Author Topic: NYT: Seth Klarman on indexing  (Read 2719 times)

BTH7117

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NYT: Seth Klarman on indexing
« on: February 07, 2017, 07:13:29 AM »
An interesting read on Seth Klarman's letter to investors.  On Trump, indexing, and the under-performance of hedge funds (If you want to skip the Trump stuff, start about halfway down).

Honestly, I did not know of Klarman before this article, but anyone who gets praised by Buffet is worth my time.  That said, whenever I read of active management pros criticizing passive investment, I can't help but think at least some of the insight is conflicted.

Happy Tuesday.

DavidAnnArbor

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Re: NYT: Seth Klarman on indexing
« Reply #1 on: February 07, 2017, 09:07:15 AM »
The part of the article that states that those stocks outside the index fund would not have as high valuations doesn't make sense. I thought a Total Stock Market Index fund invested in all publicly trades stocks.

Gondolin

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Re: NYT: Seth Klarman on indexing
« Reply #2 on: February 07, 2017, 09:31:09 AM »
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That said, whenever I read of active management pros criticizing passive investment, I can't help but think at least some of the insight is conflicted.

In general, yes. However, Klarman is an 'active manager' only in that he does not index. He creates value by long term value investing and is in a very real sense the direct inheritor of Graham and Buffet. His genius lies in an aptitude for identifying distressed securities that are undervalued through extremely through investigation of a business's operations. When we finds one where the potential losses are suitably hedged, he buys and holds for as long as it takes for a gain to be realized (this may be 3 years and it may be 20).

Obviously, 99% of people do not have the aptitude or opportunity to run a business like Klarman but, it's not fair to lump in him with all the active management fee sharks who fleece their customers with constant stock churn.

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I thought a Total Stock Market Index fund invested in all publicly trades stocks.
"The fund invests by sampling the index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full index in terms of key characteristics." - This is directly from the VTSAX info page. Every index fund is an approximation.

Moreover, Klarman doesn't differentiate between total stock funds and "exchange traded funds (E.T.F.s) that mimic various market or sector indices.” so it's not clear how much he thinks sector indices are muddling the issue.

brooklynguy

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Re: NYT: Seth Klarman on indexing
« Reply #3 on: February 07, 2017, 09:45:45 AM »
Klarman's comments on index investing (as quoted in the article) reflect the general consensus in the investment community that the growth of index investing has the effect of decreasing the efficiency of the markets.  (One of his statements quoted in the article succinctly sums up this view:  "The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become").

However, as some of us in the forum have argued before, I think the growth of index investing is actually making the markets more efficient.  The following compellingly argued Philosophical Economics article lays out the reasoning in detail:  "Index Investment Makes Markets and Economies More Efficient".

BTH7117

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Re: NYT: Seth Klarman on indexing
« Reply #4 on: February 07, 2017, 11:26:01 AM »
The part of the article that states that those stocks outside the index fund would not have as high valuations doesn't make sense. I thought a Total Stock Market Index fund invested in all publicly trades stocks.

Good question.  Not all index funds are total market, they track a set index like the S&P 500, FTSE 100, etc.  Total Market funds, while generally very inclusive, don't include every single stock.  I think Fidelity's is around 1,500 and Vanguard is like 3,800.

BTH7117

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Re: NYT: Seth Klarman on indexing
« Reply #5 on: February 07, 2017, 11:27:15 AM »
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That said, whenever I read of active management pros criticizing passive investment, I can't help but think at least some of the insight is conflicted.

In general, yes. However, Klarman is an 'active manager' only in that he does not index. He creates value by long term value investing and is in a very real sense the direct inheritor of Graham and Buffet. His genius lies in an aptitude for identifying distressed securities that are undervalued through extremely through investigation of a business's operations. When we finds one where the potential losses are suitably hedged, he buys and holds for as long as it takes for a gain to be realized (this may be 3 years and it may be 20).

Obviously, 99% of people do not have the aptitude or opportunity to run a business like Klarman but, it's not fair to lump in him with all the active management fee sharks who fleece their customers with constant stock churn.


Fair enough.

mateo_alou

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Re: NYT: Seth Klarman on indexing
« Reply #6 on: February 07, 2017, 02:25:17 PM »
I've been reading these forums quite a bit but never posting, and this article gave me the incentive to do so--thank you for starting this thread. 

Question for you all:  When referencing these index funds, or ETFs, it isn't clear,the author says, "...he sees big trouble ahead in this area — or at least the potential for investors in individual stocks to profit."
“One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to ‘lock in’ today’s relative valuations between securities,” Mr. Klarman wrote.

What do you think "big trouble" means?  I've seen enough Money Mustache gospel to recently crack some CDs, and I was ready to sink it into low-cost Vanguard index funds...but now this gives me pause.  Any advice on how to interpret this would be appreciated. 

Free Forever

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Re: NYT: Seth Klarman on indexing
« Reply #7 on: February 07, 2017, 08:08:29 PM »
Seth Klarman has been arguing that markets are less efficient due to increasing passive investing for years/decades (since at least 1991). He's a great investor and a decent writer but I don't think he's ever addressed the well known counter-arguments supporting increased market efficiency from the increasing proportion of passive investment.

If you scour the investment news you're always going to find some smart people who totally disagree with each other. One of them might even be quite right but I can't figure out a reliable way of making money (above what is offered in passive investments) from those peoples opinions.
« Last Edit: February 07, 2017, 08:10:25 PM by Free Forever »

Gondolin

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Re: NYT: Seth Klarman on indexing
« Reply #8 on: February 07, 2017, 08:29:46 PM »
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What do you think "big trouble" means?

Nothing. Put your money in that index fund.

First, if you're worrying over one light NYT piece with predictions from one investor then keep reading MMM, JCollins, and Bogleheads. You may not be mentally ready to get into the market.

Now, onto the analysis. If you read closely, you'll notice that the 'big trouble' statement is not a direct quote from Klarman but, a paraphrase from the author which is immediately caveat-ed by '...or at least the potential for investors in individual stocks to profit.'. This second statement is probably a lot closer to what Klarman actually said and is in line with his other direct quotes in the piece. Specifically that, as more people index, the market (may) lose efficiency and that, at the least, there will be less competition for the relatively rare, distressed security opportunities upon which Klarman. Less competition means easier profits for him. However, there's no indication that he feels there is a real or imminent downside to indexing for the average person.

tldr - Ignore it, the NYT author was just trying to punch up his piece.

BTH7117

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Re: NYT: Seth Klarman on indexing
« Reply #9 on: February 08, 2017, 05:47:50 AM »
I've been reading these forums quite a bit but never posting, and this article gave me the incentive to do so--thank you for starting this thread. 

Question for you all:  When referencing these index funds, or ETFs, it isn't clear,the author says, "...he sees big trouble ahead in this area — or at least the potential for investors in individual stocks to profit."
“One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to ‘lock in’ today’s relative valuations between securities,” Mr. Klarman wrote.

What do you think "big trouble" means?  I've seen enough Money Mustache gospel to recently crack some CDs, and I was ready to sink it into low-cost Vanguard index funds...but now this gives me pause.  Any advice on how to interpret this would be appreciated.

You're welcome and welcome to the forum.  You may want to check this out: http://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/ and http://jlcollinsnh.com/stock-series/, both of which will answer your question much more eloquently than I ever could.

Essentially, the best time to invest in index funds is yesterday.  The second best time is today.