Gyroscopic Investing

Another woeful year for active managers is coming to a close, sparking concerns that the day of the stock picker is over.

Just as in 2011, only about 1 in 5 active managers are beating their benchmarks in a year marked by the same type of headline volatility caused by events in Europe and fiscal concerns closer to home.

While the advantage of passive over active is nothing new, the near-record level of futility is, and the cracks are beginning to show.

Read the rest here...
http://www.cnbc.com/id/49888111?__sourc ... &par=yahoo

I don't know why otherwise intelligent people seem to have so much trouble grasping that active management doesn't work.

Once you see that active managers are basically competing against other active managers, it's easier to see why it doesn't work.

MediumTex wrote: I don't know why otherwise intelligent people seem to have so much trouble grasping that active management doesn't work.

Once you see that active managers are basically competing against other active managers, it's easier to see why it doesn't work.

Yeah active managers are fine, they just aren't worth paying for. When you hold the TSM you have all of them working for you but you don't pay any of them a dime.

Funny story...

Recently I attended an event where I met a researcher for an investment firm.  His company creates and actively manages mutual funds, and his job was to research companies to buy for their MFs. 

I asked him if he'd ever heard of the PP.  He said no.  I told him about the 40-year track record with an average CAGR of over 9% and only 4 years with drawdowns.  He raised his eyebrows at that. 

I then told him my wife and I are 100% invested in passively managed index funds, for all 6 of our retirement accounts. 

"People like you are costing us business!" he blurted out.  I laughed and told him I wasn't about to trust my retirement money to an active manager who is going to charge me substantially more money to "maybe" beat the market now and again, but probably won't. 

When he calmed down he admitted that he couldn't argue against me on that, and then he sheepishly admitted that he had most of his own retirement money invested in index funds as well! 

rocketdog wrote: When he calmed down he admitted that he couldn't argue against me on that, and then he sheepishly admitted that he had most of his own retirement money invested in index funds as well! 

LOL! People who are expected to beat the benchmark are very quick to learn how efficient indexing really is.

The thing is that active management will always have some role, because if everyone indexed the prices of securities would never make sense and a long/short manager with half of a brain could make close to risk free profits. The active managers are doing the indexers a service by keeping the capital markets reasonably efficient. I think in the grand scheme of things we need active managers, I just don't feel like paying any of them a dime.

What a great story! It's such a big red flag when an expert doesn't eat their own dogfood. If they don't have a darn good answer for why they aren't using what they're selling, stay far away!

Pointedstick wrote: What a great story! It's such a big red flag when an expert doesn't eat their own dogfood. If they don't have a darn good answer for why they aren't using what they're selling, stay far away!

After getting a few drinks in them, I think that virtually all active managers would tell you that without good luck and some occasional borderline inside information they would be screwed.

It's no surprise to me at all that a lot of the big hedge funds have apparently been relying on inside information for years to maintain their impressive returns.

Lance Armstrong may have missed his true calling as a hedge fund manager.

I too have met money managers that preach active management, but use indexing as their core investing style when you press them on the topic. I think it's much more common than many will admit.

That's a great story and one that bears repeating. I like the PP but really any portfolio that is entirely or mostly indexed and has broad diversification across asset classes is good in my book.

Ad Orientem wrote: That's a great story and one that bears repeating. I like the PP but really any portfolio that is entirely or mostly indexed and has broad diversification across asset classes is good in my book.

What appeals most to me is the connection to the macroeconomy even more than the broad diversification. That our assets are held precisely because of their responses to price changes, interest rates, and private sector prosperity is a huge draw, far more than simply owning as many asset classes as possible.

Too many portfolios take a haphazard, scattershot approach of owning as many kinds of assets as possible in seemingly random proportions, irrespective of how how any of them do in different economic conditions. Someone could think they're properly diversified by owning domestic and international stocks, REITs, and commercial paper of various kinds, despite all of those assets' pronounced prosperity tilt.

To paraphrase our favorite unPresident, Calvin Coolidge:

"After all, the chief business of the Wall Street bureaucrats is active management. They are profoundly concerned with buying, selling, investing and prospering in the world."

MediumTex wrote: I don't know why otherwise intelligent people seem to have so much trouble grasping that active management doesn't work.

Like the lottery, it is not like timing the market  does not work 100% of the time.  The overwealming majority of people can't time the market.  A few can.  I met a physician who'd given up medicine and was earning money as a day trader (which she learned as a child from her father the physician though he only did it part time).  I think in the Black Swan book he describes a few people who also had the ability.

And in the realm of psychology if you look up variable reinforcement i.e. if you do something e.g. try to time the market 100 times and "win" only 1 time, it is very difficult to get people to stop doing that kind of thing.

craigr wrote: I too have met money managers that preach active management, but use indexing as their core investing style when you press them on the topic. I think it's much more common than many will admit.

That reminds me of another similar story from way back when.  A guy I went to college with (back in the 80s, cough-cough) has an older sister.  One day back in the 90s he was telling me his sister's penthouse was in Architectural Digest magazine. 

Now, we were poor college graduates still trying to make our marks on this world (and still trying).  This was also WAY before I knew jack squat about investing.  If you had put a gun to my head and asked me what an index fund was, I would have pissed my pants while begging you not to shoot me.  Anyway, I asked him what his sister did to have such a home.  "She's an investment banker," he said.  Then he added that she was married to an investment banker as well.  He said it wasn't uncommon for them to get 7-figure annual bonuses between them. 

I almost pissed myself after hearing that, gun or no gun.  I was astonished that there was that much money sloshing around in the investment banking business (I told you, I was naive at that time).  I remarked, "She must really have some hot stock tips if you ask her!"  He shook his head and said, "No, she pretty much just invests in government securities.  She says the stock market is too risky for her tastes."

So there you have it.  Thanks for reminding me of that story -- I had forgotten all about it.

Wow.  I read this thread and was tempted to post but then I thought better.  Then again,... this Stock forum has not seen much action lately and it would be fun to whack the bee's nest and run...  What to do???  Ahh..., better not.......  I have been beaten up enough lately.  Hey, look at that, I am getting wiser with age.  Yes! 

charliemckelvey wrote: Wow.  I read this thread and was tempted to post but then I thought better.  Then again,... this Stock forum has not seen much action lately and it would be fun to whack the bee's nest and run...  What to do???  Ahh..., better not.......  I have been beaten up enough lately.  Hey, look at that, I am getting wiser with age.  Yes! 

I look at it as the bulk of the primary posters on here all use passive investing for a majority of their investments. It's like trying to convert people to a different religion in a sense although not as extreme potentially.

The only way to get others on here to come over to your side would be to have extremely strong arguments FOR active management. I will say though you'll have a terribly difficult time with these fine folks. They do their homework too. Best of luck!

1NV35T0R (Greg) wrote:

charliemckelvey wrote: Wow.  I read this thread and was tempted to post but then I thought better.  Then again,... this Stock forum has not seen much action lately and it would be fun to whack the bee's nest and run...  What to do???  Ahh..., better not.......  I have been beaten up enough lately.  Hey, look at that, I am getting wiser with age.  Yes! 

I look at it as the bulk of the primary posters on here all use passive investing for a majority of their investments. It's like trying to convert people to a different religion in a sense although not as extreme potentially.

The only way to get others on here to come over to your side would be to have extremely strong arguments FOR active management. I will say though you'll have a terribly difficult time with these fine folks. They do their homework too. Best of luck!

One of the more stubborn obstacles you encounter when trying to justify the added cost of active management is the fact that investment professionals are all betting against each other, and not all of them can win (though all of them will take their cuts from their clients' accounts).

For every trade that a professional puts on, there is normally another professional on the other side of the trade.  One will win, one will lose.

The pattern of "hot hand" managers running away from a benchmark for a few years and then crashing back to earth is so common, and yet people still pile into such managers' funds.  As smart as people can be in some realms, in other ways they can be disturbingly lemming-like.

The Permanent Portfolio's stock quadrant is probably the most boring part. I find simple total stock market funds to be dramatically outpaced in complexity by the subjects of bond durations, yield curves, bullion storage issues, tax-loss-harvesting T-bonds, I-bonds and zeroes...

Also, I really appreciate your sticking around, Charlie. We're not so mean all the time! 

charliemckelvey wrote: Wow.  I read this thread and was tempted to post but then I thought better.  Then again,... this Stock forum has not seen much action lately and it would be fun to whack the bee's nest and run...  What to do???  Ahh..., better not.......  I have been beaten up enough lately.  Hey, look at that, I am getting wiser with age.  Yes! 

I know the feeling.  But, not all of us has drunk the Kool Aid.  You must keep in mind that 95% of PPers are not investing professionally in the disciplined sense that the PP or VP is their private equity.  They are focused on their non-investment jobs or other non-investment income streams, so have very little real-world experience of successful investing or trading.  This is not to slight anyone, just the reality of how Wall Street is structured, sold and accessed.  One must have a strong incentive to navigate the minefield to come out the other end intact and I just don't think people have the perserverance, especially when it is their capital on the line.  There are easier ways to skin the cat.

That being said, it would behoove people to understand that "active management" has a specific meaning in relation to Wall Street.  It is not a general catch-all term that means any kind of non-passive investing is always unprofitable and never beats a reference index long-term.