Author Topic: Semper Augustus letter  (Read 30560 times)

Cigarbutt

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Re: Semper Augustus letter
« Reply #70 on: March 20, 2018, 01:40:31 PM »
You are correct.
The strength of a conclusion is based on solid reasoning based, as a foundation, upon the quality of clearly defined assumptions.

I got carried away with empathy after reviewing the indexing topic and after reading this article.
https://www.bloomberg.com/view/articles/2018-01-30/the-dumb-money-is-about-to-become-very-influential
Riding the wave is so much fun.

I'll try no to let it happen again (on this Board). ;)


Jurgis

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Re: Semper Augustus letter
« Reply #71 on: March 20, 2018, 01:48:50 PM »
Nah, I think your post had good and valid observations. Carry on.  8)
"Before you can be rich, you must be poor." - Nef Anyo

Dynamic

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Re: Semper Augustus letter
« Reply #72 on: March 21, 2018, 07:43:11 AM »
I agree that these are valuable observations and discussions.

We sometimes need to be precise about in what way a person, group of people or a fund is acting passively or actively.

For example, assume there exists a substantial portion of retail investors as a collective, the presumably large group who tend to put money into funds at the end of the boom cycle and withdraw it upon signs of trouble, not returning until the market has again showed multi-year gains in the recent past.

That group is making an active decision about the timing and amount of their added or withdrawn funds, regardless of whether the underlying funds make active or passive decisions about buying and selling stocks on their behalf in accord with the net inflow and outflow of investor funds.

On the subset of that group of investors that invest in broad-market index funds (market cap weighted), each fund unit represents the same fractional ownership of each company (or of each company's free float) aside from tracking error and tracker decisions to omit smaller caps or to rebalance them less often to save costs.
At the whole-market level the net inflows and outflows can be considered a contribution to price-setting (based on some kind of active momentum-like behaviour). It does not differentiate between one stock and another within the same index, however, as allocation is passive. Only flow is active and flow (assuming it is momentum-based) tends to accentuate general market rises and declines, but it shouldn't (for this subset) change the relative price-pressures on specific stocks within the index except by how it adds to or subtracts from buying or selling trends created by other market participants, unless it just so happens that, relatively to market-cap, those specific stocks happen to be among the most thinly-traded in general (daily volume as a proportion of their free float), in which case their buying pressure is outsized compared to more typically traded stocks.

Dynamic

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Re: Semper Augustus letter
« Reply #73 on: September 05, 2018, 03:59:27 AM »
Although I'm wary of resurrecting dead threads, I came across Howard Marks' Oakmark letter - Investing without people containing some interesting points while catching up on the Motley Fool's Berkshire Hathaway board in a post on June 19th.

It really got to the heart of another distinction I probably hadn't made in disagreeing with Semper Augustus about some aspects of passive funds and ETFs causing a thinning market.

Although index funds were the first passive funds and then ETFs were introduced to allow intra-day trading, not just "at close", there are now over 3,000 ETFs and they now include all manner of variations which might be considered passive or rules based investing. And of course, bonds as well as stocks can be traded via ETFs.

Many of these are not broad-market index based, some are based on a sector, region or some other category determined either by a human categorising them or by a set of algorithmic rules (e.g. value or growth or importantly momentum). Some are highly leveraged, some are reverse-weighted to an index and so on. There's a lot of potential for investors to actively choose to select and ETF that matches certain characteristics or strategies then passively invest according to those rules, as long as they hold the ETF, but then to actively time their ETF buys and sells, causing inflows and outflows of money, which may seriously affect the market in the event of a market shock or panic.

Oakmark's letter includes some interesting points.

One of them refers to ETFs being market-traded rather than settled at the closing price for the day, so there's no guarantee that in a big shock, the buyer will be willing to pay the current net asset value, so the seller may end up with less than the index would suggest they'd get. They say there are mechanisms built in that 'should' prevent serious discrepancies, but these haven't yet been tested in extremis.

Another is that deliberately selective ETFs, while being passive or mechanical in investment choice, may cause distortions and thinning of the market toward particular stocks if they should become particularly popular for inflows and outflows of funds. If there are particularly popular ETFs that hold high concentrations in FAANG stocks, for example. Thus it's important to distinguish between broad-market passive investing and narrow themed or categorised passive investing.

Also the author accords with some of our opinions in this thread that in a market cap weighted passive index fund, large inflows should not disproportionately favour the firms with the higher market cap. The important distinction they make is that some ETFs are not as passive in selection as others, so inflows into those ETFs could enhance distortions.

Reading Semper's letter with a distinction in mind between different kinds of passive, may change the validity of the passive versus active investing part.

Cigarbutt

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Re: Semper Augustus letter
« Reply #74 on: September 05, 2018, 06:07:27 AM »
Although I'm wary of resurrecting dead threads…

Reading Semper's letter with a distinction in mind between different kinds of passive, may change the validity of the passive versus active investing part.

There is a file which contains a few items, which is labeled "look again in 5 to 10 years", which lists potential missed specific investment opportunities. But, there is a also a section on passive investment risk. When looking back, often the conclusions is that you were wrong to be right or right to be wrong. Sometimes, to be approximately right can be extremely rewarding. To modify conclusions along with evolving evidence/anaysis and to "publicly" do so is one of the things I value most in people.

You may be interested in the following:
https://www.bostonfed.org/publications/risk-and-policy-analysis/2018/the-shift-from-active-to-passive-investing.aspx

Their institutional conclusion basically translates into adjustments and soft landings.
I would say that the major (and difficult to envisage) difficulty is not the math, it's the behavioral side.
Mr. Marks's conclusion:
"What, then, will be the route to superior performance? Humans with superior insight. At least that's my hope."