Is active investing worth it?
What would be better for making money:
1) Put everything into an Index Fund i.e passive investing
2) Spend hours reading books such as Intelligent Investor, Security Analysis, Asset Allocation + following the markets and investing based on this knowledge
My opinion:
I don't understand why active investing would be a thing when the ROI for studying hundreds of hours the stock market is minimal/non-existent compared to passive investing.
Also, the time and effort for doing nr. 2) could be better put into studying other things which could raise your income (skills, side hustle, etc.) and put the earned profit into an Index Fund.
Traditional equity research / stock picking stuff is pretty much dead imo.
I’m an ‘advice investor’ in the sense that I make strategic and timing bets on the market as a whole. Do I want to rotate in/out of tech, and how much leverage do I want, or how much cash to keep on sidelines, etc. i beat the market during the bull run, but getting crushed this year. Over long term horizon will I outperform? TBD - but I’m for damn sure going to try rather than playing it safe with SPY/VOO (and dying before I become a multi millionaire)
but I don’t waste my time trying to find xyz value trap stock that’s trading at discounts to comps. Not worth the brain damage. May do some smaller bets on lotto plays I see on WSO every now and then but that’s gambling money, and I’m fine with the outcome
If you believe in data, active investing is not likely to help you do better than the stock market. I think, Benjamin Graham, the father of value investing, late in his life, gave up on active investing. It is kind of interesting that having lots professional experience and superior academic credentials still does help you do better than the stock market. I am sure the hedge fund and private equity people will disagree but they are not going to show you any public data that supports the case for active investing.
not to mention the mental cost of the emotional roller coaster that is active investing
TQQQ, UPRO, and SOXL
you can achieve financial independence either way, so do what makes the most sense to you. I personally do both depending upon the asset class. so far, I'm beating the market in the active parts I control, but if I lose that edge (which could very well be pure dumb luck), I've not no problems switching it all to index funds for my clients.
like aswath, I enjoy the process and feel better about knowing exactly what I own which allows me to sleep well at night (and the fact it's performed well is a bonus)
aswath talks about this here: https://aswathdamodaran.blogspot.com/2016/12/active-investing-rest-in-p…
final quote
There is one key point everyone here is missing regarding active investing. Leverage.
It’s pretty self explanatory but when you actively invest/trade, you can use leveraged positions. Returns amplified. However, be careful with leverage. It’s a risky game.
Using leverage could technically result in a higher percentage of managers outperforming indexes but at the expense more variable returns. If you are saying taking more risk can get you a higher return, I would agree.
Your query is technical, however, I think it is dependent on your industry. For example, if you offer popular things like juice wrld hoodies, they are valuable, but they will not sell indefinitely due to the trend.
Yes that’s what I’m implying. Higher risk, higher reward.
I do think however, that using leverage is much more useful for short term trades, which can compile into long term gains. Holding positions long term, the variability is hard to stomach and posting margin can be a pain.
you can use leverage with index investing
Don't think unless you're working directly in AM that it makes sense to individually pick stocks, no edge. Probably doesn't even make sense to invest in active funds as you have no idea which outperform (in U.S. only funds, only 15% outperform over long periods while internationally it's closer to 20-25% as the latter is more inefficient)
If you work in the industry at a top decile fund, then it makes more sense to stock pick / pick active funds. For the former, you're relying on an enormous body of research from a firm with a good process that's churned out strong returns on rolling 5yr / 10yr periods + lots of institutional memory at these funds that have been around for decades. With the latter, you can invest in your own funds but you're also aware of which funds you compete against and are also top tier -- and of those, which ones are more likely to have good process vs. luck. So you have a reasonable basis in both cases for making higher-conviction bets on certain stocks / funds. Otherwise just makes no sense
From a purely financial point of view, i agree with you. However, I do think that even if you have the ability to match the market, there can be a fulfilment from taking investment decisions and seeing them do well. Plus, if you do it properly, a lot can be learned along the way.
I'm really disappointed in this discussion. Everyone is making the same mistake and doesn't even realize it: There is no single definition/method for active investing.
So unless you're taking the time to clearly define what active investing is, then how can you make a determination of whether it's right thing to do or not?
I manage my money in an active way by using options for income (tasty trade, etc.). That requires me to keep an active eye on the market and hold 80+ contracts at any given time. It can be a real burden to keep up with it but I have coded my own tools to help me manage it and I even wrote myself a web interface to look at it all. I'm currently putting the finishing touches on the automated robot part of it that will take positions for me when the really juicy opportunities pop up and I'm AFK. To have some fun with it, I even named it: Proposition Joe.
So it's active investing for me as an "advanced hobby" since working in the options market is no joke. I have been managing my own money for 2 years now, automating it over the last 6 months-ish. Am I killing it? Not yet, but I am net positive (including YTD) and I am certainly doing better than the clowns that run my 401k.
options trading isnt investing
Oh? Is there not an outlay of money with a probability-based rate of return? What else do you need to define investing, son?
Colleague of mine made 50k last year trading options. That's 80% of their annual salary
I think that active can be successful if you’re not closet indexing. Active works less well for mutual funds because many are closet indexers and trade often. If you’re making some concentrated bets you can do better. Also indexers in fixed income bluntly have underperformed.
A concentrated bets strategy is similar to a leverage strategy in that you are taking on more risk to get a higher return. Statically, there would be a higher chance of out performing an index, if you take more risk but there is also a greater chance of having much worse performance.
This isn't true. Concentration doesn't automatically mean more risk, depends on the quality of concentrated bets. Past 12 stocks, the value of diversification vastly falls anyway
The short answer - there is a high probability you're better off being passively invested.
The long answer...
This can be explained by Grossman-Stiglitz paradox.
The process of actively analyzing securities produces efficient prices, or so the story goes. If there is no active, prices can't be right. In a way, long run active management subsidizes passive management by efficiently pricing markets. We don't know what % of the market needs to be active to produce "efficient" prices, but it is clear there needs to be some level of analysis.
So why do people invest actively? Two ways you can take this....
1) Greed. People will do things that they are financially rewarded for. Investors can't help themselves when presented with a good sales pitch to "outperform", and people will happily collect fees to manage other peoples money. This is the most simple explanation. We are all simple creatures, everyone can be sold.
2) You can actually outperform. We hear about tons of famous investors becoming ridiculously rich by finding market "inefficiencies". Buffet, Simons, etc. They (in very different ways) found ways to earn excess returns than the market.
Here is the problem....
Alpha decay. When people find out how to outperform, outperformance goes away.
You’re singing my song. I was at a fund early in my career that had an inception to date alpha of maybe .4%. Then we charged nearly a 1% fee. The hustle was staying close to the index without going below it. It was an index plus strategy per se. Deep down it didn’t feel like the end investor got value out of the fees we charged. So off I went into something else. To this day I dollar cost average into low cost index funds and strengthen my skills in areas where a tangible benefit is probable.
When it comes to investing, you can control risk and fees. No one can control the return.
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