From an email Whitney tilson sent to investors

I think this excerpt from Seth Klarman’s 2004 annual letter is very timely:


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[drizzle]TilsonmountainOddly, risk moves to the forefront of investor consciousness only when things are already going badly. Losing money is perhaps the only thing that makes most investors worry about losing money. With so much pressure for competitive short-term performance, worrying about what can go wrong may seem like a luxury. Ironically, when almost no one is focused on the downside, even a minor increase in investor perception of risk can trigger dramatic market declines.


While we believe it is crucial to worry about what can go wrong, unproductive worrying will not and cannot make a difference. Worrying that your favorite team will lose is obviously unproductive. Worrying that you might have an ulcer could even prove counterproductive. Productive worrying, on the other hand, enables you to identify action that reduces or eliminates the source of concern, often at little or no cost. Concerned that it might rain? Pack a raincoat and umbrella. Worried you will be late? Leave earlier than originally planned.


Successful investing goes hand in hand with productive worrying. Worried that a stock you hold might fall sharply? Reduce your holdings or buy some puts. Concerned that interest rates may rise or the dollar fall? Establish an appropriate hedge. Worried that the stock you bought on a tip might be a bad idea? Sell it and move on. Worry enough during the day and you can, in fact, sleep justifiably well at night.


All of us are subject to biases that can impair our objectivity in investment decision-making. Striving to overcome these biases is crucial for long-term investment success. Have we been too optimistic in our assumptions? Have we blindly ignored new information because we are clinging too tightly to our original thesis? Have we held onto an investment because it keeps going up, irrationally ignoring that it has become overvalued? Without a healthy dose of reflective worry, we are unlikely even to identify our lapses in judgment, let alone correct them. In other words, only by actively, productively, relentlessly worrying about what can go wrong can we maximize the odds that things will go right, by doing everything within our control to perfect our decision-making. You rarely, if ever, make money from worrying; it does not typically enhance return. But by avoiding loss, you are able to hang on to what you have accumulated, which is a cornerstone of successful investing.


2) I’m definitely seeing this:

Investors are giving up on stock picking.

Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins.

Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.

Advocates of passive funds have long cited their superior performance over time, lower fees and simplicity. Today, that credo has been effectively institutionalized, with government regulators, plaintiffs' lawyers and performance data pushing investors away from active stock picking.

In developed markets, “the pressure has gotten so great that passive has become the default,” said Philip Bullen, a former chief investment officer at active-management powerhouse Fidelity Investments. He and others say active management can succeed with less widely traded assets.

The upheaval is shaking Wall Street.

Hedge-fund managers, the quintessential active investors, are facing mounting withdrawals as they struggle to justify their fees. Hedge funds, which bet on and against stocks and markets world-wide and generally have higher fees than mutual funds, haven’t outperformed the U.S. stock market as a group since 2008.

Some giants of passive investing, such as Vanguard Group and BlackRock Inc., are attracting lots of money and gaining clout in shareholder votes at public companies.

Although 66% of mutual-fund and exchange-traded-fund assets are still actively invested, Morningstar says, those numbers are down from 84% 10 years ago and are shrinking fast.

It feeds on itself in two ways: a) when money is redeemed from active managers, they have to sell stocks they own, depressing their prices and hurting their own performance as well as that of other active managers who own the same stocks; and b) as more money shifts to indexing, it pushes up the biggest stocks in the indices (which active managers tend to own less of), further widening the performance gap.


Possible lessons: 1) maybe own a few big-caps like GE (which I owned until recently), if they’re cheap; 2) stay away from hedge fund hotels; 3) beware of shorting stocks that index funds are likely to be buying.


3) Another article about the shift to passive investing:

Steve Edmundson has no co-workers, rarely takes meetings and often eats leftovers at his desk. With that dynamic workday, the investment chief for the Nevada Public Employees’ Retirement System is out-earning pension funds that have hundreds on staff.

His daily trading strategy: Do as little as possible, usually nothing.

The Nevada system’s stocks and bonds are all in low-cost funds that mimic indexes. Mr. Edmundson may make one change to the portfolio a year.

News doesn’t matter much.

Will the 2016 elections affect his portfolio? “No.”

Oil prices? “No.”

He follows Fed Chairwoman Janet Yellen , but “there’s a difference between watching and acting.”

Mr. Edmundson, 44 years old, has until recently been a pension-world outlier. Other state retirement systems turned to complicated investments and costly money managers to try to outperform markets with algorithms and smarts.

His strategy is to keep costs low and not try beating markets, he says. “We’re bare bones.”

4) The more reporters and investigators dig, the more horrific things they discover at Well Fargo. I hope they do so at other banks, because I’m certain that Wells wasn’t alone in taking advantage of its customers (hopefully what’s happened to Wells will cause other banks to proactively take steps to clean up their acts):

Mexican immigrants who speak little English. Older adults with memory problems. College students opening their first bank accounts. Small-business owners with several lines of credit.

These were some of the customers whom bankers at Wells Fargo, trying to meet steep sales goals and avoid being fired, targeted for unauthorized or unnecessary accounts, according to legal filings and statements from former bank employees.

“The analogy I use was that it was like lions hunting zebras,” said Kevin Pham, a former Wells Fargo employee in San Jose, Calif., who saw it happening at the branch where he worked. “They would look for the weakest, the ones that would put up the least resistance.”

Wells Fargo would like to close the chapter on the sham account scandal, saying it has changed its policies, replaced its chief executive and refunded $2.6 million to customers. But lawmakers and regulators say they will not let it go that quickly, and emerging evidence that some victims were among the bank’s most vulnerable customers has given them fresh ammunition.

5) These interviews with former Wells employees are really shocking. Here’s the first

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