
Stock Market: What Happens If Tesla Enters S&P 500 - mancerayder
https://www.bloomberg.com/news/articles/2020-07-31/stock-market-what-happens-if-tesla-enters-s-p-500
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jefftk
The S&P 500 made sense when tracking all public companies would have been too
much work, but this kind of bookkeeping has gotten much easier. For example,
Vanguard offers a low-fee total stock market index:
[https://investor.vanguard.com/mutual-
funds/profile/VTSMX](https://investor.vanguard.com/mutual-funds/profile/VTSMX)

If your model is "buy everything" then you avoid many awkward situations like
this one.

~~~
MR4D
Kindof. The mere fact that the S&P 500 exists causes the potential jump in
price for that one stock, but since you hold everything in VTSMX, you also see
the jump in TSLA.

Worse, since you own every stock (not really, but close enough), you now have
the 500 companies representing about $27 trillion of market cap, and then
thousands more representing only another $8-9 trillion. So any change in the
smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc
(as happened yesterday).

So if you want the whole stock market, buy it in multiple pieces - a large
cap, a small cap, and a mid-cap funds.

As to your bookkeeping comment about being easier, you are absolutely correct.
In fact, a competent financial advisor has the tools to trade the S&P
themselves for clients (literally buying all 500 stocks individually and in
correct proportions to the index).

Market cap source: [https://siblisresearch.com/data/us-stock-market-
value/](https://siblisresearch.com/data/us-stock-market-value/)

~~~
jefftk
_> So any change in the smaller companies is dwarfed by one good (or bad) day
of AAPL, AMZN, GOOG, etc (as happened yesterday)._

This doesn't seem that bad to me?

Imagine that you own FOO and BAR. They're each 1% of your holdings and each 1%
of the US stock market. Now they merge. How much of your holdings should be
the new company FOOBAR? Seems to me like it should be 2% now that FOOBAR is
~2% of the market.

AAPL, AMZN, GOOG, etc each represent a large number of products and
businesses, and I don't see why you'd want to decrease your exposure just
because they trade under a single stock symbol.

~~~
ethbro
One of the commonly expressed intents for buying indices is lazy
diversification. By having vastly unevenly-weighted indices, one fails to
accomplish that aim.

Assuming diversification is the goal, your comment would only be true (that
1+1 and 2 are equivalent) if the constituent parts of hyper-scale companies
operated independently. In reality, I'd say that rarely happens.

At best, you get something like Facebook (there can only be so many true
chiefs). At worst, you get something like GE (cannibalizing viable businesses
to feed others).

And all of this is to say nothing of that fact that, historically, Amazons
don't become 2x Amazons with the frequencies that {mid-cap} become {large
cap}, simply by virtue of total addressable market maximums in mature business
areas.

------
madballster
I don't see an edge here. It could very well be that the stock sells off when
the announcement comes because it has been well anticipated. This is not a
risk-free trade as some make it out to be. Proceed with caution.

------
rcMgD2BwE72F
More in-depth analysis by Rob Mauer:

\- Part 1
[https://m.youtube.com/watch?v=JN8PNPBkaWc](https://m.youtube.com/watch?v=JN8PNPBkaWc)
\- Part 2
[https://m.youtube.com/watch?v=3v-FFbdd_VM](https://m.youtube.com/watch?v=3v-FFbdd_VM)

------
mrep
I wonder if it would be good time to do another equity raise. They raised 2
billion dollars earlier this year at a price of 767 (1,430 now) to fuel their
growth because they thought there share price was high then.

Once the inclusion is announced, it seems like a perfect time to me to
announce another massive capital raise to further fuel their growth now that
their share price is almost double from their previous raise and the index
funds are going to have to buy about $35 billion to $40 billion of shares to
get to the proper weighting according to the article. Why not do a massive
capital raise which the index funds will buy a ton of to help get them to the
proper weighting.

~~~
rcMgD2BwE72F
They don't need to, and it would make no sense to further dilute current
shareholders. They have enough cash for operations and investments, free cash
flow is increasing fast and will continue to do so, it makes no sense for
shareholders to do a secondary to be included in the SP500 (the SP500 board
may ask Tesla to offer liquidity but that is the index funds' problem not
Tesla's, and such a concession would only benefit front runners instead of
long terms investors). Besides, if market cap continue to grows as expected,
SP500 will have to add TSLA at any price (otherwise the whole concept of SP
500 Index would be at risk). Also, many are waiting for Batter and Powertrain
day to assess Tesla's ability to ramp production to 10+ million EVs in ~2030)
so unless those plans disappoint, raising equity before September would be a
let down.

~~~
matthewdgreen
It doesn't seem to me like current shareholders are paying a lot of attention
to the fundamentals, and will be just as happy to bid the price into the
stratosphere after a further dilution as they were to bid it into the
stratosphere after the most recent dilution.

The fact of the matter is that the entire purpose of the stock market is
_supposed_ to be to direct capital into productive investments. There is
absolutely no way that Tesla management can look at the next 10-20 years of
global economic and business developments (a period in which Tesla will likely
be fighting for its survival as traditional automakers finally begin to
compete in the EV space) and conclude that "gosh, there is no set of
circumstances in which we could execute better with a few billion dollars of
additional reserve capital in the bank."

~~~
njarboe
I think the Feb raise by Tesla was probably done because they (Musk) thought
that COVID-19 would hit the US and cause a lot problems, unlike most people at
the time. Diluting his holdings to put $2 billion in the bank for Tesla to get
through the COVID problems seemed like a good idea. Now it looks like Tesla is
not going to be hit as hard as he predicted and Musk would like to keep his
percent ownership in Tesla as high as possible. He has said that when he needs
personal cash he borrows against his stock holdings rather than selling
them(at the tune of about $1 billion at the moment, iirc).

Musk has also said that growth in his companies are mostly people constrained
and not capital constrained. His companies can raise capital any time they
decide it is a good idea.

~~~
matthewdgreen
I guess I'm old enough to remember 2019, when Elon Musk raised the specter of
the company running out of cash if they didn't engage in massive cost cutting
[1,2]. Or even 2018, when Tesla's stock price crashed because Musk was joking
about bankruptcy [3].

But leaving recent history aside: the fact of the matter is that Tesla is now
valued at 136% the market capitalization of Toyota, an organization that
currently ships about 50x more vehicles each year than Tesla does.

The only possible way for Tesla to achieve earnings from car sales that
justify this stock price* (on a reasonable time scale) is to build out their
manufacturing capabilities at an unimaginable scale and pace. The amount of
capital that this will require is vastly higher than anything Tesla has raised
before. And since the period we're discussing is long enough that we can't
predict global market conditions, Tesla may find themselves doing this
remarkable build-out during a period where capital isn't easy or inexpensive
to come by.

* I'm assuming here that the market cap of Tesla reflects some realistic theory about future earnings, and isn't just a massive and unjustified bubble. Which it probably is.

[1] [https://www.theverge.com/2019/5/17/18629166/elon-musk-
tesla-...](https://www.theverge.com/2019/5/17/18629166/elon-musk-tesla-money-
changes-cfo-employee-expenses) [2] [https://finance.yahoo.com/news/tesla-may-
avert-bankruptcy-bu...](https://finance.yahoo.com/news/tesla-may-avert-
bankruptcy-but-it-will-still-needs-1-billion-in-cash-201304219.html) [3]
[https://www.wsj.com/articles/tesla-shares-sink-as-musk-
jokes...](https://www.wsj.com/articles/tesla-shares-sink-as-musk-jokes-about-
bankruptcy-1522682691)

------
skybrian
Vanguard has a search page where you can see how much Tesla (or any other
stock) is in various Vanguard funds and ETF's. For example, it looks like it's
0.3% for VTI. [1]

[1]
[https://advisors.vanguard.com/VGApp/iip/site/advisor/analysi...](https://advisors.vanguard.com/VGApp/iip/site/advisor/analysistools/holdingssearch?searchinfo=TSLA&isin=&orgCode=&selectedFunds=)

------
throw0101a
For more on S&P, an interview with one of the committee members:

> _Today on the Rational Reminder Podcast we have joining us Dr. David Blitzer
> who is the Managing Director and Chairman of the S &P Dow Jones index
> committee. He has been there from the time when indexes were barely even
> being traded and the first time S&P Futures began trading, and since then,
> indexing has turned into the massive phenomenon we all know today. Indeed,
> S&P indexes were (and still is) at the center of this explosion. Today Dr.
> Blitzer talks to us about the early days of indexing and shares some of his
> ideas about why indexing became so popular. We also discuss the possible
> reasons why some people still choose actively managed funds and the effect
> that the abundance of research has had on their dwindling appeal. Ever
> wondered where the rapid growth in indexing will end up? What happens after
> indexing? Can indexing become too big? Be sure to join us for this
> masterclass on indexing!_

* [https://rationalreminder.ca/podcast/54](https://rationalreminder.ca/podcast/54)

Blitzer recently retired:

* [https://en.wikipedia.org/wiki/David_M._Blitzer](https://en.wikipedia.org/wiki/David_M._Blitzer)

------
nine_k
My take:

\- Buy some TSLA now that its price has fallen recently.

\- Try to find out what other S&P 500 stocks would hedge fund managers have to
sell to make room for TSLA. I suspect these won't be best-performing or long-
term most promising stocks. Sell / short them now before they plunge, if you
hold them for whatever reason.

~~~
tachyonbeam
The S&P committee can ask Tesla to issue shares to be sold directly to large
funds so that the price doesn't move too much. This could be an opportunity
for Tesla to raise 10 to 20B, which wouldn't be such a bad move, as it would
allow them to erase all their debt and build more gigafactories or make
acquisitions. So there is no guarantee that the stock price will go up even if
Tesla gets included.

------
throw0101a
An observation someone made before the recent Q2 results were announced:

> _They will almost certainly make a profit [this quarter]. Last year they
> lost $400 MM in Q2. This year they sold almost exactly the same number of
> cars. They sold them at lower prices. They operated two car factories
> instead of one, which drives up fixed costs. There is no reason they should
> genuinely do better this year than last. But, since we are all willing to be
> blind to this obvious book cooking, they will, for sure, announce a profit._

* [https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...](https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-the-sp-500-inclusion-process/)

~~~
simonebrunozzi
I think "book cooking" is a bit exaggerated.

They received a larger amount of government incentives, and more cars sold
means more software sold (autopilot, etc), which has huge margins.

That's, in my humble view, the main reason why they managed to make a profit,
despite the larger capex you have mentioned.

I'm not a Tesla fanboy but I have to admit that, besides the currently hyped
stock price, I think it's a company that will do well in the long run.

------
gruez
Does this mean if I bought an all-cap etf, I won't be overpaying or get front
runed? VTI for instance already holds Tesla shares.

~~~
smabie
Your not over paying or getting front runed regardless, so I guess the answer
is yes.

~~~
garmaine
Just FYI, if you are buying on Robinhood or similar service, you are getting
front-runed. That’s why it’s free.

~~~
gruez
That sounds super illegal:
[https://en.m.wikipedia.org/wiki/NBBO](https://en.m.wikipedia.org/wiki/NBBO)
do you have a source to back up your claims?

~~~
garmaine
It would be illegal if Robinhood did the front running. They don't. Instead
they sell your trade to a HFT firm to execute. What do you think is going on
at the other side of that trade.

They're dancing around the legal definition of front running, and they've
gotten their hand slapped in the past for it. (E.g. they were fined $1.25M in
2019 for actual front running per the legal definition.)

~~~
gruez
>It would be illegal if Robinhood did the front running. They don't. Instead
they sell your trade to a HFT firm to execute.

I'm skeptical that this interpretation/loophole actually exists. If you're
executing the trade, you're the broker. Shuffling it between firms doesn't
absolve you of the responsibility. The fact they got fined means it clearly
didn't work.

~~~
garmaine
What they got fined for was playing brokers off each other for the same order
in order to maximize their fee. This violates the best execution principle.
Now they give each order to one broker only, irregardless of the fee.

But why is the broker giving a fee to Robinhood to handle the trade? That only
makes sense for them to do if they have the stock available at a lower price
point than the Robinhood user is getting--had the order gone straight to
market it would have cleared at a better price.

The broker is paying Robinhood for the burden of handling the order. Why?
What's the profit for them? If they just sent your order to the market and it
cleared at the market rate, there is none. Instead they do a number of tricks
that are designed to profit off of foreknowledge of the order before it hits
the market, while trying not to run afoul of front-running regulations. When
they succeed, they do so by taking money that you left on the table.

All that said, I still use Robinhood. I don't trade at high enough volumes to
get upset over these hidden costs, and I'm under no illusions that other
retail brokerages aren't doing exactly the same thing.

