Active vs Passive

[rossef2]

It's been no more than a quick thought but, if after fees so many of these active funds fail to consistently beat the market, why do people invest in them? Is it to diversify against other things? The chance of outsized returns? Getting a manager on a winning streak? 

 

I'd be interested to know what the boards thoughts are on this.

[maplevalue]

Depends on the market. In emerging markets the index is stuffed full of state owned enterprises who may not necessarily be all that concerned about maximizing shareholder value, so active management is probably advantageous in that scenario.

 

I also am a bit skeptical of indexing given the enormous flows into index tracking products over the past couple of decades. What might happen if that flow reverses (or rates start to rise)?

[ICUMD]

ETFs seem attractive for many these days due to relatively low fees vis a vis trying to create your own diversified portfolio. For non inclined, small portfolio investors, probably the easiest route.  In this high liquidity environment, they have become massive.

 

Since these are relatively new instruments, not sure how they will react in a major market turndown. 

 

The big question for me is how they will maintain liquidity if everyone heads for the exits at the same time. Could they snowball a correction? I dunno.

 

 

 

 

 

[SharperDingaan]

6 hours ago, rossef2 said:

It's been no more than a quick thought but, if after fees so many of these active funds fail to consistently beat the market, why do people invest in them? Is it to diversify against other things? The chance of outsized returns? Getting a manager on a winning streak? 

 

I'd be interested to know what the boards thoughts are on this.

 

People have long been convinced that if you have a few bucks, you should 'invest' it. Once past the clothes, the car, the good time, the ETF seems a good idea.

Buy ANY investment vs just spend the money, and you're ahead! Fees are not a consideration, the rest is just exploitation.

 

Most people are financially illiterate; they can instantly google, tell you what everything is, and even how to apply it! but there is ZERO context.

Very little if any consideration of relative risk, value-add, or alternatives - ZERO maturity.

 

Most people have mortgages, credit lines, credit card debt, etc.

While it may be obvious to us that simply applying the ETF capital directly against debt would produce a better result, to most it is just too much of a reach.

Can't see the resultant lower monthly payments, resultant diminished stress, etc.

 

SD

[Blugolds]

1 hour ago, SharperDingaan said:

 

People have long been convinced that if you have a few bucks, you should 'invest' it. Once past the clothes, the car, the good time, the ETF seems a good idea.

Buy ANY investment vs just spend the money, and you're ahead! Fees are not a consideration, the rest is just exploitation.

 

Most people are financially illiterate; they can instantly google, tell you what everything is, and even how to apply it! but there is ZERO context.

Very little if any consideration of relative risk, value-add, or alternatives - ZERO maturity.

 

Most people have mortgages, credit lines, credit card debt, etc.

While it may be obvious to us that simply applying the ETF capital directly against debt would produce a better result, to most it is just too much of a reach.

Can't see the resultant lower monthly payments, resultant diminished stress, etc.

 

SD

 

I agree with all of this based off a small data set via discussions with my cohorts. The majority ARE financially illiterate. Most would not even be able to tell you what an expense ratio is, let alone what seems outrageous. Indeed there are many who have made a business out of "skimming" the till in the form of ER. transaction fees etc. 

 

How many funds do you see that structure their compensation like Buffet in his early years? They do not think of themselves as partners. 

 

I am reminded of the movie Goodfellas...and how these funds with high annual ER regardless of fund performance must think...We didnt beat the benchmark? Market crashed? Global Pandemic? F* you...pay me!

 

 

I had a coworker that showed me some paperwork that a non-fiduciary investment "professional" pitched to him...the ER/fees were insane...and this guy happens to have quite a bit of money, but zero understanding of the big picture. Even mediocre returns would have him set up for the rest of his life...he already is...so I immediately noticed the high "skim" and said are you prepared to pay over $20k/yr for every million you have for this guy to watch your portfolio for you? Maybe make a couple trades, but likely just stick the money into a fund that gives him the best spiff? You realize you will be paying over twice the United States average annual income to have them "bring you under their umbrella" and "help" you manage your money?....if that wasnt enough for him to visualize I broke it down by the month...

 

You should have seen the look on his face...

 

The crazy thing to me, is as Sharper stated above...the majority sleep well at night thinking they are in good hands, we're "investing"! And never realize they are quietly being robbed by a bunch of financial leaches. Look at the rise of the meme stocks and how much capital flowed into those based on the pitch...comparably the pitch for high fee funds is actually pretty mild. At least with the funds you get someone to talk to and an advisor to call when you see your port lose half in a correction/crash and a nice fancy print out sent to the house once a year, maybe a Christmas card, thats more than a lot of the bag holders in Peloton/AMC etc. My god if I had a dollar for every new "investing expert" who bought meme stocks that couldn't lose and asked me if I was in them and then gave me a chuckle/smirk like I was an idiot when I made a Munger inspired response. Haven't heard much from them lately though...

 

The real deal is that the majority of people dont even know what the funds do, and anywhere you have ignorance you'll find those who make a business out of taking advantage of that, this increases exponentially the larger the sums involved. They dont know how to buy an ETF, or what that means vs a fund. Think of it like other things in life...you have a light switch in the house that needs to be replaced...everyone could go on Youtube and watch a video and figure out how to do it, fix it in 10 minutes and be good, but they're ether too lazy, or just dont care...so they call an electrician to come to the house and pay him his minimum $150 fee for 15 min worth of work and never think twice...same thing...just dealing with larger sums, combine that with the fact that most people think they "need" professional help in this regard as some kind of assurance that they are doing the right thing and there you go.  

 

 

Edited November 6, 2021 by Blugolds11

[Gregmal]

The majority or folks should not be actively investing. Doing it successfully requires an almost debilitating mental focus that borders on obsession and if you’re not prepared to be in that place it’s a total waste of time. If you can do it though, you’d laugh at the notion of being in an etf or index fund. 

[fareastwarriors]

I recommend all my friends and family to low cost passive index funds/etfs route. Only a small, small % of people can actively beat the "market." They have other stuff to take care of, other hobbies, and other things on their mind than to find the next great investment. For those of people, passive is the way to go. 

 

For all my "efforts" everyday, I barely beat my lady's all passive 401k returns. Of course I enjoy the process and a few beeps over time become a lot of money. Sure. However that doesn't change the fact that she's just chilling and her returns are beating most professional money managers. 

 

 

[rossef2]

3 minutes ago, fareastwarriors said:

I recommend all my friends and family to low cost passive index funds/etfs route. Only a small, small % of people can actively beat the "market." They have other stuff to take care of, other hobbies, and other things on their mind than to find the next great investment. For those of people, passive is the way to go. 

 

For all my "efforts" everyday, I barely beat my lady's all passive 401k returns. Of course I enjoy the process and a few beeps over time become a lot of money. Sure. However that doesn't change the fact that she's just chilling and her returns are beating most professional money managers. 

 

 

 

I don't work in the finance industry and my experience is somewhat limited. I enjoy researching and investing and I've had some good success over the past few years with some themes and ideas. However I'm aware that in these up markets  it might be just the general rise rather than my investing genius that has done that! 

The topic came to me because I'm currently trying to get some Pension money out of a locked scheme, part of the agreement of me getting this money out is that I'll have to give this to someone to manage at around 1% PA. I'm baulking at the idea of 1% for someone who is unlikely to beat the passive funds. So part of me is thinking, surely it's better to just be in passive?

[fareastwarriors]

13 minutes ago, rossef2 said:

 

I don't work in the finance industry and my experience is somewhat limited. I enjoy researching and investing and I've had some good success over the past few years with some themes and ideas. However I'm aware that in these up markets  it might be just the general rise rather than my investing genius that has done that! 

The topic came to me because I'm currently trying to get some Pension money out of a locked scheme, part of the agreement of me getting this money out is that I'll have to give this to someone to manage at around 1% PA. I'm baulking at the idea of 1% for someone who is unlikely to beat the passive funds. So part of me is thinking, surely it's better to just be in passive?

 

Scheme? Sounds like you're in UK or Europe. 

I used to work in the mutual fund world here in US. Currently at my old company all of their equity funds are currently underperforming their benchmarks for 3, 5, and 10 year periods but yet the company still manages over 100s of billions. Their charges are more reasonable at 50-60 bps but still the performance is bad over so many periods. The company employs many Harvard, Stanford, and UPenn MBAs and CFA holders but I'm sorry your numbers say you're not performing! 

 

If you're able to not panic sell and continue to dollar cost average in, your returns will be better than 98% of money managers out there.

I get fired up talking about this topic! 

Edited November 6, 2021 by fareastwarriors

[fareastwarriors]

14 minutes ago, rossef2 said:

 

I don't work in the finance industry and my experience is somewhat limited. I enjoy researching and investing and I've had some good success over the past few years with some themes and ideas. However I'm aware that in these up markets  it might be just the general rise rather than my investing genius that has done that! 

The topic came to me because I'm currently trying to get some Pension money out of a locked scheme, part of the agreement of me getting this money out is that I'll have to give this to someone to manage at around 1% PA. I'm baulking at the idea of 1% for someone who is unlikely to beat the passive funds. So part of me is thinking, surely it's better to just be in passive?

Sorry, I didn't really address your post in my first reply. Personally, I wouldn't leave the scheme if you have decent passive options. Set it and forget it. I would hate to pay someone at 1% to manage my money. 

[Gregmal]

9 minutes ago, fareastwarriors said:

 

Scheme? Sounds like you're in UK or Europe. 

I used to work in the mutual fund world here in US. Currently at my old company all of their equity funds are currently underperforming their benchmarks for 3, 5, and 10 year periods but yet the company still manages over 100s of billions. Their charges are more reasonable at 50-60 bps but still the performance is bad over so many periods. The company employs many Harvard, Stanford, and UPenn MBAs and CFA holders but I'm sorry your numbers say you're not performing! 

 

If you're able to not panic sell and continue to dollar cost average in, your returns will be better than 98% of money managers out there.

I get fired up talking about this topic! 

Personally I’ve found there is something inherently present in the Harvard, Stamford, Penn or CFA and MBA types….maybe it’s a common personality trait or maybe it’s learned….but they underperform not by accident but because they’re all very good at figuring out the best risk adjusted way to maximize the amount of money they can extract for themselves from something. Taking risk presents risk. Why do that when you can caress a steady check and bonus with a built in excuse via mimicking the broader market?

[SharperDingaan]

Where you can, leave your money in the pension scheme/plan.

The sponsor typically covers some of the ongoing costs, and most are not going to do better elsewhere.

 

Some folks are just naturally very good at turning a profit; but they are almost all outlyers, street smart, and have been from a very young age. 

And whichever side of the law, the cream rises to the top. Boiler maker or silver spoon!

 

Folks have to find their own path; almost always it's learn to trust your decisions, think independently, and think on your feet - then it's just fun!

Look around you; including yourself, maybe 5-15% would make the cut? If it is > 50%, you are keeping the wrong company! 

 

SD

 

 

Edited November 6, 2021 by SharperDingaan

[samwise]

On 11/6/2021 at 2:04 PM, fareastwarriors said:

If you're able to not panic sell and continue to dollar cost average in

This is probably the main "value-add" of investment advisors, the kind that put you in balanced ETFs and don't promise to beat the market. If you can't do this on your own, then you will lose more than the 1% you are paying them. If you can do it, then the 1% is a waste.

[K2SO]

My take is that it's not about outperformance. That's a byproduct that you hope to experience. 

It's really about having conviction in the strategy your manager is implementing on your behalf, that allows you to hold on and invest more when the market is tanking. 

Not that we're there right now, but I'd much rather have an active strategy with someone I trust making decisions on my behalf over an index that is almost 30% made up of momentum tech stocks. If the cost is that I underperform while the bubble continues to inflate, I'm fine with that. 

 

[KJP]

On 11/6/2021 at 4:36 AM, rossef2 said:

It's been no more than a quick thought but, if after fees so many of these active funds fail to consistently beat the market, why do people invest in them? Is it to diversify against other things? The chance of outsized returns? Getting a manager on a winning streak? 

 

I'd be interested to know what the boards thoughts are on this.

 

I have a portion of my assets managed by an RIA under an SMA structure, though he now also manages a private fund.  I do this for two reasons:

 

1) His strategy is to invest in relatively obscure companies/securities with a value bias, including in non-US markets.  I don't have the time or desire to investigate all of these areas, so this structure gives me access to investments that I would likely be interested in but lack the time or desire to discover on my own.

 

2) It provides some diversification from my own mind/biases, though not total diversification because my mind/biases picked him in the first place. 

 

This manager, after fees, has significantly exceeded the various microcap indices, so I'm happy with the results.  I probably would not pay someone to invest in US large caps; I could get that through an index fund.

[ASTA]

Great chart and up to date numbers on active vs indexing returns of mangers in different asset classes. I think this trend has really been stable for a while. As really big blend US large stocks are hard to compete with actively vs indexing. And the expensive vs cheaper option is a very nice touch explainer. I think the data does not include hedge funds or private equity so if one extrapolates the data one can see where one should choose these options where the difference is the biggest in the mutual fund/etf arena regarding outperformance.

 

Even Warren Buffett Thinks Picking Stocks Is Hard

https://www.morningstar.com/articles/1151888/even-warren-buffett-thinks-picking-stocks-is-hard

 

 

Edited May 1, 2023 by ASTA

[Spekulatius]

Collectively active can never beat passive, because for someone to outperform, somebody else needs to underperform and then there is the overall drag of active versus passive due to higher fees for active.

 

That said, in less efficient markets, it makes sense to pick your spot with an active manager. if you want to invest in nanocaps, where there are so many crappy and fraudulent companies around, investing alongside somebody like Alluvial capital makes sense versus investing in a small/ nano cap index fund. Same in some foreign markets where the stock market index is dominated by a few often state controlled enterprises.

In “efficient” markets, I think it makes less sense unless you can identify a truly outstanding manager and have reason to believe that he can continue to outperform due to having a better process.

 

In some cases, you can get vehicles with outstanding managers that have also very low  agency cost. Some family owned vehicles can be like this (Exor comes to my mind) or Berkshire. With those, you have to consider that they have control investors, which can become an issue if there are leadership changes.

[dealraker]

 

The problem with the Morningstar figures is that it isn't the average investor return.  It is sort of like:

 

"Everybody jumped into the river and this is how long it took to get to the take out."

 

While ommitting that, "Oh...and two-thirds of the swimmers drowned."

 

 

 

 

 

 

 

Edited May 1, 2023 by dealraker

[DooDiligence]

ba dum tss

[John Hjorth]

40 minutes ago, dealraker said:

 

The problem with the Morningstar figures is that it isn't the average investor return.  It is sort of like:

 

"Everybody jumped into the river and this is how long it took to get to the take out."

 

While ommitting that, "Oh...and two-thirds of the swimmers drowned."

 

 

 

 

 

 

 

 

@dealraker, 

 

You are for all other CoBF members [I think], our constant preferred vendor of good humor. If you were Danish, you would likely be appointed "Kongelig Hofleverandør" by our Majesty the queen Margrethe II ["Kongelig Hofleverandør" translates to  "Preferred vendor by the Royal Dansk Court", which is actually a protected trademark in any business. It's considered a Danish stamp for quality. It's a by invitation only thing, like i.e. Mastercard Black - and unlike orders, it does not hang on idiots only because of many years of loyal and faithful service.[Danish saying].]

[Vish_ram]

On 11/6/2021 at 1:14 PM, Blugolds11 said:

 

 

 

The real deal is that the majority of people dont even know what the funds do, and anywhere you have ignorance you'll find those who make a business out of taking advantage of that, this increases exponentially the larger the sums involved. They dont know how to buy an ETF, or what that means vs a fund. Think of it like other things in life...you have a light switch in the house that needs to be replaced...everyone could go on Youtube and watch a video and figure out how to do it, fix it in 10 minutes and be good, but they're ether too lazy, or just dont care...so they call an electrician to come to the house and pay him his minimum $150 fee for 15 min worth of work and never think twice...same thing...just dealing with larger sums, combine that with the fact that most people think they "need" professional help in this regard as some kind of assurance that they are doing the right thing and there you go.  

 

 

 

So true. My partners and I are RIA's and have some active portfolios. Even though we've outperformed S&P 500 after fees since inception 9 years ago (lumpy though), most don't care. They look at portfolio of $x and want that to not drop. Even if we give consistent 7% they'll be very happy. 

 

99% of investors aren't sophisticated and view the equity markets as a casino. Invariably they refer clients and add $ only in rising markets. 

[james22]

How passive are you if you time and tilt your index funds?

[fareastwarriors]

just for fun:

 

World’s Biggest Solo Stock-Picker Is Having Best Year Since 1991

 

Edited December 14 by fareastwarriors