Announcement

Collapse
No announcement yet.

The Case for Active Investing

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts
    Zaphod
    Physician

  • Zaphod
    replied
    CM is one of those guys and can probably do it, this doesnt transfer to the majority though. Honestly there are several ways to do it, but it increases your risk of course. The easiest is to do things others are unwilling to do.

    Single stocks were last generations only option, so thats what they trade. This generation has etfs and thats whats common. Even when I trade I now try to use indexes as its simpler and less overall company specific risk (and upside).

    What is absolutely right is most drs certainly dont have the time to be paying attention. Im impressed with the amount of thought most of this board puts into it. It takes effort. With our level of income and contribution ability really there is no need to do more than get the market rate or take on extra risk, though some of us will inevitably play.

    @G I have now started to cut my losses asap, before 10% turns into 50% and there is no reasonable hope to get back to break even in that vehicle. I do keep some of my twtr around to remind me of my brilliance in single stock days though.

    The less I've played with my portfolio the better my returns have been. Now Im just really selective and opportunistic, like last year I tried like crazy to put everything in while the market was tanking, and whenever it hiccups I try to capitalize.

    Leave a comment:


  • Sneezy
    replied
    By definition, the overall return of all active investors before fees and costs must equal the overall return of the market as a whole.

    So for every active investor who beats the index, someone else must do worse.  And fees and trading costs are non-negligible, especially if you trade a lot.

    So sure, maybe you can outwork/outsmart the market but lots of people just as smart as me went to work on Wall Street, not in medicine.  Absent some "inside" information I am not confident I can beat the market, nor is the small increase in return I might be able to achieve likely to be worth the time

    Leave a comment:


  • G
    replied




    There are zillions of people with the time and the interest.  Guess what they dont beat the indexes the vast majority of the time.  Its sort of foolish to believe that its going to be highly likely that one can do a better job actively managing just bc they have time and interest and this wouldnt even account for the value of that time.  Now with that said, i do own a few stocks.  I call it what it is…gambling….I like to do it.  I dont spend a ton of time on it but it does interest me for fun.  I actually do better than my index funds entirely because of both luck and taking on more risk.  I dont kid myself.  There would be tons of warren buffets out there if this was truly the case that time and interest can make it happen.

     

    Its also funny to see the size argument.  I love how active proponents use it both ways.  People also argue that because they have such size that then they can get special deals or that the costs become a small fraction.

     

    There is no real tax advantage of managing it yourself vs buying an index.
    Click to expand...


    I have a gambling portion of my portfolio too...some of them have soared, some of them have tanked.  The majority have done just ok.

    For the longest time, I had a line on my account of a stock that was worth like $0.05...a 99.99% loss.  It glared at me whenever I logged on, heckling me, calling me names.  Finally, I got the brokerage service to put me out of my misery and take it off so that I could claim it as a complete loss.  Perhaps I should have left it on there forever as a reminder of my genius.

    Leave a comment:


  • CM
    replied













    It is difficult. It requires education (formal or informal) and research. It might not pay off, and most people don’t want to invest the effort. Who can blame them?

    Most blogs don’t make money. Rental properties and franchises can lose money. All of these things require effort and risk.

    However, just about everyone acknowledges that it’s possible to earn a return on effort with blogs, real estate, or franchise operations. Yet there seems to be a consensus that equity investing is an impossible black box.

    Based only on my acquaintances, most people fail at active investing because they don’t make sufficient effort. They dive in without knowing what they are doing, or they treat the endeavor like a night at the casino. They are the bloggers that give up after a year, and the franchisees who don’t understand their UFOC.

    But I should stop writing. The fewer intelligent, motivated investors the better (for the rest of us).

     
    Click to expand…


    Trust me, there are plenty of smart people working in Wall Street. Some people lament the brain drain from academia into finance; imagine all the advances we could achieve in science and medicine if the best and brightest worked in medical research instead of coding algorithms to make money off Donald Trump’s tweets.
    Click to expand…


    I know who works on Wall Street. I earned an MBA from Booth (a prominent Wall Street feeder) and the CFA designation while working as a healthcare equity analyst. My former colleagues are scattered throughout the sell side and (mainly) the buy side.
    Click to expand…


    What chance does a full-time physician have to out-analyze the mutual funds / hedge funds who employ your former colleagues?
    Click to expand...


    A very small chance. As I wrote above, "There is no reason to believe that a busy physician (lawyer, engineer, etc.) with no financial training can beat indexes." Most should buy an index.

    I only object to the notion that equities are impervious to talent and work, but blogs, rental units, franchises, and (insert favorite active investing endeavor here) can make attractive side-hustles.

    We have advantages over active fund managers (some listed above), but they beat the market before fees (which is both surprising and reassuring). The greatest advantage (related to size) may be the illiquidity premium (http://www.ibbotson.com/US/documents/MethodologyDocuments/ResearchPapers/LiquidityAsAnInvestmentStyle.pdf).

    Note that despite my training and experience, I currently invest in stock indexes and individual treasury bonds, but I've been working 12 hour days and taking call every other night and every other weekend--until this month. Now I take call 10 nights/month and one weekend/month. That is still probably too much to allow successful investing, but I hope to find an opportunity here and there (if I can pull myself away from finance blogs long enough to study).

    If I had the energy that WCI or Michael Burry apparently possess, and if I could modulate my workload as readily as an ER doc, then I would be a much more active investor. When I "retire," my tentative plan is to start with indexes and gradually transition to my handpicked portfolio as I find opportunities.

    Leave a comment:


  • G
    replied
    As mentioned above (Zaphod?), the amount of work required for the tiny alpha isn't worth it.  Unless, perhaps, it is your full time job, ideally with others paying you to do it, the more the merrier in terms of scale.  Thinking of the liquid portion of my portfolio as a late-mid career physician, I would need to beat the market by 20-25% this year to equal my anticipated income from medicine in 2017.  Not gonna happen unless by sheer luck.  Even when my boring index-dominated portolio (hopefully) doubles in 10 years, I would need to beat by 10% to equal my full-time doctor income.  That's not going to happen either; besides, I'll be too busy in mostly-retirement to do financial research work.

    And this is assuming that research and hard work actually leads to making the right call...which I, respectfully, think is a deeply flawed assumption.

    Leave a comment:


  • ginmqi
    replied
    If the failures of active guys are not hard enough studying/work...then this also implies there is are tried and true methods/strategies for active management. Much like medical school...if a student fails a test/rotation it is much likely the student's failure to study rather than the system itself (can happen the other way but is rare).

    So if there are textbooks of active management then everyone should be reading/studying these to beat the market. And I'm sure all of us would love to know these.

    I did come across a recent active management book that touts momentum investing and shows some VERY nice graphs on very very nice returns.....another physician/financial blogger seems to like it quite a bit over at the Miles Dividend MD blog.

    Leave a comment:

  • WallStreetPhysician
    Member

  • WallStreetPhysician
    replied










    It is difficult. It requires education (formal or informal) and research. It might not pay off, and most people don’t want to invest the effort. Who can blame them?

    Most blogs don’t make money. Rental properties and franchises can lose money. All of these things require effort and risk.

    However, just about everyone acknowledges that it’s possible to earn a return on effort with blogs, real estate, or franchise operations. Yet there seems to be a consensus that equity investing is an impossible black box.

    Based only on my acquaintances, most people fail at active investing because they don’t make sufficient effort. They dive in without knowing what they are doing, or they treat the endeavor like a night at the casino. They are the bloggers that give up after a year, and the franchisees who don’t understand their UFOC.

    But I should stop writing. The fewer intelligent, motivated investors the better (for the rest of us).

     
    Click to expand…


    Trust me, there are plenty of smart people working in Wall Street. Some people lament the brain drain from academia into finance; imagine all the advances we could achieve in science and medicine if the best and brightest worked in medical research instead of coding algorithms to make money off Donald Trump’s tweets.
    Click to expand…


    I know who works on Wall Street. I earned an MBA from Booth (a prominent Wall Street feeder) and the CFA designation while working as a healthcare equity analyst. My former colleagues are scattered throughout the sell side and (mainly) the buy side.
    Click to expand...


    What chance does a full-time physician have to out-analyze the mutual funds / hedge funds who employ your former colleagues?

    Leave a comment:


  • CM
    replied

    Leave a comment:


  • ginmqi
    replied


    OP wrote:

    "most people fail at active investing because they don’t make sufficient effort.

    ...

    But I should stop writing. The fewer intelligent, motivated investors the better (for the rest of us)."

     

    Seemingly two cognitively competing views. On the one hand you tout that the reason for non-success is people not making enough effort...but then again in the last sentence you imply that the fewer people the better it is for the rest of us (implying there is a zero sum phenomenon).

     

    A few thoughts:

    -What indexes are the active guys using to measure? Seems like a biased selection if they can select funds that make their own look good.

    -You mention they do beat indexes...before fees. Can consumers easily buy into active funds, beat indexes AND come out ahead after fees?

    -If you know of or have a way to beat indexes...why not share it? If this is not a zero sum game, as you mentioned, there should be no problem in sharing the wealth so that your colleague, friends, family, and everyone else can benefit from increased investment returns.

     

    "The primary takeaway is that actively managed funds have a very high bar standing in the way of market-beating performance. Since 1871, the S&P 500 Index has returned about 9% annually. Thus, with an average fee of 0.84%, an actively managed mutual fund would need to generate a 9.84% annual return just to match the returns of an unmanaged stock market index." source: http://www.fool.com/investing/2016/08/27/index-funds-vs-mutual-funds.aspx

    Of course there are managers who can beat the index consistently year after year for 10, 20, 30 years. See legends like Peter Lynch and et al. But where are you going to find someone who can do that for you for 30 years?

    As a high earning professional, I contend that we are LESS in need to take risk. We're already VERY fortunate to be in our position as MDs in the USA worrying about retirement and returns and not about our next meal or if our family will live through a bombing/attack/famine/etc in a neighborhood/nation that's MUCH worse. So this is why I stick with indexes and I don't try to chase the highest return possible.

     

     

    Leave a comment:

  • Zaphod
    Physician

  • Zaphod
    replied




    It is difficult. It requires education (formal or informal) and research. It might not pay off, and most people don’t want to invest the effort. Who can blame them?

    Most blogs don’t make money. Rental properties and franchises can lose money. All of these things require effort and risk.

    However, just about everyone acknowledges that it’s possible to earn a return on effort with blogs, real estate, or franchise operations. Yet there seems to be a consensus that equity investing is an impossible black box.

    Based only on my acquaintances, most people fail at active investing because they don’t make sufficient effort. They dive in without knowing what they are doing, or they treat the endeavor like a night at the casino. They are the bloggers that give up after a year, and the franchisees who don’t understand their UFOC.

    But I should stop writing. The fewer intelligent, motivated investors the better (for the rest of us).

     
    Click to expand...


    I dont think thats the case. With all those other things you have to put in effort to do well, and unless you're cracking the nut it wont happen at all. No one believes investing is a black box, its just that literally the richest and brightest people in the world are all gunning for it as well, competition is fierce and that makes the return lower.

    In contrast to those things investing gives you a return for no effort whatsoever, and its pretty dang good. Then given tax, commisions, and other drag the more effort you put into investing often times the more likely you harm your returns. So it just has to make dang good sense. I think we all go through periods feeling like we can and should beat it, I have been trying for the last several years to do less and less and be more focused in what I do if anything. I still cant seem to totally stop myself, but I wish I could, though I like my strategies and they are not dependent on any fancy extra work (besides all the learning I guess).

    Leave a comment:

  • WallStreetPhysician
    Member

  • WallStreetPhysician
    replied




    It is difficult. It requires education (formal or informal) and research. It might not pay off, and most people don’t want to invest the effort. Who can blame them?

    Most blogs don’t make money. Rental properties and franchises can lose money. All of these things require effort and risk.

    However, just about everyone acknowledges that it’s possible to earn a return on effort with blogs, real estate, or franchise operations. Yet there seems to be a consensus that equity investing is an impossible black box.

    Based only on my acquaintances, most people fail at active investing because they don’t make sufficient effort. They dive in without knowing what they are doing, or they treat the endeavor like a night at the casino. They are the bloggers that give up after a year, and the franchisees who don’t understand their UFOC.

    But I should stop writing. The fewer intelligent, motivated investors the better (for the rest of us).

     
    Click to expand...


    Trust me, there are plenty of smart people working on Wall Street. Some people lament the brain drain from academia into finance; imagine all the advances we could achieve in science and medicine if the best and brightest worked in medical research instead of coding algorithms to make money off Donald Trump's tweets.

    Leave a comment:

  • WallStreetPhysician
    Member

  • WallStreetPhysician
    replied
    Duplicate post.

    Leave a comment:


  • CM
    replied
    It is difficult. It requires education (formal or informal) and research. It might not pay off, and most people don't want to invest the effort. Who can blame them?

    Most blogs don't make money. Rental properties and franchises can lose money. All of these things require effort and risk.

    However, just about everyone acknowledges that it's possible to earn a return on effort with blogs, real estate, or franchise operations. Yet there seems to be a consensus that equity investing is an impossible black box.

    Based only on my acquaintances, most people fail at active investing because they don't make sufficient effort. They dive in without knowing what they are doing, or they treat the endeavor like a night at the casino. They are the bloggers that give up after a year, and the franchisees who don't understand their UFOC.

    But I should stop writing. The fewer intelligent, motivated investors the better (for the rest of us).

     

    Leave a comment:

  • The White Coat Investor
    Founder

  • The White Coat Investor
    replied
    Just a reminder that the reason active management no longer works isn't because nobody is smart enough to outsmart the market. The reason is that there are too many very smart people trying to outsmart the market. The more people try to beat it, the harder it becomes to beat. So what might have been easy for Benjamin Graham was harder for Warren Buffett is nearly impossible for you and I.

    Leave a comment:

  • WallStreetPhysician
    Member

  • WallStreetPhysician
    replied
    I've written several posts about this topic on my blog:

    8 Reasons Why You Should Not Trade

    If You Must Trade, Follow These Five Rules

    In short, if you are going to trade, you need an edge. Physicians working hard caring for patients do not have the time, knowledge, energy, or resources to gain that edge.

    I'm writing a series of posts about Wall Street traders / investors who have successfully beaten the market. The common theme among them is that they have some advantage over the rest of us that enables them to beat the market. That advantage is different for each trader, but none of these advantages is something that can be replicated by your typical retail physician investor.

    Many physicians will beat the market, and they will brag about it to their friends or on message boards, but it will be purely because of luck.

    Leave a comment:

Working...
X