Index Index, Colin, Warren Buffett discussed on We Study Billionaires - The Investors Podcast

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You're listening to T- IP on today's show we bring back a guest from five years ago. Mr Collin rose from pragmatic capitalism collins. Private an investment partnership was able to navigate the two thousand eight crisis with a fifteen percent positive return when the rest of the market was down more than fifty percent before starting his own investment confirm Colin managed to half a billion dollars for Merrill Lynch in the early two thousands and on today. Show we talk about contrarian ideas and Collins top down thinking for economic principles bulls so without further delay. Here's our discussion with Colin Roche. You're listening to the investors podcast. I well we studied the financial markets and read the books that influenced self made billionaires. Most we keep you informed and prepared for the unexpected. Yeah well constantly they show. I'm your host astigmatism. And as always I'm here with my co host Preston Pysche. We're here with Colin Roach from pragmatic capitalism Colin. Thank you so much for taking the time to speak big with us here today. Hey guys thanks so much for having me so calling again. Thank you so much for making time to speak with us. Because on today's show. We'll debunk different myth in economics and investing. But before we do that I wanNA talk to you about a very hot topic these days. I WanNa talk about this whole discussion about active Tiv- and passive investing and more funds than ever really invested in so called passive indexes than ever before and a lot of people talk about that creating a bubble but before we talked about that before we talk about. If it's truly passenger with a no you have an opinion about that I would like take a step back and talk about the very basic so perhaps you can. I explain the importance for the investors about the confusion. The term active and passive. Yeah I really tried to formulate a foundation for understanding the whole financial world that is very sort of operational in nature. Sort of looking at the world through the Lens of like an engineer would look at the way that he might construct a plane so you understand the basics of the dynamics of flight and then you can construct whatever you want that will actually achieve the goals that you want and from a financial angel perspective the active versus passive debate. It doesn't really make a lot of sense. I mean from from a strict. I think industry industry perspective. The reason these terms exist is pretty simple there basically just marketing BS. I think that the the passive community created the the term passive so that they could create an opposing side that they could demonize to some degree for marketing purposes. Press' so when you look at it. From a very sort of operational perspective it doesn't make a lot of sense to refer to anything as really active versus. Pass it because the reality is that everything we're doing in investment management involves a certain level of activity. You know this. It's really hit me over the head in two thousand eight. I was studying a perspectives. I'm the type of Nerd who will go through and actually read a full perspectives inspectors from a new. ETF and I'm sitting there reading perspectives from a new hedge fund. ETF One of the first few pages of it described the fund as a Passive Index Fund. And I was sitting there thinking to myself. Am what a load of garbage. This is a fund that is going to charge a three three percent. Management fee has super active underlying element of it that is invested in a bunch of sort of opaque and very the active strategies by any definition but they're calling themselves a passive index and it's interesting with the rise of ETF's that they kind of exposed this reality that nothing is really passive because an ETF is basically a it's a structure that takes an investment strategy and creates its own index and so by creating its own index. All it does is it tries to track that index so an example that your our listeners might enjoy is for instance let's say Warren Buffett wanted to start an ETF he would I mean. Warren Buffett is by no measure a passive investor. He's an active investor by any use of the word but if he started an ETF and he created the Warren Buffett Index and he tracked that Index Index. He could technically say that. He tracks a passive index. He is just passively tracking the index that he subjectively created in doing so he would be able to refer to himself technically as a passive investor. And that's what is happening. With a lot of these these index funds and passive funds funds. They basically create their own index fund or their own index and then they track it in what they refer to as a passive way but the the actual activity city of managing an index fund is highly active. If you look at the what's going on underneath the surface when someone goes out and buys for instance the Eh the vanguard S. and P. Five hundred fund which by the way the S. and P.. Five hundred is a very active fund. It's just a subjectively created set of five hundred companies beneath in a world of tens of thousands of public companies that are subjectively picked by the SNP indexing committee but when someone goes out and buys vise that index. They're actually what they're not seeing under. The surface is that there is a huge amount of market making activity and a a lot of action that goes on in the actual underlying management of the fund that investors don't see so one way to think of this. This is that if you were thinking of the end investor the person with the vanguard account as the person who is passive they actually are enabled bold by the market makers vanguard itself who was very actively managing the fund itself and so when you look at the totality of everything that makes that passive Passive Index Fund available and workable. There is no one side of the arguments very two sided perspective where you have to understand and the passive investor in that relationship is allowed or able to be passive because there is all of this activity on the other side the market making in the interaction with you know building the actual index in maintaining the index rebalancing the index. This is going on on every single minute of every single day. In these index funds these index funds are some of the some of them are the most active funds in the markets on a daily basis. This that exist in increasingly so as the grow in popularity so the distinction is more to me a marketing term for the fund management in companies than anything else in. So it's it's not as black and white people tend to portray it as so so call an I know you're a.

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