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There is a great deal of discussion these days regarding the impact of passive investing (or of systematic active investing in risk factors), and what it means for active management, and perhaps for security pricing generally. In many cases – even with an in interesting or intuitive conclusion – the premise is all wrong.
Stock prices are not “made” by investors, whether they are active or passive. Demand curves for shares are generally horizontal, and while things can get out of equilibrium temporarily due to price pressure (e.g. index inclusion), eventually the value of something is the value of something, and not dependent on price pressure.
Granted, the market may become depressed or exuberant, but we don’t need market participants to actually trade the underlying shares for individual prices (or markets in aggregate) to fade or rally.
For example, imagine company XYZ closes at €40 per share, and overnight agrees to a takeout by company ABC at €55 per share, and issues a press release before the market opens the next day. We don’t need an actual buyer to “lift” XYZ toward €55, it just would have happened without a single share trading. In other words, even in the absence of flow, equilibrium eventually happens.
FOOTNOTES
DISCLAIMER
The views and opinions expressed in this post are those of the post’s author and do not necessarily reflect the views of Albert Bridge Capital, or its affiliates. This post has been provided solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The author makes no representations as to the accuracy or completeness of any information in this post or found by following any link in this post.
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