Most Index Funds and ETFs are driven by an underlying Index. Most Indexing companies uses the Market Capitalization [MCAP] Method which has history going back to 1871. The Index funds and ETF industry have seen fast growth because Active Investing underperforms the Passive MCAP based Indexes. The feature below explains that though the MCAP method has brought clear distinction to Active vs. Passive performance, it has also brought concentration, lack of diversification, and hence not the best representation of what the financial literature defines as “Market”. And since the Individual and Institutional investors trust their life savings and Passive investments with these MCAP indexes, more should be done to educate the investors about the harmful risks of concentration and the amplifying nature of MCAP. 

I tried hard to dissociate economists from Pareto but invariably I found that the society has spent more time celebrating Pareto than finding why it works. The article below is the celebration part. When the society will start wondering beyond Pareto i.e. the 80-20 rule and understand that it as a part of a larger mechanism, we would have advanced Science.

MP - Do you know who got the Nobel Prize in Economics in 2013?

CG - The Nobel Prize in Economics for 2013 was awarded to Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller "for their empirical analysis of asset prices." Fama and Hansen were awarded the prize for their work on financial markets and asset prices, while Shiller was recognized for his research on the volatility of asset prices and the role of emotions in financial markets.

There are many things a startup founder learns and unlearns on his journey. I can speak about many things starting, pivoting, business model, product, technology, storytelling, imposter syndrome, communication, clarity, legal, thick skin, breathing, gratitude, why me? why not me? industry, timing, belief, faith, other stuff, etc. But there is one thing, which stands out for me is the fact that if it was not for Venture as an Industry, we at AlphaBlock would not have been where we are and we wouldn't have dared to do what we do.

The Conscious Web

The web is becoming conscious, even if you don’t see it yet. Soon it will help you automate more of your day-to-day life and bring more intelligence into everything it does. How you consume information is going to change forever.

If someone tells you that nobody saw the interest rate coming, you should point them to the 'What If?' thinking. Central Banker is neither the friend of stock market investors nor the friend of real estate holders when it comes to fighting the war on Inflation. Central Banker has one purpose above all, Inflation control. So saying that zero % interest rates are not forever, is commonsensical thinking not forecasting the future.

Dreaming BRICs 2050

Dreaming BRICs was a Goldman Sachs paper released on 1 October 2003, which popularized the term BRIC [Brazil, Russia, India, China] with a macroeconomic investment thesis. The authors speculated a spectacular growth of the emerging block. Revisiting the feature one can see that the last 19 years have not worked out well for the forecast. Barring India, the rest of the BRICs have not produced spectacular returns and rather as the name innocuously suggested, two of the four components have sunk in underperformance vs. U.S. 500

My first interaction with ChatGPT creates a lot of hope for the future. However, a lot more needs to be done before we can teach machines to assimilate knowledge. I spent time on the playground asking the following 30 questions. Though initially answers seemed a lot coherent, it did not take me much time to trip the chat to generate conflicting answers.

S&P’s flawed indexing methodology spills over risk into the commodities markets.

If you are an investor seeking commodities exposure because you understand that an inflationary world means allocation to commodities, you are in for a big surprise. Out of the $153 trillion total global assets, only $18 trillion represent alternative asset classes like PE, Real Estate, Hedge Funds, Infrastructure, Natural Resources, Commodities, and private debt. Natural Resources and commodities own 6.7% of this pie, which means just about $1 trillion of the total global assets. And if we take timber and farmland out of this small share, commodities are barely 0.5% of the big pie.

Standard Statistics Co & Poor's Publishing Co merger back in 1941 had a lot to do with the American Railroad Journal managed by Varnum Poor. The merger increased the number of the list of stocks to 490. This was a significant jump and leapfrogged the merged entity into the top spot among its competitors. But the Indexing company's leadership had little to do with its underlying methodology of building a benchmark. The 1871 Laspeyresian bias and calculation convenience still echo in the market capitalization method. The bias of overweighting the winner (with every price change) leads to concentration in our Indexes, references, and benchmarks, a real challenge for modern finance, and one which is intrinsically linked with the Google Paradox.

This is not intuitive thinking but your passive SPY (S&P500 ETF) sitting in your pension fund is only passive and low risk in perception. What you call a zero fee (or near zero fees) portfolio is not only concentrated but it is as concentrated as the most active portfolios in the world.

The story of modern finance starts from a faucet. The Navier–Stokes equations is considered to be the first step to understand the elusive phenomenon of turbulence. The Clay Mathematics Institute in May 2000 made this problem one of its seven Millennium Prize problems in mathematics. There is a US$1,000,000 prize to the first person providing a solution for a specific statement of the problem. Call it poetic justice, but solving finance is a scientific problem connected to turbulence in the faucet at your home.

The two Nobel Prizes awarded in Economics in 1990 [1] and 2013 [2] define the boundaries of Modern Portfolio Theory (MPT). Size is the pillar for both the models. The 1990 winners assumed market to be driven by Market Capitalization (MCAP) [3] size, while the 2013 winner explained that factors like ‘Small Size’ [4] can explain portfolio performance better than ‘Big Size’ [5]. This conflict between the two ideas has bifurcated the industry into benchmark investing (MCAP) [6] and everything else not MCAP (Smart Beta) [7]. The fact that benchmark investing and smart beta is expected to be 50% of the USD 100 trillion investment management industry in 2020 [8] makes it imperative to seek a coherent argument and a conflict resolution.

Einstein famously said, “A new type of thinking is essential if mankind is to survive and move towards higher levels”. We need to rethink Psychology if we have to give the world better tools for judgment. Because Psychology - the scientific study of mind and behavior - has stopped relating to Science. As hyperbolic as this may sound, a lot of Science and Physics connected to the human mind predates the subject of Behavioural Finance by more than a century.

While Robert Solow suggested not to think of Economics as Science [1], Andrew Lo warned us about the dangers of using Physics to build economic systems [2]. Physics has been a late entrant to the world of Finance. The subject has reached critical mass to answer some of the biggest challenges of Finance of the last 50 years. The Nobel Prize-winning Finance has failed to reconcile efficiency and inefficiency, forcing the global money to rely on the Efficient Market Hypothesis (EMH) as the last standing hypothesis, which can neither be rejected nor accepted [3]. This has left trillions of dollars in Pension funds clueless regarding what to rely on. The consequence could be an unintended risk, which the society is not prepared for.

Venture capital companies have to work through a lot of confusion when it comes to allocating capital to Investment Management Fintechs. It’s natural because Active Investment Management itself is facing an upheaval when it comes to fees, increases in compliance, financial theory redundancies [1], and foremost, the lack of Alpha. A Venture firm can’t be expected to be well versed with the reality on the ground.

Concentration is the most undermined risk working against long-term wealth generation. The reason you have not heard about it is that both active and passive investment management indulge in concentrated portfolios and don’t think there is anything wrong with the approach. In addition, human active asset managers’ skill of stock selection is rare, and hard to measure and passive indexes are concentrated because of poor design [1]. This is why it is convenient to ignore concentration and allow investors to be misled by performance.

If you thought it could not get worse, a new paper suggests that investment managers are rampantly indulging in what I could see as a benchmark heist. They are systematically going back in time and choosing a benchmark with the poor performance of up to 5% lower and representing the results in a better light, somehow magically eeking out the last minute gain, touching the finishing tape.

The 17th century was the period during the Dutch Golden Age, when the Dutch become an economic and military power. The Dutch controlled the seas and had a monopoly on spice trade. The speculative bubble in the prices of a Tulip bulb, a desired commodity, caused a mania, which has represented everything speculative, everything bubble, everything madness, everything irrational, everything which Newton shouldn’t have done [He lost money in the bubble], but Tulip mania has never been seen as the extension of a chaotic information system which took the society for a ride. Society understands the event as psychological herding, but rarely do we look at historical events as an extension of informational realms that operate at biological, social and environmental levels. Information has always been seen as a perspective defining prism that helps us focus through it, but never on it.

Kate Crawford's "Atlas of AI" is a masterwork in technological thinking. Rarely do I find a thinking alignment regarding the brain model as a narrow definition of intelligence [Human AI]. However, this is the first time, I have seen someone reflecting on media as a geological process, which indirectly questions the foundational assumption about information [The Conceptual Age], what it is, and what it should be.