanguard, Blackrock, & the other usual providers of index ETFs.

>These funds buy based on market cap of the stock.

There might potentially be a problem if ETFs owned the entire market, but owning half the market cap still allows for market pricing of the other half. I don't see that you are pointing out a problem?

The market put a price on NKLA, and you are simply claiming that you know better than the market (to hell with the wisdom of crowds); such beliefs are generally unfounded. One example does not tell a convincing story, do you have a portfolio of disbelief that you have tracked the performance of?

You don't need to be at the limit case of 100% of the market owned by passive funds to start creating problems [1].

Still, my point was that passive EFTs create a constant bid on company shares, disregarding any fundamentals. The speculative mania of 2021 artificially inflated the market cap of many SPACs like NKLA - speculators have all the rights to do this, but passive ETFs will blindly follow and increase their allocation based on market cap (the effect goes both ways, as price goes down allocation decreases). Who has been buying NKLA shares? Vanguard, for one: look at fund flows since 2021, mostly positive https://etfdb.com/etf/VTI/#fund-flows most of those inflows result in purchases of NKLA shares.

[1] https://www.acheroninsights.com/blog/wbdvi4uarbd3hdssx3f5kaf...

“The market can stay irrational longer than you can stay solvent.”

Eventually- Markets go back to the mean, but predicting when is the hard part.

“It’s very lonely being the only correct investor on Wall Street”

Interesting -- I made quite a lot on NKLA selling put spreads. It was obvious that they were a fraud. But the market was full of obvious frauds that didn't collapse. GME and AMC had scared the short-sellers out of the market. Idiots were pouring money into NFTs. I just made a bet that NKLA wouldn't fall apart right away, and it paid off very well.

Well, in the end all the short sellers profited hugely from Gamestock, the hodld crowd was left holding the bag. That's what happenes if, as part of a pump and dump, you forget to dump.

> Hindenburg publication

I have not been following the Nikola story, and the fact that the founder has now been convicted of fraud came as news to me. I also was not aware that Hindenburg had published anything on Nikola - reading that now: https://hindenburgresearch.com/nikola/

> belief that “all public information is quickly priced in.”

if you actually believed that all public information is quickly priced in, why did you short or buy puts? Did you have non-public information? Being bearish is expressing doubt that the information is priced in.

What subsequently happened (nothing) is confirmation that the information was priced in, and should reinforce your stated belief.

Obviously, I believed that there was significant uncertainty around the validity of the Hindenburg information at the moment of its release, but my reading led me to a conclusion that Nikola was very likely not a viable company, likely not a viable company at the then-existing market cap, and that the balance of investor sentiment wasn't likely to tip towards the buy-side.

My surprise wasn't that that it took weeks to sort out (and for Nikola to issue comically terrible responses) but rather that, after making the judgment and investment, that it took well over a year to 75% complete with no credible (to me) positive news from the company.

Differences of opinion about the future are what makes a market. I'm puzzled at who was holding the opposing opinion and why...

> What subsequently happened (nothing)

I invite you to take a look at a 40 month (or just a 5 year) chart of $NKLA and decide if nothing happened to the shares.

> all public information is quickly priced in

Yeah this theory is bollocks. Priced in by whom, Wall St or Redditors? This theory may have been relevant before retail investors were a large force, but now it's irrelevant. I mean, if it worked, you'd never have meme stocks.

If you look at actual cases of "meme stocks", they happened because the meme factor could actually help the underlying business. GameStop was one famous example of that - if a meme makes the company more popular with the general public, that translates to better forecasts for business outcomes.

Citation needed. If that were the case, meme stocks would have been embraced by Wall St instead of heavily shorted (IIRC BB & B was) because a pump and dump doesn't in fact materially improve the underlying business.

economic and finance theory is based on some clear assumptions. if those assumptions are violated, the theory predicts that the theory cannot predict.

"meme stocks" attract a small amount of capital (, large only) to a small number of stocks whose price becomes inflated. Given the nature of memes, this will rarely happen to the whole market. If you owned a broad index fund, your portfolio would inflate along with the meme stocks, and it will deflate along with them later. If it turned out that GameStop was an actual runaway hit, you would participate in it. If it turned out it was just a fad, you participate in that also. There's no place in this story for broad index funds to be a bad idea. Investing directly in the meme stocks carries a huge amount of diversifiable risk, and the market rewards risk, but not diversifiable risk.

I said "rarely" to the whole market above because one could consider the .com boom a whole market meme. But you would have been worse off if you stayed out of the market through that bubble.

Every theory is based on assumptions. I'm saying the efficient markets hypothesis is less relevant now, not CAPM.

In defence of the efficient market theory, retail investors can be just the wisdom of the crowd. Meme stocks are a rare exception.

That assumes the crowd has wisdom/some information that should be reflected in stock prices, instead of just buying based on FOMO/emotion

Public information is quickly priced in, when it is decided that it is important. For when it's important, the market can stay irrational longer than you can stay solvent, and all that.

I think this is similar to LTCM in the 90s, which reminded people of the depression era quote: “Markets can stay irrational longer than you can stay solvent”

How so? I mean, you can argue that Russia defaulting was (arguably) irrational, but the market response to it was fairly textbook. I might be wrong, but even if they didn't get killed by margin calls, weren't the losses on their bad bets enough to wipe out any profits the company ever made?

Tether is transparently BS, but as long as the consensus is that it’s worth pretending it’s not, it will continue on regardless of the facts.

It’s rabbit holes all the way down.

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