“Active Management Is a Loser’s Game”
Top 5 of the Week of May 28
Heading up our Top 5 this week, The Irrelevant Investor Michael Batnick argues the cost of waiting. Mark Rzepczynski, on his blog, explains how we should be asking why a lot more. And from ETF.com, Larry Swedroe discusses skill among analysts.
Nicolas Rabener, writing for Alpha Architect, examines if value investing is really as dead as everyone believes. And Morgan Housel, a partner at Collaborative Fund, teaches us how to plan for the unexpected in life…
Don’t Delay, Start Today
- Given a choice between money immediately and more money in the distant future, most people are likely to pick the immediate gratification option
- It seems like the choice between giving money to yourself now or a stranger in a few years because we have no connection with our future self—so we stay loyal to who we are now
- Many of us put off saving till it’s affordable, but there’s a significant cost implication to waiting—don’t delay, the person you are tomorrow is no different to who you are today
So, what are you waiting for? Share your comments in the section below
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But Why?
- Father of Toyota Industries, Sakichi Toyoda, advanced the “5 Whys” approach for finding the root cause of issues as part of his manufacturing process for problem-solving
- The same approach can work well in investment management for finding the source of underperforming investments or due diligence difficulties
- This deep dive questioning technique can help you further both your own and your manager’s analysis by pushing you for even more information past the first question
“Active Management Is a Loser’s Game”
- Research shows that analysts who make fewer buy recommendations and have less volatility in their success are more likely to be skilled than those who behave the opposite
- Studies also show that only 2% of equity managers can outperform three-factor model benchmarks (market beta, size, and value)
- The large majority of skilled analysts found in the first research is at odds to the underperforming fund managers whose returns rarely cover their costs—further reason to avoid the active management game
Have We Seen the Last of Value Investing?
- Many believe that we have seen the death of value investing and it won’t return—in part, due to the discussion around the price-to-book valuation metric
- The traditional price-to-book no longer fits today’s business environment as it fails to incorporate the value of a company’s brand, intellectual property, and customer base onto a balance sheet
- Value investing isn’t necessarily dead, therefore, we just need to change how we measure it
Expect the Unexpected
- When it comes to risk management, it’s impossible to plan for everything—yet, invariably, what will happen is the least expected and most crazy scenario possible
- Most professions, investing included, study and plan for the risks involved in common situations only, but it’s the crazy ones that can inflict the most damage
- To mitigate the crazy unexpected stuff, avoid having single points of failure in a process, be humble in learning from past mistakes, and include more room for error
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.