1. an interview with Jason Zweig[1], Seth Klarman said the following:

I still think indexing is a horrendous idea for a number of reasons. A tremendous disservice is perpetrated by the idea that stocks are for the long run, because you have to make sure you are around for the long run, that when you have unexpected pain, as many people did in 2008, you don't get out and you actually are a buyer. The prevailing view has been that the market will earn a high rate of return if the holding period is long enough, but entry point is what really matters.

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. A stock is kicked out of an index because its market cap has shrunk below the top 500 or the top 1000.

We all know that the evidence shows that when you enter at a low price, you will have good returns, and when you enter at a high valuation, you will have poor returns.

a) Klarman clearly doesn't like indexing (i.e. passive investing). Is Klarman's position correct? What are the pros and cons of indexing, from the point of view of an institutional investor? What might happen to a stock's price if it is kicked out of an index where it has a low weight but ends up in an index where it has a high weight (e.g. out of the Russell 1000 and into the Russell 2000)?

b) Assume Klarman is right that an institutional investor cannot simply have a 'buy and hold' perspective to generate high returns. How should an investor behave in bull, bear, and uncertain markets, to try to generate high returns?