Active vs Passive investments


#1

Careful, I was called “dogmatic” for saying exactly this in another thread :slight_smile:

One question OP: How did you calculate your savings rate? 5000 monthly seems ambitious to me


Greetings to Everyone
#2

The other thread was about active vs passive management or something? There’s absolutely no doubt that there are active management approaches that work, just look at the top hedge funds that consistently outperform year after year after year. Especially in the last year when indexes were suddently down. Bigger problem is that there’s really a lot of charlatans and closet indexers in the space and as everything’s probabilistic it’s hard to separate true talent from dumb luck. Another factor is that active funds tend to overcharge too much eroding the outperformance for you, and that trading strategies tend to deteriorate with time and fund size.

I’m doubting however that a random retail investor is up to the task of consistently beating the index especially with IU limited to a few broad subindexes which leaves you basically to pursuing some macrostrategy and with no time/resources to properly research the market and trading strategies. Hence, just go for the really low hanging fruit - buy whatever everybody’s buying like VT and call it a day. Focus the rest of the time on your career instead - it generally has a much higher ROI potential than the stock market when you’re not filthy rich yet - and maybe you’ll retire in early 30s instead!

Like for example, earning 50k more per year with 500k portfolio is a whopping 10% return! Compare that to stock market’s long term average of 7% or so. It’s a no-brainer what you should deploy your time into at these figures.


#3

Just to clear any misunderstanding and/or rancor here, since I am the one who use the “dogmatic” word.
In that other thread, OP got a lot of criticism for, among other things, choosing one active fund and Berkshire (and BRK can almost be assimilated to an active fund).

As i already said, passive investment really works well, no doubt about that.

My point is that even if there are not many active institutional investors with a superior track records, they exist. As Hedgehog mentioned, the problem is often that they are hidden among charlatans, so the burden of proof is clearly on them, and any investor has to put a lot of time to do his due diligence about the manager and his strategy.

Of course, many people don’t want to put too much time (and often for good reasons) into the selection of their holdings, so for them the absolute best solution is a low fees broad world index ETF, end of the story; it’s hard to find a better reward/effort ratio.

Having said that, if a retail investor has spent time and due diligence and did find a good manager, i am totally OK with that as well (and in the case of BRK, i don’t see why there is even a debate about superior performance in the 5 or 10 years to come; BRK owns now so many business that it could be seen as an index of the best businesses in the US). There are at least two of three well known companies, like Markel, Fairfax or Berkshire, who employed the same strategies and compounded at 11%+ over the last 20 years. So if someone did the work to check the background of these companies, is convinced by the rationale, has been holding for many years and is very happy with the results, yes i was surprised by the criticism he received for that.


#4

I wonder how much time that is. I studied economics and been following FIRE topics for some time and I still feel like an idiot when it comes to investing. I consider myself smart, but I feel like I lack the mental capacity to grasp investing. There are so many variables in play. I can understand index funds, but whenever I try to read through your net-net posts, my brain turns off :joy: .


#5

Well, few Nobel laurates in economics failed as investors, so it’s not only you.

PS. Offtop deserves a fork.


#6

I think that active management strategies can work, but not in the long run. Instead you are loading on more risk to your portfolio compared to index funds which you then actively have to manage. Thats why a lot of people then become active traders when things change and try to time the market when they are not happy with their funds performance.

For example BRK carries a “Warren Buffet death risk” which might be only psychological but who knows … see what happened to other companies when their “godfather” died or left the company.


#7

I’d like to ask: when you say economics, do you means macro-economics, micro economics or most likely a mix of both? In my case i usually find that the most useful thing is to concentrate at the micro level, i.e focus on the business and think like a business owner.

For instance, you mention Net-Nets. Net-Nets is just an accounting version of the following business principle:
Let’s say i buy the business at the price suggested by the market, and:

  • I immediately stop operations
  • I sell all of my liquid assets
  • i am such in a hurry that i get a bad price (i.e 0) for my non-liquid assets(real-estate and machinery…)
  • i pay back all the other claims on the business (debt, pensions, payroll and so on)

Then at the end, is what’s left at least 50% more than what i paid? if yes, it looks like a good bargain to me.
By doing this i guess i think more like a business-owner than an economist (by this i mean that i do not focus on the current interest rate, or what central banks are going to do, or how volatile the stock has been in the past).


#10

@oozoo
I’m currently saving around 4.5k CHF from my monthly salary. After my monthly contribution to the Pillar3 I have ~4k left for investment. I supplement this amount with my yearly bonus and I reach the 5k for buying an ETF per month.


#11

One question important too is : Is active investment a hobby or a work ?
For me it’s a hobby, I will be frustrated to just buy ETFs.
I got this curiosity for finding some small caps value stocks, reading some value blogs, tracking financial results, etc… It’s like a treasure hunt.

Plus you got that dream of catching a 10 or more bagger (i.e. a stock performing x10 or more).

Obviously 90% of stock-pickers think they can outperform the market, I think this is near impossible on big caps (if it is, it’s just luck) for individuals investor.

However on some illiquid small caps there are some opportunities, funds cannot enter (illiquidity, too low cap), these stocks aren’t covered by analyst and mainstream media. Some of them are clearly undervalued and a have higher return than index.