Seek Out The Opposing View; Passive Investing
Ganging up on Gold
Because I hold gold related investments, I always seek out the opposing views to test my thesis. On the recent 5% fall in gold, a chorus of bears came out.
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
Natixis offers three main arguments for this call, only one of which makes sense, at least “technically”, if you will:
“For 2017 and 2018, we think that the biggest factor influencing the price of gold is the expected path of U.S. interest rate hikes,” the analysts said. “Also, we do not expect further rate cuts by the [European Central Bank] or [Bank of Japan] as this is likely to damage their banking system especially in the case of Europe.”
Natixis economists are expecting to see the Federal Reserve raise interest rates by 25 basis points three times next year: June, September and December.
Not only will higher bond yields raise gold’s opportunity costs but they will also boost the U.S. dollar, providing another headwind for the precious metals, the analysts explained.”
So when you read the above, always ask for theoretical and empirical evidence of the authors claims. Is there any long-term correlation between US interest rates and the dollar price of gold? And why? More here: Ganging up on gold
Some negative comments on gold is spot-on like
…The most successful professional investors like Warren Buffett, Paul Tudor Jones, John Templeton, George Soros and Jim Rogers, know this well. Their methodologies are even built upon the idea that an intelligent investor can get ahead by taking advantage of those times the crowd becomes irrational, the antithesis of the EMH and MPT.
Active vs Passive Investing
Passive investing strategies have become all the rage. Since 2000. Index strategies. together with their close cousins, Exchange Traded Funds. have gone from a little more than a tenth of US. Equity Mutual Funds assets under management [AUM] to just under one-third at the end of 2014 [Figure 1]. The numbers are even more dramatic for Global/International funds, with passive strategies going from under 3% in 2000 to 27% at the end of last year.
Over that time span, passively managed AUM has grown at 15.3% per annum, more than triple the rate of actively managed AUM, with no sign of slowdown in recent years. This market share shift has been cause for a lot of soul- searching within the ranks of active equity managers and a lot of speculation within the ranks of industry analysts. Do these data suggest a secular trend or a gigantic cycle? What is the end-state for passive share?
This paper asks the following question: Is the rise of passive investing inevitable because it offers a superior value proposition? In simple terms, is passive investing the “right” strategy for equity investors to follow? We examine the arguments most commonly cited in favor of passive strategies and look at the assumptions that underlie them. We conclude that passive investing is far from the panacea that many proponents claim it to be. Passive investing offers two good things – low fees and tax efficiency – and gross performance consistently close to a market index. A moment’s thought shows then that. on a net basis. passive strategies allow investors to systematically and consistently underperform the market throughout an investment cycle, the underperformance being precisely those fees and taxes.
In contrast, active management strategies adhering to a consistent style in a disciplined fashion across the cycle offer investors a way to outperform an index over the totality of a cycle. despite higher fees and despite almost assuredly underperforming during meaningful portions of that cycle. At the root of the argument for passive investing is an assumption that investors have short time horizons and prefer consistent and predictable underperformance to lumpy and unpredictable outperformance. We question this assumption. Patient investors with long time horizons should seek to exploit the excess returns offered via disciplined active management. rather than the consistent below-market returns offered via passive strategies.
What is active versus passive investing?
Before delving into the active-passive debate. we need to define some terms. Somewhat surprisingly, there is no single agreed-upon definition of passive investing in the market today. Among the terms tossed around in a discussion of passive investing are simplicity. low turnover, absence of judgement [“rules-based” investing], and others. However. the general consensus among professional investors – which we adopt here uses the term passive to mean an investing strategy seeking to mimic the returns of a given market index or benchmark. In practice. such strategies are enacted through portfolios holding all stocks in the index in proportion to their equity market capitalizations.‘ Using the above definition, we can then define active strategies to be those that seek to depart from a given index with the purposes of achieving some positive investment return over and above that of the index. commonly referred to as “alpha.”
See the full PDF below.