SpaceX Context

It's finally over. SpaceX is officially a publicly traded company, and we can all go back to our everyday lives now.

7 thoughts about the most hyped IPO ever

Decisions matter. But the magnitude of expected outcomes from decisions can help determine how much time to spend on it. The sheer volume of content around index committees (Nasdaq, S&P Dow Jones, etc...) fast-tracking or not fast-tracking SpaceX onto their index list has been outlandish for the actual impact on you, the investor. Nasdaq bent its existing rules and is allowing SpaceX onto index lists before meeting the usual criteria, whereas S&P Dow Jones decided not to. The reality is that even at Friday's closing valuation of $2.1 trillion, SpaceX won't/wouldn't make up a meaningful part of broad market index funds...because (1) the broad market is so damn large, and (2) the various ways index committees typically incorporate other factors further dilutes the weight of SpaceX (e.g. "the float" — how many shares are even available to the public). Nick Maggiulli has a great blog post on this specific topic, and the final tallies that SpaceX will likely make up are approximately:

• 0.1% of a U.S. Total Stock Market Fund

• 0.7% of the Nasdaq 100 (i.e. ~ largest 100 tech companies)

The media has spent too much time here. You don't need to.

Instead, when investing your time and energy, put it on financial decisions you can control, and that have a large magnitude impact on your expected outcomes — like how much you spend, how much you earn, the ongoing investment fees you pay, taxes, etc...

Not whether SpaceX is in the S&P 500 or Nasdaq...which is not in your control, and small magnitude.

"All investing has active decisions." Wall Street uses this catchphrase to sell against passive, market-based investing, and to position stock-picking as something you're already sort of doing. Their statement isn't wrong, but let it be mostly semantics.

As the decisions by Nasdaq and S&P Dow Jones highlight, even "passive index funds" have active decisions like whether to include SpaceX or not. So a passive investor may choose to "not pick stocks" but...didn't these committees just choose one for us?

Yes.

WHO CARES. There will always be discrepancies and nuances about how to define the stock market or its segments. A defining quality of market-based investing is that the desire to own all stocks, and the indifference to any specific one, itself dilutes the impact of any single stock on your outcomes. It's OK that passive investors have made, or committees have made on their behalf, active decisions. If you have low fees and broad diversification, you've directionally correct. Don't concern yourself with someone else's definitions: just engineer your portfolio so that your outcome is going to be driven by the return of the broad market, not whether you own SpaceX or not.

Product pushers want to convince you that you are already active, so why not consider what they're selling, too? To hell with this marketing tactic. You don't have to care. Acknowledge that there may be some required active decisions in passive investing, but you don't need expensive, traditional active management to solve something that is an inherent quality (rather than a problem needing solving).

You get to choose what type of investor you are. My comments about the impact of SpaceX on market-based investors is only for them. Obviously if you decide to have a concentrated portfolio (e.g. only own 15 stocks, not market-based), then looking back in five years there will likely have been a large returns discrepancy whether you decided to include SpaceX in that portfolio or not. For context, there are about 13,000 stocks around the world...I consider a market-based investor someone who owns some of basically all of them.

As an investor, you can choose whether your returns come from the market, or your returns come from the decisions of a manager (yourself, or someone else). The long-term data is clear about the benefits of market-based returns, as they have been both reliable and persistent across time periods. Overlaying opinions onto the market typically creates a broader distribution of potential future outcomes, which increases the chance that you hijack the market return itself, from yourself.

Elon Musk became the first trillionaire through IPO'ing a company with currently negative profits. Great reminder that stock prices are set by expectations for future profits, not historic nor current profits.

Every company has a cost of capital, but it can take different shapes. Every stock, including SpaceX, must clear at a price where investors believe they have a positive expected rate of return. Companies with elements of binary, moonshot goals still have reasonable costs of equity capital — meaning the average investor expects a return of say between 8%-12% per year (long term averages of various types of stocks) — but the shape of that expectation differs greatly compared to a company with more reliable outcomes (e.g. McDonalds).

Companies that are trying to get humans to live on Mars, or biotech companies trying to solve a specific disease...that distribution of expected outcomes that brings us back to a reasonable cost of capital isn't always intuitive.

I'd suggest that SpaceX isn't a $2T company because the most common opinion is that it's a $2T company...but instead something more like this logic:

• 10% chance it should be worth ~ $10T, and

• 90% chance it should be worth $1T

That probabilistic thinking gets us to $2T, but from a wider dispersion of reasonable outcomes than say, a non-moonshot company like McDonalds where success is judged by steady hamburger revenue, rather than putting people on Mars or not.

It is impossible to know whether SpaceX stock is better than McDonalds stock. The job of the price is to make us generally indifferent between any two companies. Don't mistake finding innovative companies that trade at relatively high multiples for necessarily great investment opportunities. Like any well-functioning marketplace, we can pay a higher price for nicer things or lower prices for less-nice things.

As an investor — if you don't care about price, you don't care about anything.

Trillionaire intrigue is not going to improve your investment journey. All the wealth that was just created makes for a fantastic news cycle. SpaceX employees get rich. Bankers get rich. Elon gets rich. Friends of Elon get rich.

The news is all over this.

But remember, none of these people are thinking about you.

End.