 Good day, fellow investors. We continue with summarizing one of the most important investment books out there, The Margin of Safety from Seth Claremont. If you want to buy it on Amazon, it costs more than $1,000 per copy, so a summary will add you real value. Today's topics, chapter 3, the institutional performance derby. So what is the problem when institutions control the market, what are the issues there and how we have to be careful what's going on and how to invest accordingly, not to get into those traps. So the topics for today's first part of chapter 3 summary are how institutions invest, how institutional clients behave, institutional managers and their own money, 10 impediments to institutional investor returns. And the second part of the chapter that I will do in a video tomorrow is index funds part 2. The first thing to understand is institutional investors are a new thing. So they have started growing, started developing in the 1960s, slowly in the 1970s, nobody wanted to invest them. And then really the market exploded, 70s, 80s, 90s, 2000s until now. Now we have a culmination with ETFs. So the first thing to understand, it's really a short period in time that we have institutional investors. Before the 1970s, most people that had money to invest were private investors investing into a select number of stocks, which made the market controlled by investors that really invested into the details, the fundamentals, the businesses. Unlike now, where everybody invests in everything because the market should be efficient. So just for example, the California state teachers retirement system is the second US largest pension fund with 219 billion in assets under management. If we take a look at their investment beliefs, the core is diversification. However, diversification, how can diversification be costing 1.64 billion per year on assets of in 2016, the case that I found 195 billion. So the management fee is 0.8% in this case, almost 2 billion on 200 billion, which is a huge fee to just be diversified when we know that index funds out there charge 0.04%. So 1.20 of the fee, this well diversified fund is charging. So if you are a California state teacher, you should really urge to eliminate that fee because you are overpaying for nothing as the California state teacher retirement system portfolio is simply a market portfolio. One should could easily copy with index funds, Vanguard is in the index funds and no one should pay a fee for that, at least not above, if above 0.04. If we look at the composition of the stocks, they simply own practically everything. They even own 522,000 of accurate ink cancer treatment business that didn't do that good. So they buy everything, no matter what, no matter the fundamentals. And buying whatever, no matter the fundamentals, means that there should be no fee for the management. So this is California state teachers being robbed by 1 to 2 billion per year in their pension fund. You're working for 40 years, 1.64 billion is the yearly fee that fee goes up constantly, put that lower that every year, let's say you cut off 1 billion per year over 40 years, add 5% on that 1 billion if it is reinvested and then you get to a huge sum that should increase your pension and not go to those that manage your fund without anything, any value added for a huge fee because of the huge diversification. However, that is exactly an asset Claremont discusses in his book, that's exactly how managers work. If you manage more and more assets, your fee gets bigger, bigger and bigger and the key in the industry is to manage more assets, not to perform well when you are extremely diversified. Like the California teachers investment fund is global equity, real estate, private equity, risk mitigating strategy, whatever that is, the derivatives with the cash, whatever they do. So hugely diversified over a big portfolio. So when you have something like this, then it is really pointless to have any fees attached to it. And then the key of such a diversified portfolio is just to limit any kind of risk for the managers. They will perform as the market performs. So whatever happens, they will never outperform the market, they will never underperform. They will underperform certainly because of the fee, but okay, that nobody cares about because it's small, let's say, but it accumulates over time, as we said. And here is the trick. Index funds insist on just managing more money. And if they offer stability, so they offer market performance, then people will feel comfortable and they will just add more and more money to that. California teachers should switch, so should find managers that charge just 0.1%, not 0.8%. That would be much more profitable for the same value in the long term. So something to think about. Another very important thing is the clients and their money in case a manager does wrongly. We have recently seen, we have discussed David Einhorn in a few videos and he didn't perform that well over the last years. What happened to his funds? Well, the clients simply pulled away 50% of his funds, nobody trusts him, nobody believes in him and he's forced to sell his positions to return money to clients. That is the nature of the industry we have seen, but also the nature of the clients. Clients like to invest with winners and that's why most investments get into the market when the market is already up. Nobody likes to buy a declining stock, everybody likes because it's easy to buy a stock that goes up. Let me show you the performance of this fund. This is a fund that in 1998 to 2000 to January 2000 underperformed, lost actually 20%. The SAP 500 went up 20%. So the difference is 40% even more, which is a huge difference and everybody was calling, everybody that was happy from the gains from the SAP 500 was calling the guy managing this fund as a loser, that he lost his touch, that he doesn't understand the internet, the new times that he doesn't understand anything because of the relative performance and everybody is chasing this relative performance. And if you are an investment fund manager and you lose 20%, while the market is up 20%, you are guaranteed to lose your job, to lose your clients, to practically lose everything. So taking the risk of trying to outperform the market is something simply no institution will ever do. Therefore, diversify, diversify, diversify and take a small fee that nobody feels. The guy that underperformed that lost 20% while the market was up 20% is Warren Buffett. And I'll show you a chart that shows that the rest is history. Since then, Warren Buffett destroyed the SAP 500 and that shows how tricky it is for institutionals to do a good job. Of course, this is Warren Buffett and he has been doing this for the past 60 years. Another very interesting thing is a few years ago Morningstar reported that 47% of US stock funds have no manager ownership, 61% of foreign stocks funds had no ownership, 66% of taxable bond funds had no manager ownership, 71% of balanced funds put up Goose eggs and 80% of municipal funds lacked investor ownership, not even one share. Morningstar article got deleted, I cannot find it online anymore, but this is the truth. Most investment managers don't even have assets in the funds they're managing, 80%, 60% that is outrageous. If somebody is managing the money, they should have most of their wealth in those assets and that should be something publicly disclosed. But if you disclose that publicly, 80% of the industry is another thing is 10 impediments to good institutional investment performance. One, the institutional investor has no time. I also fall here into, I dedicate, also I have to make videos, I have to promote what I do, but I have managed to sort it out so that I only film Friday morning. I prepare some videos usually after 9 o'clock from 1911 when I'm the most tired, but I cannot really do investment research and that I do over the week and then on Friday morning I film it, I have Benjamin that edits everything, puts everything online, does everything else. I just have to answer comments 15-20 minutes per day. So I try to really focus on investment research and not talking to clients. I can talk to you like this, I can talk to thousands of you like this. If I would be talking to each one of you on a daily basis, what happened to this stock, what happened there, then it would be simply impossible to be a research or stock market researcher and that's the problem also with asset managers. They have no time, it's impossible to do your job properly and talk to clients. Therefore Buffett talks to clients once a year at the conference, the rest is for his research and try to call him. The cost of being wrong when investing, we already discussed that with Buffett, if you are wrong, ciao ciao ragazzi, you lose your job, then there is no rebalancing. If a position goes up, no fund is going to sell and buy something else. Too much fuss, just let it there, just say oh we did good, that's it. Managers are not researchers, most money managers take analysts' reports and compare them to make a decision. Few do the research themselves, this is I think one of the biggest flaws of institutional investors. Money managers are human beings, investing in feds, easy profits, fear of missing out, talking about Bitcoin, talking about the cannabis industry, 3D printing, internetcraze.com bubble in the 2000s, you have all seen it. Portfolio size limitation, the bigger you go, good investments are in short supply, so the bigger is the size, the bigger you have liquidity issues, you have to invest in subpar investments and also you have to be fully invested at all times. And this is also fully invested at all time because you are paid to do something, you are not paid to do nothing. And Warren Buffett is often saying how investors, Berkshire Hathaway investors, pay him to mostly do nothing, so it prevents from them to doing stupid things. And this is something that's underrated in the market. Number nine, window dressing, so if I own for example a Russian stock in December and the Russian market didn't do so well, I sell it in December, so when I do report the 1st of January or the last day of December, my portfolio, I don't have that big loser in my portfolio, that's called institutional window dressing and that's done and still being done. Number 10, abandonment of fundamental analysis index fund investing, which is something we will discuss tomorrow when we touch on Claremont's view on index funds. Thank you for watching, seeing see you tomorrow when we discuss index funds.