Ritholtz and Brown are impresarios of the Twitterverse and the presiding geniuses behind the fast-growing Ritholtz Wealth Management. In a recent talk with Barron’s, they talked about their market views and the charms of direct indexing. Here, in an edited outtake from the interview, the two discuss the allure of Tesla, Bitcoin, and special purpose acquisition companies (SPACs).
Barron’s: In a wild year, some wild investments captured investors’ imagination. Tesla (TSLA) has shot up 731% so far this year; Bitcoin reached an all-time high of more than $23,000, and SPACs—shell companies created to go public in order to acquire a private company, became the hottest mechanism in M&A. What’s going on?
Brown:Jack Bogle [founder of Vanguard and inventor of the index fund] has done more for the profession of asset management and individual investors than Warren Buffett, but one of the things that bothered me about his acolytes and the puritanical movement around indexing in general, it’s how it doesn’t allow for the idea that sometimes people just feel like speculating, because they want to. It’s their money. It’s their life. We of course want to play around with Tesla. So I think that stuff has a place in portfolios.
Let’s start with your thoughts on Bitcoin.
Brown: Whether or not Bitcoin increases in prominence among institutional investors and then trickles down into individuals’ wealth management accounts, remains to be seen. I can completely picture it. Bitcoin could be the next generation version of gold, but that part of the story is not as interesting, and we’re not building positions in Bitcoin [based on] that. Right now financial advisors are terrified to add cryptocurrencies, because nobody wants to be the first one to get sued for blowing up a client’s account with Bitcoin.
And SPACs? These shell companies reemerged as a way to take private companies public without going through the traditional vetting an initial public offering requires. SPACs don’t have a great track record—are they as risky as they used to be?
Brown: They’re actually extremely conservative. They’re basically piles of cash. So hedge funds can buy them and [say] they’re invested. But they’re not invested. They own cash with an option to become invested. They can flip it the day of an announced deal, or even vote against the deal. So it’s a clever way for managers who are expected to put money to work, but don’t have ideas or don’t want to take that much risk. SPACs are speculative if you hold them past the point that they make their acquisition, because then you are investing in a business that was vetted essentially by one investor, rather than a traditional IPO roadshow. Had Nikola (NKLA) tried to go public as a traditional IPO, it never would have made it.
Ritholtz: Why should SPACs follow any different type of performance distribution than mutual funds or ETFs or hedge funds? Ninety percent of everything is junk.
Brown: Their historical performance is atrocious. It’s because the type of company that historically did the SPAC wasn’t good enough to warrant their own traditional idea. Now, I am somewhat sympathetic to the idea that a SPAC is professionalizing. But not all of them.
Ritholtz: They’re competing with each other for the same handful of things.
What are your thoughts on Tesla, which just entered the S&P 500?
Ritholtz: Everybody looks at Tesla wrong. Tesla’s already shifted the paradigm. They’ve already won. Whatever happens with the stock price of Tesla is almost irrelevant. I did an analysis recently that looked at the 10 most valuable car manufacturers. About half their value comes from the electric car side. Traditional automakers are thinking “we’re not going to let Elon Musk do to us what Jeff Bezos has done to booksellers and retailers.”
Tesla and Bitoin represented totally different things. Tesla is basically a recognition that no matter what the president says, the world is shifting towards renewable and green energy. Look at the price of coal under an anti-green president. Look at the price of oil. The market has already decided this new technology is the future. Ultimately it’s going to be Mercedes (DAI.Germany), BMW (BMW.Germany), Honda (HMC), Volkswagen (VOW.Germany), and Toyota (TM) are going to be world’s leading electric car producers.
Brown: I find it funny that a huge swath of the industry thinks it’s more conservative to have held ExxonMobil (XOM) over the last 10 years, [which is essentially] deliberate climate science denial—and that actively trying to address climate science [via Tesla], that’s the speculative play. As we’ve learned, Exxon is now a shell of its former self. The idea that it could hang onto oil forever was more speculative than the idea we could build batteries.
Thank you, gentlemen.