03-14-2022, 07:01 AM
Why I Love Active Investment: It's not about beating the market
<!-- SC_OFF --><div class="md"><p><strong>TLDR</strong>: Market is made up of participants with different goals & investment horizons. I reject the notion of an "Efficient" market...its simply a weighted average of what market participants are doing. My own goals are different from that of the average market participant.</p> <p>Much adieu is made by Bogleheads over how difficult it is to "beat the market", with fewer than 80% of funds "beating the market" year-over-year after costs. The assumption here is that the investor seeks to earn the 'average' market return, minus fees. Efficient market hypothesis will state that every stock has the same risk-adjusted expected return given the information available out there. Let's entertain this idea, and assume that Johnson & Johnson (JNJ), Tesla (TSLA), and some bio-tech small-cap have the same expected <strong>risk-adjusted return</strong>.</p> <p>Notice the key part highlight: <strong>risk-adjusted</strong>. Clearly the expected <strong>dispersion</strong> of outcomes for a blue-chip dividend grower like JNJ is going to be different from a higher-risk bio-tech small-cap. The small-cap has potential to be a 10-bagger, whereas it also has a much higher chance of going to zero. Tesla on the other hand is an entirely different beast from either, with option-activity off the charts compared to anything else in the S&P 500.</p> <p>Imagine if you will, that there is no benchmark & no index. You only have three investors:</p> <ul> <li><strong>The conservative</strong>: They are seeking the 'surest bet' of a return that keeps up with inflation. They are okay under-performing other investors in exchange for limiting risk of a major draw-down or wipe out. </li> <li><strong>The professional day trader</strong>: They don't care if the stock goes up or down long-term, they are seeking the most intra-day volatility.</li> <li><strong>The YOLO speculator</strong>: Seeking the biggest max payout possible.</li> </ul> <p>If they each are only allowed to pick a single stock, it's pretty clear who would pick JNJ, TSLA, or the bio-tech.</p> <p>Let's bring this to why I reject the absolutism over broad-index investing. The market is efficient, sure, but <strong>efficient at what?</strong> Pricing, valuation? Clearly not, as ARK bag-holders have learned the hard way. Instead it's efficient at providing a view over the $$$ flows of the <strong>average-weighted market participant</strong>. So what does it mean then to invest in a broad index? At a macro-level, it means you are following the flows of what the average participant is doing, but what sense does that make if every participant has different investment horizons and goals?</p> <p>Look, the Boglehead system is certainly right for most folks. Costs matter, and most folks are better off index investing as many fortunes have been lost chasing the returns of hot funds, or doubling-down on losers. Active investing is hard, you either need to spend a lot of time or find a good - and cheap - manager whose portfolio-management is in alignment with your investment goals. I know only a handful of managers I'd trust in this regard, and they all fall under the 'Conservative' camp.</p> <p>As for my own circumstance, I actively invest so that I can stick to securities and strategies that are in alignment with my goals and investment horizon. I am risk-averse, I don't hold "bubble stocks". This doesn't mean I'm afraid of market downturns, those are unavoidable. I'm afraid of things <strong>much worse.</strong> My biggest fear is a complete wipe-out, followed by a Japan-style scenario where markets have a dead double-decade. My goal isn't return-maximization, but risk-minimization. </p> <p>I'll share a glimpse of my current stock portfolio construction (not a recommendation, really... I've gotten very "lucky" if you will in energy and do not suggest chasing) :</p> <ul> <li>Over 15% allocation (currently) to oil & gas producers & infrastructure to hedge against inflation. Most of this is in a Canadian energy producer as I seek to avoid the risk of US oil/gas depletion.</li> <li>5% allocation to gold [previously 10%] as a hedge against slowing growth & geopolitical risk. </li> <li>A small allocation to gold miners, which are all hand-picked so my exposure is only to Canadian/US gold mines. Note: there are literally gold miners in the index that have exposure to Russia - oof.</li> <li>A significant over-weight to European/Japanese equities, simply because I don't want all my eggs in the US basket.</li> <li>Most my US stocks are in industries that have minimal geopolitical or disruption risk. For example, I have a large holding in a funeral-services conglomerate.</li> <li>An overweight to utilities as I am bullish on their long-term contributions to electrification, but instead of holding XLU I hand-pick as I want to avoid any utilities with wild-fire risk.</li> </ul> <p>Have I been "beating the market"? Actually - mostly thanks to the energy overweight- I have over the last few years...but I frankly don't care about beating the market and who knows if I will going forward. Investing for me is about meeting my goals. To the folks out there that want to deviate from the broad index, just be aware that the market is more efficient than you think. The only thing you can control is how much <strong>risk</strong> you are willing to take. If your goal is to "beat the market", you're thinking about it wrong. Instead, think about your <strong>goals</strong> and whether you want to take on more-or-less risk than what the market is offering.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/cr0ne"> /u/cr0ne </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/tdfol2/why_i_love_active_investment_its_not_about/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/tdfol2/why_i_love_active_investment_its_not_about/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p><strong>TLDR</strong>: Market is made up of participants with different goals & investment horizons. I reject the notion of an "Efficient" market...its simply a weighted average of what market participants are doing. My own goals are different from that of the average market participant.</p> <p>Much adieu is made by Bogleheads over how difficult it is to "beat the market", with fewer than 80% of funds "beating the market" year-over-year after costs. The assumption here is that the investor seeks to earn the 'average' market return, minus fees. Efficient market hypothesis will state that every stock has the same risk-adjusted expected return given the information available out there. Let's entertain this idea, and assume that Johnson & Johnson (JNJ), Tesla (TSLA), and some bio-tech small-cap have the same expected <strong>risk-adjusted return</strong>.</p> <p>Notice the key part highlight: <strong>risk-adjusted</strong>. Clearly the expected <strong>dispersion</strong> of outcomes for a blue-chip dividend grower like JNJ is going to be different from a higher-risk bio-tech small-cap. The small-cap has potential to be a 10-bagger, whereas it also has a much higher chance of going to zero. Tesla on the other hand is an entirely different beast from either, with option-activity off the charts compared to anything else in the S&P 500.</p> <p>Imagine if you will, that there is no benchmark & no index. You only have three investors:</p> <ul> <li><strong>The conservative</strong>: They are seeking the 'surest bet' of a return that keeps up with inflation. They are okay under-performing other investors in exchange for limiting risk of a major draw-down or wipe out. </li> <li><strong>The professional day trader</strong>: They don't care if the stock goes up or down long-term, they are seeking the most intra-day volatility.</li> <li><strong>The YOLO speculator</strong>: Seeking the biggest max payout possible.</li> </ul> <p>If they each are only allowed to pick a single stock, it's pretty clear who would pick JNJ, TSLA, or the bio-tech.</p> <p>Let's bring this to why I reject the absolutism over broad-index investing. The market is efficient, sure, but <strong>efficient at what?</strong> Pricing, valuation? Clearly not, as ARK bag-holders have learned the hard way. Instead it's efficient at providing a view over the $$$ flows of the <strong>average-weighted market participant</strong>. So what does it mean then to invest in a broad index? At a macro-level, it means you are following the flows of what the average participant is doing, but what sense does that make if every participant has different investment horizons and goals?</p> <p>Look, the Boglehead system is certainly right for most folks. Costs matter, and most folks are better off index investing as many fortunes have been lost chasing the returns of hot funds, or doubling-down on losers. Active investing is hard, you either need to spend a lot of time or find a good - and cheap - manager whose portfolio-management is in alignment with your investment goals. I know only a handful of managers I'd trust in this regard, and they all fall under the 'Conservative' camp.</p> <p>As for my own circumstance, I actively invest so that I can stick to securities and strategies that are in alignment with my goals and investment horizon. I am risk-averse, I don't hold "bubble stocks". This doesn't mean I'm afraid of market downturns, those are unavoidable. I'm afraid of things <strong>much worse.</strong> My biggest fear is a complete wipe-out, followed by a Japan-style scenario where markets have a dead double-decade. My goal isn't return-maximization, but risk-minimization. </p> <p>I'll share a glimpse of my current stock portfolio construction (not a recommendation, really... I've gotten very "lucky" if you will in energy and do not suggest chasing) :</p> <ul> <li>Over 15% allocation (currently) to oil & gas producers & infrastructure to hedge against inflation. Most of this is in a Canadian energy producer as I seek to avoid the risk of US oil/gas depletion.</li> <li>5% allocation to gold [previously 10%] as a hedge against slowing growth & geopolitical risk. </li> <li>A small allocation to gold miners, which are all hand-picked so my exposure is only to Canadian/US gold mines. Note: there are literally gold miners in the index that have exposure to Russia - oof.</li> <li>A significant over-weight to European/Japanese equities, simply because I don't want all my eggs in the US basket.</li> <li>Most my US stocks are in industries that have minimal geopolitical or disruption risk. For example, I have a large holding in a funeral-services conglomerate.</li> <li>An overweight to utilities as I am bullish on their long-term contributions to electrification, but instead of holding XLU I hand-pick as I want to avoid any utilities with wild-fire risk.</li> </ul> <p>Have I been "beating the market"? Actually - mostly thanks to the energy overweight- I have over the last few years...but I frankly don't care about beating the market and who knows if I will going forward. Investing for me is about meeting my goals. To the folks out there that want to deviate from the broad index, just be aware that the market is more efficient than you think. The only thing you can control is how much <strong>risk</strong> you are willing to take. If your goal is to "beat the market", you're thinking about it wrong. Instead, think about your <strong>goals</strong> and whether you want to take on more-or-less risk than what the market is offering.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/cr0ne"> /u/cr0ne </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/tdfol2/why_i_love_active_investment_its_not_about/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/tdfol2/why_i_love_active_investment_its_not_about/">[comments]</a></span>Kind Regards R