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The Case for Active Investing

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    Zaphod
    Physician

  • Zaphod
    replied
    I do mean your first point. As to Shiller CAPE its not that great to use for forward returns as its been predicting terrible returns every year and it has not materialized. One day it will and people will say it was predicted, but down periods occur no matter what. We have spent the last two decades 98% higher than average cape and it has been until just this year a flat market, we just may possibly be breaking into a new bull market finally. We'll see if Trump throws any kinks in that, but I lean to that before thinking we'll crash (outside of 20-30%, which is absolutely normal and you have to expect).

    The economy is doing great and has been. Until this changes, over valuation, etc..etc...insert favorite scary theme will only have temporary flux in the market and be meaningless in long term. Heres a comment I made during last years scare, and you'll note it was the day before the official bottom. WCI was selling bonds and buying stocks, I was going all in stocks as well at the time.

    Zaphod |



    "Agree with using the recent market high, makes it dead simple. If youre dead set on timing (and I wouldnt be if you’re long term) your upside from waiting is much smaller than that for getting in now. You’re already 10-15% off the highs depending on your fav broad index.

    Thats as good a time as any unless you are for certain we are about to have a recession. Bear markets without a recession (4 of last 10) seem to end near the 20% range, and only those during recessions go much further (obv 6/10). There was a good paper on this a day or two ago. So while more downside may be in the cards…the risk/reward is firmly in favor of being in even so."



    The other thing to realize and I tried to touch on in first post is in any given year the amount of out performance you can gain is at the expense of someone else losing, it is a zero sum market from this standpoint. There are so many people now chasing this that it is has been spread so thin as to almost be non existent. This is the problem active management has been coming up against. Also as returns are lower due to lower growth overall fees start to represent a consequential amount of your return. Information asymmetry was where it used to be made and that is almost a nonexistent phenomenon now.

    Unless you have an understanding of where your out performance is going to come from, the amount of risk youre willing to take to get it, and when to call it quits you are much more likely to harm yourself than do well long term. That is, you have a process that makes fundamental sense either by structure (my fave), psychological (2nd fave), regime, info asym (pretty much impossible now), or some mechanical system. Most people including learned famed investors/managers of the past in most cases were simply the statistical anomalies that did well. In fact if you find all the 80s gurus and then totally disregard that they came up in the period of the largest fat pitch ever (1982), which accounts for likely 90% of their greatness, you see the number that did great for 20 years is consistent with the number that would have by chance. Not very reassuring.

    Leave a comment:

  • The White Coat Investor
    Founder

  • The White Coat Investor
    replied




    JavaGuy started a thread named “American Funds pushes back against indexing.” It links to the company website and data purporting to show that American Funds equity products have beaten their indexes over many decades. I find this credible, but more importantly, active managers in aggregate do beat their indexes before expenses.

    I think it’s important to point this out because it seems to be an article of faith on personal finance blogs that individual investors cannot improve on the returns of index funds by researching stocks and investing actively. Yet fund managers (including the good, the bad, and the awful) do it despite many disadvantages relative to individual investors.

    The biggest disadvantage is size. They may have to manage $10 billion, but you may not have $10 million. They also hold cash to fund withdrawals they can’t control. They risk losing clients (who typically chase short-term performance) if they make substantial investments in out-of-favor companies that may take several years to pay off.

    Individual investors can also manage their portfolios to optimize their personal tax burden, thus improving after-tax returns, the ultimate bottom line.

    There is no reason to believe that a busy physician (lawyer, engineer, etc.) with no financial training can beat indexes. On the other hand, if you have the time and the interest, why shouldn’t you be able to use the advantages above to improve upon the pre-expense, market-beating returns of active managers?

    For example, WCI must have invested enormous time and effort in this blog and related speaking engagements over a number of years. Many other physicians invest time and money and suffer a significant hassle factor to build a real estate portfolio. Blogs and rental properties may provide attractive returns or losses (measured in time or money), depending on the ability and work ethic of the blogger/landlord.

    I contend that effort invested in equity management is the same, but apparently this is a minority opinion.
    Click to expand...


    Many investors think this. Then they try it. Then they realize why investing in index funds is so smart. It's a lot harder than it looks and unlike most things in life, additional effort doesn't necessarily pay off.

    Leave a comment:

  • Complete_newbie
    Member

  • Complete_newbie
    replied
    I am with you CM and Zaphod is on point.

    1. We are all very lucky (? not a good word) that we can generate the income that we do. Not many can. It'll take a good homerun hit in a business for a business owner to generate MD income. Not saying we make a lot, but enough so that one can invest in index funds and be FINE.

    2. I personally believe that income allows us to TAKE more risk. What happens in real life is dump in index fund 3 portfolio or whatever and call it a day. Because thinking is "Do not lose money!" Playing it safe.

    3. As a "newbie" I am struggling to understand if index investing is really investing at all. I mean I set up a 3 fund portfolio in 401 K recently (yes long story, I didn't have 401K before) and it is on auto set. Is that investing? really? I have NO idea what a company's balance sheet is or revenue growth etc. On the other hand I have been screening RE investments and am finally close to pulling the trigger with 2 other partners on a deal after like 6 months of modeling, due diligence etc. I understand my risks, market, and what I can do to achieve the returns. I think that is investing.

    4. Totally agreed. 10% S&P 500 returns last year. Legit because economy kick rear or BS? with PE of 28 yea...the later.

    5. Your thoughts are going on deaf ears on this forum. Also passive investment is so simple, it sells on personal finance blog. Can they really talk about unique investments as a replicable process for readers to then be able to generate ad income? Yea. Not so much.

    Leave a comment:


  • CM
    replied




    People also forget that hedge funds absolutely used to crush it for a long time even with their fees. What has happened is simple market forces. These margins brought in so much competition there is very little alpha left to fight for. At the same time factors and knowledge is no longer hidden in black boxes but on the web for all to see, further decreasing any hidden values and pockets to be exploited. Yes its possible, and in fact used to be easy, but there are simply way too many very smart people all clamoring for a fixed amount of outperformance, its a self limiting thing.

    At the same time people have become even more fickle and dont want any draw downs which has taken hedge fund to be closet indexers for the great majority and certainly for mutual funds/etfs. Those with active share can and do outperform, albeit with volatility and no predictability. You have to choose funds that are not representative of the overall market/index and are concentrated, but there is also increased risk that when combined with the above make little sense.

    Its actually far easier for us little guys to do better with such small amounts of capital, but again is risky personally and the possible upside is not great compared to the downside. We are already lucky that we have an income that allows us to win by contributions only, why take on extra risk?

    For the record I myself do some types of investing that would be seen as heretical and excessively risky, but I do know the risks and see the points of those that do not.
    Click to expand...


    If you mean that the upside is not great compared to the downside because the index (the default option) provides an adequate return (given the amounts we can save), so that the benefit of outperformance is outweighed by the consequences of underperformance, I think that is a reasonable position on average.*

    If you mean that the degree of outperformance or underperformance has a negative skew, I'm not sure why that should be true. A monkey with darts should have a 50:50 chance of either outcome with a Gaussian distribution, correct? If you can add any value relative to a monkey, the distribution should have a positive skew.

     

    *Today's circumstances are not average. With the Shiller PE above 28 (http://www.multpl.com/shiller-pe/), expected returns are well below average. If the PE10 was in the single digits, I'd be more inclined to rely on an index fund and call it a day.

    Leave a comment:

  • Zaphod
    Physician

  • Zaphod
    replied
    People also forget that hedge funds absolutely used to crush it for a long time even with their fees. What has happened is simple market forces. These margins brought in so much competition there is very little alpha left to fight for. At the same time factors and knowledge is no longer hidden in black boxes but on the web for all to see, further decreasing any hidden values and pockets to be exploited. Yes its possible, and in fact used to be easy, but there are simply way too many very smart people all clamoring for a fixed amount of outperformance, its a self limiting thing.

    At the same time people have become even more fickle and dont want any draw downs which has taken hedge fund to be closet indexers for the great majority and certainly for mutual funds/etfs. Those with active share can and do outperform, albeit with volatility and no predictability. You have to choose funds that are not representative of the overall market/index and are concentrated, but there is also increased risk that when combined with the above make little sense.

    Its actually far easier for us little guys to do better with such small amounts of capital, but again is risky personally and the possible upside is not great compared to the downside. We are already lucky that we have an income that allows us to win by contributions only, why take on extra risk?

    For the record I myself do some types of investing that would be seen as heretical and excessively risky, but I do know the risks and see the points of those that do not.

    Leave a comment:


  • CM
    started a topic The Case for Active Investing

    The Case for Active Investing

    JavaGuy started a thread named "American Funds pushes back against indexing." It links to the company website and data purporting to show that American Funds equity products have beaten their indexes over many decades. I find this credible, but more importantly, active managers in aggregate do beat their indexes before expenses.

    I think it's important to point this out because it seems to be an article of faith on personal finance blogs that individual investors cannot improve on the returns of index funds by researching stocks and investing actively. Yet fund managers (including the good, the bad, and the awful) do it despite many disadvantages relative to individual investors.

    The biggest disadvantage is size. They may have to manage $10 billion, but you may not have $10 million. They also hold cash to fund withdrawals they can't control. They risk losing clients (who typically chase short-term performance) if they make substantial investments in out-of-favor companies that may take several years to pay off.

    Individual investors can also manage their portfolios to optimize their personal tax burden, thus improving after-tax returns, the ultimate bottom line.

    There is no reason to believe that a busy physician (lawyer, engineer, etc.) with no financial training can beat indexes. On the other hand, if you have the time and the interest, why shouldn't you be able to use the advantages above to improve upon the pre-expense, market-beating returns of active managers?

    For example, WCI must have invested enormous time and effort in this blog and related speaking engagements over a number of years. Many other physicians invest time and money and suffer a significant hassle factor to build a real estate portfolio. Blogs and rental properties may provide attractive returns or losses (measured in time or money), depending on the ability and work ethic of the blogger/landlord.

    I contend that effort invested in equity management is the same, but apparently this is a minority opinion.
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