Active VS Passive

Discussion in 'Share Investing Strategies, Theories & Education' started by Big A, 13th Feb, 2019.

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  1. sillydad

    sillydad Active Member

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  2. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Advisors can be classed in the "sales" category including cars and real estate. Their personal gain is correlated with customer loss, which is why we find ourselves in an unjust system without governance.

    Government's are in bed with the financial institutions via either their symbiotic relationship (you make money, the economy grows, we're all happy) or plain old vanilla corruption.

    You cannot blame people either. As a skeptical, paranoid, individual with low risk tolerance I jumped straight into a super fund assuming the system would take care of me; part of my impaired vision may have been a personal acquaintance with the advisor. It was only after many years that I reviewed my returns after extremely poor long term performance. Since then I've been completely DYOR.

    The only solution is knowledge sharing. People will ask, why are you giving me this free information, it can't be good. The motive is justice.

    Does active beat passive? Statistically no, or in other words no. The only active managers who can guarantee a better than market return must have more information than the market. Are they going to share their information? How will you know they have the information to guarantee performance or they've just been lucky? Even the "greatest investor" Warren Buffet has fallen on hard times. Was all his prior success luck or is the market about to return him to savant status? Are you willing to bet your life savings on it? What about half your life savings? Quarter? Eighth? Etc.
     
    Last edited: 23rd Jul, 2020
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  3. oracle

    oracle Well-Known Member

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    Over the long term the difference between active vs passive mostly comes down to fees (management expense ratios + performance fees) and sometimes also higher turnover via trading resulting in greater tax bill.

    So in theory active can work provided you can find active managers who charge fees similar to passive (good luck) and managers who invest for the long term (avoid trading).

    Coming back to Buffett's underperformance over last decade two main reasons IMHO.

    1) Size of Berkshire. He needs to find investments worth $10s of billions to make it worthwhile and move needle on Berkshire's returns. These kinds of opportunities don't come often and even when they come it needs to be offered at attractive price.

    2) Second reason Berkshire has not done as well as S&P500 is because of technology sector being best performing sector over last decade and Berkshire (apart from Apple) has been technology light.

    So question is has his past outperformance been just purely luck which he has somehow run out of over past decade? I don't think so. Let me explain

    Investing 101 means you part with your money today in hope of getting more money in future. The most important thing here is getting more money in future. So your principal + investment returns. Avoiding loss is paramount.

    If you look around with exception of few majority of the tech companies either make no money or very little. They are all being valued at some crazy multiple of sales (not profits).

    Let's look at an example.

    JP Morgan Chase is largest bank in US. Below are it's financials.

    Screen Shot 2020-07-23 at 12.37.51 pm.png


    Net income is $34,642,000,000 for 2019

    How much is it valued at? $300 Billion

    Now let's look at market darling Tesla

    Screen Shot 2020-07-23 at 12.42.53 pm.png

    As you can see it doesn't make a profit yet as of 2019.

    How much is it's market cap? Around same as JPM $295 Billion.

    If you want do some cals on how many cars Tesla would have to sell to generate $34billion in profits and how long will it take to get there.

    You might say but Tesla will make a lot of money from autonomous cars, battery storage etc etc. Again you are buying hope and not investing. Investing is a numbers game and as they stand today you are not getting much back for the money you put in by investing in Tesla.

    Similar stories exists for Netflix, Amazon and majority of the cloud computing tech companies.

    You are basically paying for hope and growth factor possibly disruption. Let me assure you this is not new. Airlines has been a growth business (except last few months) where more people travel each year than previous, Telecom (data and voice) has been growth business where more data is used each year than previous.

    What is common theme here is most of the above industries have been good for the consumer not the investor. Just look at Qantas, Telstra 10-15 year charts.

    What will happen with cloud industry? Hard to say and that is why Buffett is not investing his money because he doesn't know whether cloud industry will end up like airline/telecom. Secondly, he cannot predict which companies will be the ultimate winners from this race.

    When he finds company he can understand the economics of and the price is right trust me Buffett will bet big but until then he is happy to wait patiently doing nothing. He will double or triple that $140 odd billion dollar cash pile in a very short time.

    So I personally don't think is has lost his investing luck. He knows his circle of competence, he knows when to bet and when not to bet and he is doing exactly that. Most importantly he doesn't care what others think about him.

    Cheers,
    Oracle.
     
  4. MangoMadness

    MangoMadness Well-Known Member

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    Is it also because everyone has all the data now?

    Lets say prior to 2000's he knew how to grind the numbers, what to look for, how to really analyze a company and its numbers alot better than everyone else, the human analytical engine.

    Now everything is so transparent and with a significantly higher number of people looking at the numbers every day and a vast amount of computing power grinding search parameters 24 hours a day.

    Was his advantage that he could reveal the hidden and see what noone else could see? Now, everyone sees everything millions of times a day.

    Im not suggesting that is the only edge that he has/had but surely the data computers can compile and sort are vastly superior to reading dusty annual reports or generating manual pricing charts etc. :)
     
  5. oracle

    oracle Well-Known Member

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    Being good at investing requires atleast 3 things if you ask me

    1) Numbers - Which everyone has access to and can crunch. So that advantage is gone for Buffett

    2) Ability to make an informed decision about a company's future 5-10-20 years from now. This is more art than science. How will Telstra look 10 years from now as opposed to BHP or CSL or CBA. Will it be making more money or less? Everyone will have an opinion but the investor who gets it right about companies he/she invests in will succeed. Now here is where sometimes market can have a different opinion to an individual investor. If you think Tesla is going to rule the world and hence deserves a market cap of $300 billion even though it doesn't make any profit you can invest in it and if your prediction comes true you will make a lot of money. Because that is exactly what the market (general consensus) is saying by giving Tesla a market cap of $300 billion.

    3) Last one is having right temperament. Where you can be unemotional about what the crowd around you is doing and continue to act in accordance to your research. Like for eg. buying when there is fear and everyone is selling and do the opposite when there is euphoria.

    You can make an argument that point 2 and 3 can work for you even with competition being so intense but they are the hardest to implement and cannot be programmed into any computer.

    Having said the above I don't think it is easy to beat the market and therefore best to stick with index funds with low costs and dollar cost average over 20-30 year period. You will outperform more than 90% of professionals.

    Cheers,
    Oracle.
     
  6. pippen

    pippen Well-Known Member

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    AMEN!
     
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  7. dunno

    dunno Well-Known Member

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    Under-performance is the mechanism that compresses the spring for future out-performance. No pain no gain, end of the day most people suck at active because they lack the capacity to suffer in the short term for long term reward.

    Staying the course is indistinguishable to being wrong – until the outcome is known and then it is too late. If you want to win, you must be prepared to look like a loser in the opinion stakes for considerable periods, but bloody well not be wrong on the eventual facts.

    When people who’s net wealth doesn’t even amount to 0.1% (US$2.9 Million if you’re wondering) of what Buffett has given away just this year are lambasting (instead of listening) to Buffett its not a bad sign that the spring is near full compression.


    upload_2020-7-23_15-42-37.png
     
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  8. bkiat

    bkiat Member

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    Warren Buffett is the 7th richest man in the world with a net worth of US$77B, he probably knows what he's doing when it comes to investing :)

    He is a core value investor, and the last decade hasn't been kind to value. The reason for this deserves a novel. But Warren has stuck to his principles, and guarded the wealth of his shareholders very prudently
     
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  9. sfdoddsy

    sfdoddsy Well-Known Member

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    I'm sure he does know what he is doing. But he does not do what he recommends (ie passive index investing).

    He has a concentrated active portfolio.
     
  10. bkiat

    bkiat Member

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    That's true. But if you have an edge and a track record like he does, would you not do the same thing ? I would :)
     
  11. MB18

    MB18 Well-Known Member

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    He recommends passive indexing investing for most people, not everyone - presumably himself included.

    I'm a happy holder of BRKB but I also understand it's a bet on value and to some degree Buffet himself, however if that means underperformance over a period of time I am happy all the same.
     
  12. Omnidragon

    Omnidragon Well-Known Member

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    In active, you don't have to have a view on how Telstra or BHP will look in 10 years, because maybe it doesn't matter as you won't invest in either. What's important is to have a view about a company that you're familiar with and investing in (qualitative and quantitative). The market's so big and no one is going to be in a position to cover and be across every stock listed. Same with investing in a fund, you don't have to have a view on how every fund will perform and whether funds on average beat the market, you just need a view on the particular funds and the particular managers you've chosen (having a view on this is itself an active form of wealth management). Of course we've talked about this many times before here and some people don't want to do anything actively for various reasons, either because they don't have the skills to or can't be bothered, which is fine.
     
  13. oracle

    oracle Well-Known Member

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    BHP and Telstra were used just as examples since most people are familiar with those names

    What you are suggesting is knowing your circle of competence and investing accordingly which is very important i agree when being active

    Cheers
    Oracle
     
  14. Zenith Chaos

    Zenith Chaos Well-Known Member

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    I agree about Buffet. However, to invest with a value tilt requires strong evidence that this factor will return. Does anyone here have that knowledge? Based on the full historical dataset it will return, but who knows how much arbitrage has been removed from the market since the introduction of algorithmic trading for example.

    In summary, I know so little about the market and investing, that any deviation from the market index, which includes the value factor, is a gamble.

    PS: I am gambling now with my portfolio as I hold some value tilt and direct shares that I know not how to sell, as I also hold a never sell mantra. Mathematically I should sell all non-complying assets and rebalance, but doing it now feels wrong. Happy for any input.
     
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  15. MB18

    MB18 Well-Known Member

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    I've also become a believer in following market indexes over the year and this certainly represents the the core of my portfolio.

    That said, I also have slight value bias (and hold BRKB) as well as a few individual shares of which I hold a strong conviction.

    It would be reasonable to argue any deviation from the index is a gamble, but the the joy of our capitalist society is that I am free to take such a 'gamble' to the extent of my convictions.
    Afterall it could be argued that I should invest my spare change in the index rather than buying a lottery ticket every jackpot, but where is the fun in sticking so strictly to any otherwise sensible plan.
     
  16. SatayKing

    SatayKing Well-Known Member

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    In the end it's going to be whether you score more points than I have on my drivers licence.
     
  17. Big A

    Big A Well-Known Member

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    Since we have had an eventful 6 months I figured I will update how my little experiment of active vs passive is playing out within my holdings.

    So in Aus I hold VAS vs Hyperion Global and Bennelong ex 20 in the active space.
    Hyperion in the last month being at 31st July returned 2.79% vs VAS .05%. 3 months 13.65% vs 7.62. 6 months 1.73% vs -14.25% and 1 year 16.45% vs -9.87%. Hyperion is certainly proving its self in the active management space so far in this volatile period.

    Bennelong ex 20 vs the S&P/ASX small ordinaries index as of 31st July. 1 month 4.33% vs 1.39% index. 3 month 15.64% vs 9.94%. 6 M -3.4% vs -10.95% and 1 year 8.96% vs -8.49%. Again it looks like bennelong ex 20 is holding up as an active manager.

    On the international side we have VGS vs Magellan Global, IFP global and Walter Scott global in the active corner.

    Magellan vs VGS as of 31st July. 1 M 1.12% vs 0.6%. 3 M 1.54% vs 2.86%. 6 M -4.76% vs -7.06% and 1 Y 5.84% vs 3.42%. While not a knock out performance, Magellan still kept ahead.

    IFP vs VGS as of 31st July. 1 M -1.9% vs 0.6%. 3 M -0.68% vs 2.86%. 6 M 1.32% vs -7.06% and 1 Y 1.32% vs 3.42%. IFP has struggled a little an is only ahead on the 6 month measurement.

    Walter Scott vs VGS as of 31st July. 1 M 1.0% vs 0.6%. 3 M 1.89% vs 2.86%. 6 M -3.84% vs -7.06% and 1 Y 4.67% vs 3.42%. Mixed result but overall not a bad effort by walter scott.

    So far I am still happy with how the active players I hold are performing and will continue to allocate new capital between both the active side and the passive side.

    Let the battle between active and passive continue till next time. :D
     
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  18. Ross36

    Ross36 Well-Known Member

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    Is it though? Most of the return is from tesla (11% of the portfolio), and if you wanted to compare it to a global growth benchmark etf (it is a global growth fund after all) you would do IOO which has beaten all of those active investments you've shown with 19% YOY after all fees and not including dividends. And IOO isn't so dominated by just a few companies.

    No offence...but your comparisons seem to be to the wrong benchmarks. The ex-20 shouldn't be to small caps, it should be to EX20 which it is outperforming handily. Our ASX has not done well the past year so kudos to the active pickers who have beaten it over this very short time frame. SPIVA doesn't lie though, over time the odds are stacked heavily against those active managers continuing to exist let alone beating the index.

    To each their own - but if comparing active to passive it's only fair to compare active vs. passive in respective sectors. Otherwise you're falling for the trap that active managers do when comparing to incorrect benchmarks to make themselves look better.
     
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  19. sillydad

    sillydad Active Member

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    I think he meant the Hyperion Australian Growth Fund, not the Global Fund. I hold the same fund and it has outperformed 5 and 10 year period. That’s not luck.

    Comparing the global fund with IOO it would still beat it I think over 5 years.

    Some active funds still outperform the index despite the fees.
     
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  20. Big A

    Big A Well-Known Member

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    Sorry my bad. Its Hyperion Australian Growth Companies fund that I hold and was comparing to the VAS. Thank you @sillydad for picking that up.

    Now when comparing it I am only comparing it to the passive investment that I hold and is part of my plan. As part of my strategy / plan I will either inject capital into the passive fund I hold being VAS for AUS and VGS for international or these active players. So if i didn't put the capital into the hyperion fund then it would go into the passive side being VAS. So that's what I am comparing too for the purpose of my portfolio analysis. Should I be comparing it to a index fund that closer aligned to what this particular active fund is buying? Maybe, but for my purpose I don't hold this other index fund and don't have any intention too. So I compare it to the options I have in my plan which I decided was the best strategy for me. I couldn't care less if the active manager holds 11% of the fund in tulips. As long as they deliver above what my other alternative in that space is which would be the Aus index or international index then I am happy.

    And for the last almost 5 years that I have held these active players they have done that reasonable well. If they start under performing and depending on how long and by how much then that might be the moment I decide to drop these active players and go the 100% index path.

    I like your point about the ex 20 comparison though. And for my purpose I should be comparing to VAS as well. I say that because my other option that is part of my plan is VAS. So i couldn't care less if this active manager is buying small caps or just outside the top 20. As long as they don't under perform the passive index option that I have in Aus equities.

    This comparison is a active vs passive from my view and based on my holdings and plan. What I have learnt when it comes to equities you can look at things from many different angles and comparison view point and come up with what ever argument and result you want.

    Equities investing is something I barely understand and probably never will. By learning a little something from the great members on here and working with a financial advisor I have put together a plan / strategy that makes some sort of sense to me on the surface of it at least. I am sure someone smarter than me could pull that strategy apart and find a million flaws in it. But for now I will stick with it.