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Being a Cynic of Active Stock Picking

Active management has been the traditional way consumers invest their money. This traditional method says through research, an investor may discover a stock trading at a discount to it's true value. This 'informed investor' may then profit at the expense of the 'uninformed investor' who is willing to sell the stock below it's true value.

Yet a drastic shift has occurred over the last decade with more dollars going into index or index-like strategies. Traditional investors have been disappointed with active-management results and have migrated to lower-cost, indexing strategies.  

Scott Burns at Morningstar recently spoke with AQR Capital Management's founder Cliff Asness -- a well-respected academic turned money manager whose strategies are based on empirical studies.  Asness said, "I tend to be on the cynical side when it comes to stock-picking." Asness points out that as more dollars chase market inefficiencies (aka mispricings), it becomes harder to outperform indexes especially net of the higher fees for active management strategies. This is a key concept many investors ignore.

Asness further points out that there are "two dimensions" to active managers, one depends on how much they differ from the index (security selection), while the other depends on how often they readjust their portfolio (market timing).

See the full interview below. It's a bit more technical than I tend to prefer to share, but Asness is one of the great thinkers in investing today and worth understanding.




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