 Good day fellow investors. Now, Seth Klarman is too much of a nice guy to make public rents. However, in 1991 he wrote his book, Margin of Safety, and today we're going to discuss a very, very interesting chapter where he discusses the institutional investing environment. So we're going to discuss institutional investors, the self-imposed rules institutional investors have, not eating their own cooking, following the crowd mentality, lack of time portfolio size, and index investing, all according to Seth Klarman. Even if the book was written in 1991, the wisdom in that book is eternal. We all talk about Wall Street, institutional investors, big banks, financials, this and that. However, the trend, the Wall Street, has been growing, has been created only after the 1950s going into the 1960s. Stock market has been created in 1602 in Amsterdam. And since then, up to the 1960s, most of the stocks, practically everything, was owned by private investors, private families, private people and so on. Only since the 1960s have we seen this institutionalization of the stock market and of investing, where most people have given up their financial responsibility to other people. And those other people don't have their interests in line with the investor interest. Remember that institutional investing is very, very new in the financial world. Now, second topic from Seth Klarman is that self-imposed rules are terrible when investing. Let me quote Larry Fink. I will constantly add contemporary examples to explain better the eternal wisdom Seth Klarman has shared. Larry Fink, the CEO of the largest passive money manager in the world, BlackRock, said this. So we have to own companies that are poorly run and companies that are well run. We own all the companies and we have to own the stock, whether we like it or not. And this is precise what passive investing means. Index investing, you invest in everything no matter the quality of it. And that is good until there is more and more and more money and index investing has been developed since the 1980s and it exploded in the last 20-40 years. Why? Because interest rates went down and created more and more money that pushed index investing and stock prices up. If we see 10-15 years of stock prices going down, like we have seen lost decades in the past, even lost three decades in the past, then index investing, the trend, the Fed, as Seth Klarman calls it and I agree, will disappear into oblivion. And we might even be calling this bubble the 45-year bubble, the index passive investing bubble. Let me show you an example. Under Armour is one of the worst performing stocks this year, part of the S&P 500. And if we look at the ownership structure of Under Armour, look at the purchases in the last quarter. Vanguard, the largest index fund in the world, has added to its position. BlackRock has also added to its position. So even if the market capitalization hugely dropped, those stocks would be supposed to sell. But they have been adding, adding and adding because they have more money inflows and they simply have to buy everything. They have been buying a lot when the stock price has been high and they continue to buy when the stock price is low. If those index funds, if those financial institutions are forced to sell those stocks or any other stock, we will see the S&P 500 into triple digits pretty pretty soon. Now global fund managers don't eat their own cooking. 99% of my stock market value is in my investment fund. So my interests are completely aligned with the interests of my clients. However, the situation isn't such in the rest of the world. According to a Morningstar research paper, 47% of US stock funds report no manager ownership. 61% of foreign stock funds have no ownership and 71% of balanced funds have absolutely no manager ownership. Now the 47% US fund ownership might mean a lot, but even if a manager only gets one dollar into the fund, then the fund has internal ownership. The question is how much of their value is in the funds they manage. Very very little. Ray Dalio has his own value in his funds. Warren Buffett has his own value in his funds. Seth Claremont, George Soros. So if you can invest with those guys, invest with those guys because your interests are aligned with their interests. And that's the only way to invest in the long term. If not, Wall Street will screw you up as it has done always to everybody in order to get the fees. Be aware of that. Claremont gives a great quote in his book From John Silver. In the building practices of ancient Rome, when scaffolding was removed from a completed Roman arch, the Roman engineer stood beneath. If the arch came crashing down, he was the first to know. Thus his concern for the quality of the arch was intensely personal and it is not surprising that so many Roman arches have survived. What is Yellen doing? She said, I am resigning, I am 71 years old. Who cares? If whatever I did in the past years is wrong, who cares? Very very interesting how this current financial environment works. Another topic from Claremont, everybody is following the crowd mentality because if you are invested in the market and something bad happens, you just did what everybody else did. And then nobody can tell you anything. If you are a contrarian and you say, let's do this, let's do this, let's do this, because it's the smartest thing to do. If it doesn't work in the next six months, in the next year, your clients will pull their funds away from you and you are out of the job. So therefore everybody must follow the trend. In the short term it might work, in the long term it doesn't work because what everybody is doing is usually the wrong thing to do in the longer term in investing. And usually investors that follow the crowd lose money because they do things wrongly. When did you start investing? Did you start in 2009, in 2002 or did you start in the last few years? That's very very important. Now Claremont also mentions lack of time, managers are now mostly on roadshows promoting their funds instead of doing research. That's very important and then there is also the portfolio size issue. BlackRock cannot trade because they have 5 billion under management. Therefore they have to own everything and the bigger they get, the bigger the market gets distorted and the bigger are the issues. When the trend reverts, all hell could break loose. When the Fed reverts, as Claremont would say. Claremont concludes the chapter with his view on indexing because he says it's inherently flawed. Because one, if there is plenty of liquidity stocks go up, if the liquidity dries up, there is nobody to sell, nobody will buy those stocks. So crashes are imminent and we have seen already two crashes of 50% in the last 70 years. Exactly what Claremont was predicting in 1991. Consequently, the indexing trend is self-reinforcing and self-predicting. The more people invest in indexes, the less people think and the stock market goes up and up. If you are not convinced that this is the wrong way to invest, just look at what happened in Japan in 1989-1990. That is a lesson for all of those who think that the SAP500 will go higher, higher and higher and that the evaluations don't matter. Just look at what has been going on in the last eight years. Indexed mutual funds, indexed ETFs have extremely positive inflows, while actively managed mutual funds have negative inflows. And even actively managed funds are turning to index funds because they are losing their clients money and there are not able to survive. And if you look at actively managed funds, PE ratios, there are around four or five crazy low because nobody wants to invest there anymore. Everybody is crazy about ETFs. However, those who are smart and those who don't follow the market usually outperform. Look at Berkshire Hattieway, simply easily outperformed the SAP500 even despite the indexing and everything because the SAP500 hugely crashes when the trend reverts, which will happen again, soon or not so soon, but it will happen again. And all the paper money over and all the paper gains that have been built up in the last eight years will be erased in just a year. Claremont concludes on indexing by quoting Buffett, in any sort of a contest, financial, mental or physical, it is an enormous advantage to have opponents who have been taught that it's useless to even try. Thank you for watching, a lot of food forethought from Claremont, looking forward to your comments and I'll see you in the next video.