The Case for Active Investing

[Zaphod]

The White Coat Investor wrote:

It’s really beyond me why someone would try active management with stocks. If you want to be an active manager, go do real estate. It’s FAR less efficient and you are far more likely to be able to add (or subtract) value depending on your skills, connections, knowledge, work etc. You can do other small businesses too- websites, franchises etc.

But joining the crowd trying to beat an index fund? What makes you think you’re better than all the pros trying to do it, 80-90% of which fail over the long run?

Click to expand...

I think real estate is an excellent example of what I was saying. Easier for us to do given our income and a variety of ways to do get exposure many people cannot, and it is much less efficient than the market. Great example.

Trying to do what everyone else is doing is a very hard path indeed.

[Complete_newbie]

This has to do with the fact that pretty much all of these investors invest in index funds and thus their definition is that of stock picking for active investing.

That's he dumbest active investment as mentioned above.

Private business, websites/e commerce, real estate are one of the best venues to do "active investing" in. Small businesses ARE the engine that drives USA. Higher risk higher reward. Stick picking is higher risk and not that great return for an average investor.

[CM]

The White Coat Investor wrote:

It’s really beyond me why someone would try active management with stocks. If you want to be an active manager, go do real estate. It’s FAR less efficient and you are far more likely to be able to add (or subtract) value depending on your skills, connections, knowledge, work etc. You can do other small businesses too- websites, franchises etc.

But joining the crowd trying to beat an index fund? What makes you think you’re better than all the pros trying to do it, 80-90% of which fail over the long run?

Click to expand...

The market for the largest stocks (e.g., S&P 500) is usually very efficient, but that isn't necessarily so for illiquid stocks with no coverage.

It also wasn't true in the late 90s. TMT stocks were insanely overvalued, but I bought thrifts and REITs and a small cap named Deb Shops (the latter selling for little more than net cash) at very attractive prices then. The thrifts and REITs were priced in a sensible way relative to one another (a form of efficiency), but the entire industries were undervalued and so was just about every small cap "value" stock. That was also true of homebuilders then but I missed that boat at the time.

The overvaluation seems uniform now, but I don't spend any time in financial statements these days so I wouldn't be aware of undervalued niches even if they existed. If history is a guide, this condition is not permanent.

Real estate can be a good business, just like a lot of other businesses, but it doesn't fit my temperament. I don't want to deal with tenants or maintenance, and I don't want the liability. On the other hand, I like to be left alone at the computer to read and study, so long-term value investing is a good fit for me. And I already have the training. I'd have to start from scratch in real estate, or in a franchise business.

As to why individual investors might expect to beat professionals, I listed a number of reasons above (and included a link to a paper on the illiquidity premium). As before, this is not a reasonable expectation for a busy hobbyist with no training.

[The White Coat Investor]

CM wrote:

The White Coat Investor wrote:

It’s really beyond me why someone would try active management with stocks. If you want to be an active manager, go do real estate. It’s FAR less efficient and you are far more likely to be able to add (or subtract) value depending on your skills, connections, knowledge, work etc. You can do other small businesses too- websites, franchises etc.

But joining the crowd trying to beat an index fund? What makes you think you’re better than all the pros trying to do it, 80-90% of which fail over the long run?

Click to expand…

The market for the largest stocks (e.g., S&P 500) is usually very efficient, but that isn’t necessarily so for illiquid stocks with no coverage.

It also wasn’t true in the late 90s. TMT stocks were insanely overvalued, but I bought thrifts and REITs and a small cap named Deb Shops (the latter selling for little more than net cash) at very attractive prices then. The thrifts and REITs were priced in a sensible way relative to one another (a form of efficiency), but the entire industries were undervalued and so was just about every small cap “value” stock. That was also true of homebuilders then but I missed that boat at the time.

The overvaluation seems uniform now, but I don’t spend any time in financial statements these days so I wouldn’t be aware of undervalued niches even if they existed. If history is a guide, this condition is not permanent.

Real estate can be a good business, just like a lot of other businesses, but it doesn’t fit my temperament. I don’t want to deal with tenants or maintenance, and I don’t want the liability. On the other hand, I like to be left alone at the computer to read and study, so long-term value investing is a good fit for me. And I already have the training. I’d have to start from scratch in real estate, or in a franchise business.

As to why individual investors might expect to beat professionals, I listed a number of reasons above (and included a link to a paper on the illiquidity premium). As before, this is not a reasonable expectation for a busy hobbyist with no training.

Click to expand...

Did you keep track of your returns and benchmark them adjusting for value and small factors? The reason I ask is your statements sound like so many cocktail party conversations where investors remember their winners and forget their losers.

[CM]

The White Coat Investor wrote:

CM wrote:

The White Coat Investor wrote:

.for that period.

[Zaphod]

The information asymmetry that used to exist used to provide real value and alpha. Its hard to find now but it can exist in microcaps, but that will take a lot of sweat equity to do.

Reading Ed Thorps newest book right now and thats exactly what he did, figured out relationships or equations/mispricings that no one else understood (options pricing formula) or thought was impossible (gain the edge in black jack, roulette, baccarat, etc...). Was able to exploit that to his advantage. Now, finding something of that nature is very tough and people spend millions to do so or simply get there faster. Tougher game.