The overnight non-farm payroll data exceeded expectations, and the market's hopes for a steady rise in the USA stock market this year have been completely dashed.$S&P 500 Index (.SPX.US)$ "Returning to the pre-liberation days overnight."

Before the release of the non-farm data, David Einhorn, the founder of the renowned hedge fund Greenlight Capital, had already warned that the current structure of the USA stock market is "fundamentally collapsing". Einhorn rose to fame for shorting Lehman Brothers during the 2008 financial crisis.

At a recent meeting organized by the Norwegian Asset Management company Skagen Funds, he stated that the rise of passive investment and investors' focus on price rather than value has led to overvalued stocks becoming even more overvalued and undervalued stocks becoming even more undervalued. This phenomenon distorts market value and buries significant risks.

"Many companies' stock prices are far above their actual possible value. This situation may persist for a long time, but eventually, the market always returns to value."

The rise of passive funds is causing the concept of value investing to fade away.

Einhorn noted that traditional stock pickers have disappeared from the professional investment community. In the past, investors would conduct in-depth research to find undervalued quality companies to invest in, thereby promoting the market towards a more efficient resource allocation.

"In the past, large long-term investment Institutions sent Analysts to participate in every conference call, with five people attending each meeting and having a large research team. They needed to understand everything about each company."

However, this traditional value investment philosophy is now disappearing. Most of the funds have now shifted to Index Funds, which charge very low fees. The fees for the remaining actively managed funds have also dropped from 1% to 0.35%-0.4%. Therefore, these Institutions have had to lay off a large number of personnel engaged in in-depth research.

Einhorn believes the "culprit" for this situation is the popularity of multi-manager hedge funds and Index Funds. Index Funds passively Buy all Assets, investing solely based on past performance, while multi-manager hedge funds tend to focus more on short-term price fluctuations rather than the intrinsic value of the companies.

He stated: "What we now call 'pod shops' may have some fundamental views, but they are basically only concerned with what will happen in the next one or two things. 'Will I be right this week? Will I be right next week?' These people do not care what the value is, they are only interested in the price."

Once the capital flow reverses, the market may face a "massacre."

Einhorn describes the current market as a "very, very stable non-equilibrium state."

"Overvalued may become more overvalued, undervalued may become more undervalued, and you are not achieving capital efficiency as designed by the market. I do not know whether or when this situation will reverse. If it does happen, it will cause a massive massacre."

He believes this situation has created a "fundamentally risky scenario" where stock prices are disconnected from their actual value.

Einhorn admits that although traditional value investing seems to be fading, it may not be an opportunity for investors who persist. As the number of value investors decreases, the phenomenon of market mispricing will become more common, providing more profit opportunities for those skilled in in-depth research.

"This is an industry with much lower competition, and you will find a greater degree of misvaluation."

However, he also points out that there is still a consistent long-term trend of firing these traditional Analysts, redeeming the value stocks they already Hold, and reallocating the funds into Market Cap weighted Indexes.

The market trend at the end of 2024 well confirms this. By year-end, there was a significant Outflow from active Funds, reinvested into Index Funds, resulting in a huge divergence between USA large Technology stocks and other QITABANKUAI. Einhorn believes this is precisely the effect caused by the year-end redemptions of active Funds.

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Editor/danial