🎙️ Illegal Index Funds

[5 minutes to read] Plus: Buffett disciple invests in San Francisco

By Matthew Gutierrez and Shawn O’Malley

🏈 Congratulations to the Kanas City Chiefs for solidifying their NFL dynasty on Sunday with back-to-back Super Bowl wins. We were watching alongside 115 million others.

Another thing we’ve been watching? The dried-up IPO market. Over the past two years, the IPO market hadn’t been much more than tumbleweeds.

But the good news is that there have been 10 initial public offerings on U.S. exchanges this year.

We’re on pace to surpass IPO activity from 2022 and 2023 — an IPO resurgence, if you will.

Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

  • Should index funds be illegal?

  • Stocks are at a record, but are they expensive?

  • A Buffett disciple’s big bet on commercial real estate

All this, and more, in just 5 minutes to read.


What’s the worst year for the U.S. IPO market over the past 50 years? (Scroll to the bottom to find out!)

Chart of the Day

In The News

💬 New Research Published on Index Funds

Created by DALL-E via ChaGPT

Should index funds be illegal?

It’s more of an intellectual question than a serious one. For example, the U.S. stock market couldn’t really function if 100% of investors held all their money in S&P 500 index funds, at least not as any useful tool for allocating capital.

  • Yet, as index funds, particularly in ETF form, democratize access to stock investing and become increasingly popular, at what point does the share of “passive” investors become so high that it hinders market function?

  • In a now famous research note, one equity analyst declared that index investing is “worse than communism.”

  • Saying, "A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market-led capital management.”

Everything has a cost: Critics fear the masses automatically buying index funds in their personal or retirement accounts, blindly pushing prices higher and disrupting the market’s ability to value companies.

  • As index (or passive) investing goes more mainstream, the stock market itself becomes a public good, a tool we all rely on for retirement that is “too big to fail.”

Why it matters:

While we are far from the index-investing revolution smothering markets, some are noticing its impacts on “efficiency,” the market’s ability to react to and reflect new information quickly.

In the weeds: A new paper shows just this. Bloomberg’s Matt Levine explains its findings: “The basic idea is that there are some public companies whose fundamental performance is particularly sensitive to exchange rates: They do a lot of business in Europe (or wherever), and so their profits fluctuate when the euro/dollar exchange rate goes up or down.”

  • He adds, “An efficient market would, arguably, reflect this: When the euro goes up, those companies’ stocks would go up.”

However, researchers found that stocks not included in the S&P 500 index responded more efficiently to currency fluctuations. They also found that, as index investing has gone more mainstream, it’s overlapped with the weakening efficiency of stocks included in major indexes.

  • While many wonderful things can be said about index investing, don’t expect the debate over its impact on markets to go away anytime soon.

Read more (counterargument to worries about passive investing)

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🤔 Stocks Are Expensive, But Could They Keep Going?

Stocks are expensive. No, stocks are fairly valued. No, they’re cheap!

Ask 100 analysts, and you’ll get many opinions. Nobody knows the future. As stocks hit repeated new highs, it’s worth revisiting a few popular valuation models to see what they tell us about the market. 

Price/earnings ratio 

One of the most common metrics to determine valuation, calculated by dividing a company’s stock price by its reported or projected per-share earnings.

  • The ratio answers: What is an investor willing to pay for each dollar of a company’s earnings? If earnings rise and prices stay level, valuations contract, for example.

  • The S&P 500 P/E ratio is 24.18, above its 10-year average of 20.36. The index’s forward multiple (20.38) is above 20 for the first time in two years, above the long-term average of 17.96.

  • Last year, the S&P 500 rose 24%, yet profits were relatively flat — the “P” in P/E rose. But investors might bet that rising earnings — the “E” in P/E — could sustain stock gains. 

Case in point: Nvidia, whose stock keeps going up. Its valuation rose to over 60 times forward earnings last year, yet its P/E ratio fell because the company reported enormous profits.

From The Wall Street Journal

Price-to-book ratio

Think of this as simply dividing a company’s stock price by its book value or equity, which measures total assets minus liabilities. 

  • While P/E ratios can work well for many companies, the price/book ratio is commonly used to evaluate financial stocks, especially banks, because they have a lot of tangible assets.

  • The current S&P 500 forward price-to-book ratio is 4.15, above the 10-year average of 3.26 and its 20-year average of 2.76

Equity-risk premium

What’s the reward for owning stocks over government bonds? This method seeks to answer that by calculating the gap between a company’s earnings yield and that of a Treasury. 

Today, the S&P 500’s equity risk premium is at 0.7 percentage points, near the lowest level in about two decades. The lower the ratio, the more “expensive” stocks are.

Price/earnings growth ratio

The PEG ratio is the market’s valuation of a company while considering expected earnings growth, not just current earnings. 

  • The S&P 500’s PEG ratio is 1.48, below its 10-year average of 1.49 and above its 20-year average of 1.35

CAPE ratio

Divide a stock’s price with its average inflation-adjusted earnings from the past 10 years, which can work because it corrects for good and bad times. For example, in post-recession recoveries, weak earnings make stocks look pricey. 

  • This metric seeks to account for that. It’s often used to value banks and oil and gas companies.

  • The S&P 500 CAPE ratio is at 33.4, higher than it has been more than 96% of the time since 1881 but well below peaks in the dot-com bubble and 2021.

More Headlines

Recapping the Super Bowl’s most talked-about commercials 

🤑 Jeff Bezos sells $2 billion worth of Amazon stock

👉 Israel’s credit rating downgraded amid war

🏈 Why the NFL went all in on sports betting

😘 The new dating app only for people with good credit scores

🏢 Buffett Disciple Is Buying San Francisco Office Buildings

No current strategy might embody “contrarian investing” more than that of a Warren Buffett disciple who loves San Fran. 

Yes, the 49ers came up just short of beating the Kansas City Chiefs on Sunday night. But could the city’s commercial real estate provide reason for optimism in the 415?

Meet Ian Jacobs, who is buying up San Francisco’s downtown real estate while most shrewd investors run far away. 

  • Jacobs has ties to a real-estate dynasty that made a fortune buying properties in nearly bankrupt New York City during the 1970s.

  • Jacobs, 47, has secured funds from relatives and wealthy families to buy up San Francisco office buildings.

  • Jacobs has secured about $75 million for a few deals, trying to buy 3 million square feet of office space for prices about 70% below what it would cost to build the properties.

  • He’s telling investors it could take a decade for San Francisco to recover, and technology firms will ultimately return to the office.

  • “His whole professional career has been around value investing in public markets,” said one of his advisors. “This is the first time he can do value investing in real estate.”

Buffett’s influence? About 20 years ago, Jacobs was an equity analyst at Goldman Sachs, when he mailed Warren Buffett a letter with a $500 check saying he’d pay Buffett every week to learn from him. 

Buffett turned down the offer and mailed back the check, but he said he could find him a project if he ever visited Omaha. In the summer of 2002, Jacobs arrived in Omaha and started working as a financial analyst for his idol. 

From The Wall Street Journal

Why it matters:

Tech companies’ embrace of remote work in San Francisco (and nationwide) has  created a “doom loop” where rising vacancies prompt more companies to leave. When there are fewer other companies to mingle with downtown, why pay high rent and stay?

Jacobs’ plan? “Project Uris,” a reference to the famous 1977 purchases of eight large Manhattan buildings. NYC struggled with crime, corporate flight, and political issues back then, just like San Francisco today. 

  • But the values of those properties in the Big Apple have skyrocketed since (more than 10x within a decade of the late 1970s purchases alone). Jacobs is hoping for a similar result out West. 

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Quick Poll

Do you think the office commercial real estate market nationwide will bounce back within the next two years?

(Leave a comment to clarify your thinking)

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On Friday, we asked: Who are you cheering for in the Super Bowl?

— Said a reader, I adopted Mahomes in my mind, so who else could I root for. They've got to win no ifs, ands or buts.

— Added another who said No Preference, My wife is a 49ner so I’ll be cheering for the Chiefs to win a bet. If I win, she takes me to my favorite restaurant, if she wins I take her out to her favorite place.


The year 1990 remains the worst year for the U.S. IPO market, worse than even 2008, per an Axios report.

See you next time!

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