While Mr. Klarman has long kept a low public profile, he is considered a giant within investment circles. He is often compared to Warren Buffett, and The Economist magazine once described him as “The Oracle of Boston,” where Baupost is based. For good measure, he is one of the very few hedge managers Mr. Buffett has publicly praised.
.. “Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” he wrote.
.. “President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces,” he continued. “While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off.”
.. “The Trump tax cuts could drive government deficits considerably higher,” Mr. Klarman wrote. “The large 2001 Bush tax cuts, for example, fueled income inequality while triggering huge federal budget deficits. Rising interest rates alone would balloon the federal deficit, because interest payments on the massive outstanding government debt would skyrocket from today’s artificially low levels.”
.. “The erratic tendencies and overconfidence in his own wisdom and judgment that Donald Trump has demonstrated to date are inconsistent with strong leadership and sound decision-making.”
.. Trump is high volatility, and investors generally abhor volatility and shun uncertainty,” he wrote. “Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.”
.. hedge funds had returned only 23 percent from 2010 to 2015, compared with 108 percent for the Standard & Poor’s index — he blamed the influx of money into the industry.
.. “When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership),”
.. To Mr. Klarman, “stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it.”
“This should give long-term value investors a distinct advantage,” he wrote. “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.”
Muhlenkamp Memorandum: Waiting for the Market to be Rational
As we have said before, there are dozens of ways to successfully invest, but each has its own inherent fl aws, and the investor has to understand his discipline well enough to know what those fl aws are. We have yet to fi nd a fl awless investment discipline. The inherent fl aw of value investing is that it doesn’t work well when markets are irrational or driven by non-economic considerations; and that markets can be irrational longer than we expect.
Our experience is we cannot chase performance, we have to get out ahead of it and wait for it to come to us. We have been waiting longer than we expected, but part of the problem with value investing, if it’s done properly, is the tendency to be early; and being too early can wind up being wrong. However, we think value investing in general, and our particular implementation of it, may soon be rewarded.
The markets since 2009 have been infl uenced to an unprecedented degree by governments and central banks. This was driven in part by central banks pushing investors out of bonds into everything else. Central banks bought government bonds en masse, pushing the former owners into higher-risk assets. Stock picking was less effective than it historically has been when the big money was flowing.
.. Instead of changing our process to take advantage of past conditions, we think conditions are changing to meet us. We continue to focus on bottom-up, fundamental analysis and value-driven stock picking. We own companies that are more profi table, and selling for less, than the companies which have led the market indices to new highs. We haven’t changed what we are doing to try to improve our performance, but by sticking to our discipline we should be ready as the investment “climate” brings our companies back into favor.
.. So, that’s what we are doing. Stock and bond markets have been divorced from underlying economic realities since 2008, which is irrational. Stock and bond markets are rational in the long term, and we think it is more reliable, more conservative, and more productive to invest rationally than to try and predict the next irrational move of the markets. We continue to invest our money and your money according to these principles, even though it has taken longer for the rational to override the irrational then we thought it would.
The Champions of the 401(k) Lament the Revolution They Started
The dominant vehicle for retirement savings has fallen short of its early backers’ rosy expectations; longer life spans, high fees and stock-market declines
Herbert Whitehouse was one of the first in the U.S. to suggest workers use a 401(k). His hope in 1981 was that the retirement-savings plan would supplement a company pension that guaranteed payouts for life.
.. Some early 401(k) backers are now calling for changes that either force employees to save more or require companies to funnel additional money into their workers’ retirement plans.
.. Just 61% of eligible workers are currently saving, and most have never calculated how much they would need to retire comfortably
.. Financial experts recommend people amass at least eight times their annual salary to retire.
For people ages 50 to 64, the bottom half of earners have a median income of $32,000 and retirement assets of $25,000
.. Roughly 45% of all households currently have zero saved for retirement
.. “It’s a very simple formula,” he says. “If you save at 10% plus a year and participate in your plan, you will have more than 100% of your annual income for retirement.”
.. Traditional pension plans, on the other hand, had weaknesses: Company bankruptcies could wipe them out or weaken them, and it was difficult for workers to transfer them if they switched employers.
.. Two bull-market runs in the 1980s and 1990s pushed 401(k) accounts higher.
.. she offered assurances at union board meetings and congressional hearings that employees would have enough to retire if they set aside just 3% of their paychecks in a 401(k). That assumed investments would rise by 7% a year.
.. Ms. Ghilarducci wants to ditch the 401(k) altogether. She and Blackstone Group PresidentTony James are recommending a mandated, government-run savings system that would be administered by the Social Security Administration and managed by investment professionals.
.. “There are a lot of governors and mayors who are Republicans, and the first wave of the crisis will affect states and cities,” Ms. Ghilarducci says.
.. Others are calling for a national mandate on savings or requiring companies to automatically enroll participants at 6% of pay.
How the Internet Hurt Actively Managed Mutual Funds
Yet given that the ETF is over 20 years old, and Vanguard is more than 40 years old, the question arises…why just in the past 5-10 years has the explosive growth finally shown up?
To understand why, reflect back on what it was like 20 years ago to evaluate an actively managed mutual fund. The average consumer only knew how they were doing by getting a once-per-quarter statement showing account balances, or by pulling out The Wall Street Journal stock pages to see the prior day’s closing NAVs. While this approach was fine to monitor that the portfolio was growing–which it was, almost continuously, throughout the 1980s and 1990s–it did nothing to tell investors whether the funds were actually good, or whether the rising tide of a booming stock market was lifting all boats together (even the laggards).But with the internet, for the first time, it was possible to look up not just the closing prices of the funds, but to benchmark them, with actual performance data... And the lesson brought about by that transparency: It turned out that a lot of actively managed mutual funds weren’t beating a simple, passive index fund. And it didn’t require complex calculations and reading a 172-page prospectus to figure it out. A straightforward website could easily collect all the performance data automatically, and calculate the results instantly... The coming Department of Labor fiduciary rule in 2017 will likely drive the trend even further, as advisers who hold out as such will actually be held accountable as advisers (at least with respect to retirement accounts). Which means the adviser has to justify that the actively managed fund really is worth the additional management fee over a lower-cost passive index ETF instead.