INDEXING - HUGGING

“I don’t know, I don’t care, Indexing lets you say those magic words.” Jason Zweig

"Any program which involves complete investment of all capital at all times is not apt to be the most successful one." Gerald Loeb

“You can understand why many succumb to the pressure to “hug” the index, so to speak. But we believe if you go down the road of trying to make sure you’ll never do much worse than the index, you’re almost insuring that you’ll never do well enough to justify your compensation as an active manager.” Bill Nygren

"If you want to beat a benchmark, you should not look like the benchmark.” CT Fitzpatrick

"The idea of indexing isn't something I believe in or would follow." Henry Singleton

“The mentality of ‘I’ll save transaction costs and management fees by indexing’ ignores the fact the underlying still needs to produce for you.” Seth Klarman

“Capitalizing on opportunity requires thought, which can’t be done with software allocating $3.80 for every $100 invested to Apple because that happens to be its weight in an index.” Christopher Bloomstran

"Both closet indexing and shooting for the stars are exposing financial planners’ clients to undue risk. Both are a result of benchmark tyranny.” Jean Marie Elliellard

“I would argue that in a lot of the wealth advisory business, people are charging for skill and delivering closet indexization. In other words, nobody can stand being that different from the crowd and results. They’re afraid they’ll lose their fees. So, everybody does the same thing. It’s mildly ridiculous.” Charlie Munger

“Money managers motivated to outperform an index or a peer group of managers may lose sight of whether their investments are attractive or even sensible in an absolute sense.” Seth Klarman

"To us it makes little sense to invest in industries we don't particularly like, or understand well, only to have to find the least bad idea of the group, in order to maintain semblance to a benchmark index.” Allan Mecham

“Index envy is not a route to outsized returns and at the end of the day it is blindingly obvious that our relative returns are what they are because we don’t own what everyone else is chasing.” Nick Sleep

"The pressure for short-term performance versus a benchmark can easily disorient the investment brain of a portfolio manager. What should matter is capital enhancement in bull markets and capital preservation in bears; in other words absolute, not relative returns." Barton Biggs

“Passive investors, benchmark huggers and herd followers have a high probability of achieving average performance and little risk of falling far short.” Howard Marks

“In the case of the active management industry, you see so many funds that label themselves as active that charge fees for active management, but have huge overlap with the index or low active share as it is known. What those companies are really focused on is business risk and not producing an outcome that diverges too much from the market. Because, of course, diverging too much from the market is what leads you to your clients to fire you.” Tom Slater

“The pressure to retain clients exerts a stifling influence on institutional investors. Since clients frequently replace the worst-performing managers [and since money managers live with this fear], most managers try to avoid standing apart from the crowd. Those with only average results are considerably less likely to lose accounts than are worst performers. The result is that most money managers consider mediocre performance acceptable.” Seth Klarman

“[With] closet indexing….you’re paying a manager a fortune and he has 85% of his assets invested parallel to the indexes. If you have such a system, you’re being played for a sucker.” Charlie Munger

“It’s funny how people don’t understand that every single fund that has a benchmark index, that is being monitored for risk adjusted-returns, is a sector fund. Because that index defines a sector. Whether is a junk bond sector index or the S&P500. Everything it is a sector fund.” Jeff Gundlach

“At the extreme, if everyone practised indexing, stock prices would never change relative to each other because no one would be left to move them.” Seth Klarman

“No matter how diverse the companies in an index are, if the indices themselves dominate the market, then all the securities in the index do indeed share one fateful ‘shadow’ correlation. They are all members of the index, and it is the index, not the companies, that the market is trading.” Andy Redleaf

“When everybody indexes, the 500 stocks will remain unchanged relative to each other.” Gary Helms

“I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.” Charlie Munger

“Stocks trade up when they are put in an index. So index buyers are overpaying just because a stock is included in an index. I am much more inclined to buy a stock that has been kicked out of an index because then it may have value characteristics – it has underperformed.” Seth Klarman

“We pay disproportionate attention to companies that largely reside outside of the passive indexes. If a company is well represented in the universe of indexation, it is more likely to be efficiently priced, or overpriced. If it’s not well represented, that will at least offer an interesting starting point for us.” Murray Stahl

“You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is. For most professional money managers, if you’ve got four children to put through college and you’re earning $400,000 or $1 million or whatever, the last thing in the world you would want to be worried about is having gumption. You care about survival, and the way you survive is just not doing anything that might make you stand out.” Charlie Munger

“The percentage of assets under management with active share less than 60% went from 1.5% in 1980 to 40% today.” Michael Maubousssin

"Share prices fluctuate more widely than values. Therefore, index funds will never produce the best total return performance." Sir John Templeton

"Closet indexing is far more comfortable than being wrong but it is certain to produce subpar returns." Christopher Parvese

"Instead of taking refuge in closet indexing with a portfolio that mimicked the S&P500, we elected to represent our shareholders in areas where they stood prudent investors' chances of making a buck." John Neff

"The common practice of hugging a benchmark index to ensure sticky assets leaves us cold considering the deceptive practice of touting track records (often besting a benchmark by less than 2%, usually worse) that fail to add value after accounting for fees and taxes (the average tax drag is a meaningful 2.2%)." Allan Mecham

"Even indexes can be victims of bubbles.. at certain times, an index is not a conservative investment." Chris Browne

“People generally think that an equity index is a way to achieve instant portfolio diversification. However, a property of the way indexes are constructed is that they eventually un-diversify themselves; this happens when a handful of firms become hugely successful and come to dominate such indexes.” Murray Stahl

"An index always looks average, so it seems centrally safe in an investment portfolio. But its constituent parts might look far from safe to an investment mind.” Jonathan Ruffer

"Trouble comes in all kinds of shapes, sizes and directions. We find it worrisome that to many investment folks, trouble begins and ends with underperforming a benchmark. Although we list stock and bond indices in our performance tables, our benchmark is essentially cash." Paul Singer

"By investing passively in a low-cost ‘index fund’ that mirrors a market average, you can be sure to capture the return of the average. People err, however, when they think of such funds as being low-risk. Index funds eliminate the risk of under performing the market average, but not the risk inherent in the average itself." Howard Marks

"We think clients will have more money in 10–20 years if we focus on stocks with robust prospective return characteristics rather than attempting to structure portfolios whose year-by-year returns track an index closely." William Browne

“I don’t own any indexes. And I have always been willing to own just two or three stocks. And I have not minded that everybody who teaches finance in law school and business school teaches that what I’m doing is wrong. It isn’t wrong. It’s worked beautifully. I don’t think you need a portfolio of 50 stocks if you know what you’re doing. And I hope my heirs will just sit.” Charlie Munger

“So there is no confusion: The index is not our benchmark. I spend no time at all thinking about the index… I have witnessed many investors make terrible investment decisions from thinking via the index. The most common mistake is to view the index (indeed any index?) as a risk-free ‘home’. That this disposition still exists after the irrational index bubbles that preceded the Asian crisis and technology collapse may be testament to the strength of the marketing skills of the financial establishment. Once the index is seen as risk free the mistakes that follow cascade and include: requirement to have have an opinion on everything inside the index regardless of one’s circle of competence, an unwillingness to invest in other better opportunities, and over diversification. These three mistakes destroy a lot of capital.” Nick Sleep

“Index funds really in a way, they take more and more of the float out of a security, so the marginal trader can move a stock more because there’s less flow, if that makes sense. It’s almost like having an index fund as major holders of securities in stable market conditions actually reduces the liquidity of companies.” Bill Ackman