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The Case for Active Investing

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  • Zaphod
    replied
    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.

    Leave a comment:


  • CM
    replied


    Leave a comment:


  • The White Coat Investor
    replied







    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.

    Leave a comment:


  • CM
    replied




    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.

    Leave a comment:


  • Complete_newbie
    replied
    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.

    Leave a comment:


  • Zaphod
    replied




    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.

    Leave a comment:


  • The White Coat Investor
    replied
    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?

    Leave a comment:


  • Zaphod
    replied
    There are definitely "inefficiencies" or rather risk premia in areas that are still available. Its much simpler to do what most people will not, thats where its "easier". If you try to fight with millions of other professionals, funds, and individuals looking for value companies for example, good luck with that. If you're willing to take on certain risks or due to nature of our incomes have access to different deals than the average person, you certainly can get more than the "market" average.

    However, the definition of "market" changes. I can beat the s/p fairly easily with only a couple extra moves or trades, however my portfolio or style no longer represents the market as previously defined and I now have a new hurdle to beat. If you want to beat the s/p index, that can be done, but you will do so by taking on extra risk, much of it reasonable but most people wont be doing it or have access to it (leverage, etc...) which is a large part in why it still works.

    Leave a comment:


  • ginmqi
    replied
    ^^Interesting. Looks like his blog is a bit barren and maybe other needs are more pressing for him. The Dual Momentum strategy does sounds very very enticing (I read the ebook) and I applaud people who have the guts to try that.

    As an evidence based man myself, I can't say unequivocally that the market is perfectly efficient and there are no inefficiencies to exploit and make money for a subset of investors/managers. Certainly I think that probably is true and as the few posts above mentioned...those are likely very closely guarded secrets to those in the know.

    From my very cursory knowledge of active management and my watching of a few documentaries on how hedge funds work....it seems one of the core pillars is overwhelming information asymmetry. Where one side has information that is clearly advantageous to the other side (whether its on the buy side or sell side). And that information can be either be content-sensitive (ie, specific information regarding something that other parties are unawareof ) or speed-sensitive (knowing of something that may happen before knows are able to).

    Of course you can imagine that can skirt with the boundaries of the SEC/insider-trading laws and many have been publically shamed and a few are legally sanctioned. One of the leaders of that industry, now "retired" it seems, Stephen A Cohen certainly made himself extremely wealthy.

    The challenge, it seems, is to find inefficiencies to exploit that is worthwhile lucrative (not just a small advantage) while being completely legal.

    I too would LOVE to generate incredible returns in my investment over 10-30+ years above the market average. Though as others have alluded to...these kinds of strategies/information are rare going to be accessible to the lay public and the risk is trusting a manager to do it or risk your own time/money to do it yourself.

    Leave a comment:


  • PhysicianOnFIRE
    replied


    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.
    Click to expand...


    I'm not sure if he's stuck with it or not, but he reported his returns after 14 months using dual momentum, and the strategy underperformed for him over that time frame. He stated he still likes it for the potential to reduce drawdowns when the market tanks, but the last update was over a year ago.

    Regarding individual stock or sector picking, the time and stress involved in constantly deciding whether to buy, sell, or hold each stock or fund is a hassle I wouldn't want for myself. All the woulda coulda shoulda and second guessing would drive me up a wall. There's a chance I would outperform the markets, and there's a pretty good chance I would underperform. Either way, it would be a lot more work.

    If you enjoy the work and what I call stress, you call excitement, knock your socks off. You gotta do what works for you. I do what works for me, and that's index funds. I take a little extra risk for potential reward with tilts to small cap value and EM, and I've invested in new craft breweries with play money, but that's the extent of my risk taking.

    Leave a comment:


  • 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?
    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.
    Click to expand…


    CM, I think we’ve found some common ground here. While we fundamentally disagree on the validity of the efficient market hypothesis, I think you should try your hand at individual stock picking.

    If you are right, you will get above-market returns. If I am right, you will end up with an expected return equal to the market (assuming you invest in individual stocks and in a tax-efficient manner, albeit likely with a higher standard deviation).  All you’ve lost is the time and effort analyzing the markets in vain, but it’s something you (and most of us on this forum) enjoy doing.

    I say go for it.
    Click to expand…


    If even Fama still believes in the Efficient Market Hypothesis after so many anomalies have been discovered and published, then it’s only because (to paraphrase Upton Sinclair), “It is difficult to get a man to understand something when his academic reputation depends upon his not understanding it.”

    If Jim Simons ever publishes his memoirs, the literature will expand by an order of magnitude.
    Click to expand...


    Agreed on Jim Simons. But I think he would rather keep on printing billions of dollars for himself than share his secrets with us. As would any investor who has found a market inefficiency to exploit. My guess is that they would not publish it in the academic literature.

    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.
    Click to expand…


    CM, I think we’ve found some common ground here. While we fundamentally disagree on the validity of the efficient market hypothesis, I think you should try your hand at individual stock picking.

    If you are right, you will get above-market returns. If I am right, you will end up with an expected return equal to the market (assuming you invest in individual stocks and in a tax-efficient manner, albeit likely with a higher standard deviation).  All you’ve lost is the time and effort analyzing the markets in vain, but it’s something you (and most of us on this forum) enjoy doing.

    I say go for it.
    Click to expand...


    If even Fama still believes in the Efficient Market Hypothesis after so many anomalies have been discovered and published, then it's only because (to paraphrase Upton Sinclair), "It is difficult to get a man to understand something when his academic reputation depends upon his not understanding it."

    If Jim Simons ever publishes his memoirs, the literature will expand by an order of magnitude.

    Leave a comment:


  • Zaphod
    replied
    I think there is far safer opportunity using indexes than individual stocks. You have to get so much right with a single stock on the long side, and the market has to not see it. Lot of more time to get it done as well. Its easier to spot great short candidates, but then your timing becomes the problem as it may be awhile before the market realizes it and the company will sometimes fraudulently do what they can to go on, or you get a wicked short squeeze (DRYS amirite?).

    Leave a comment:


  • Dicast
    replied
    I'm all for attempting to outsmart the market.  I know from prior performance that I'm not likely to be that guy though.  Indexing may be the lame, boring way to invest but it makes it much easier for me to sleep at night.  I don't have to spend significant amount of time deciding when the right moment to sell is, or when the right moment to buy is.

    Despite the above I've been fighting the urge to go back to individual stock picking and it has pretty much played out like this in my head...I could rationally put 10% of my portfolio into individual stocks...but for them to make any meaningful positive impact on my portfolio they need to go big...well, I know the last time I went "big" I created a tax loss harvesting opportunity...I'll just stick with index funds.

    Leave a comment:


  • 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?
    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.
    Click to expand...


    CM, I think we've found some common ground here. While we fundamentally disagree on the validity of the efficient market hypothesis, I think you should try your hand at individual stock picking.

    If you are right, you will get above-market returns. If I am right, you will end up with an expected return equal to the market (assuming you invest in individual stocks and in a tax-efficient manner, albeit likely with a higher standard deviation).  All you've lost is the time and effort analyzing the markets in vain, but it's something you (and most of us on this forum) enjoy doing.

    I say go for it.

    Leave a comment:

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