Skip to main content

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.




Popular posts from this blog

Healthcare Reform Explained

If you're like me, you find the 1000 page plus Heathcare Reform Act a bit confusing. This nine minute animated movie -- featuring the "YouToons" -- explains the problems with the current health care system, the changes that are happening now, and the big changes coming in 2014, produced by the Kaiser Family Foundation. Kevin Kroskey, CFP, MBA

Did You Do as Well as Your Mutual Fund?

It's common practice to look at a fund's total return number for a snapshot of what performance to expect, but that won't give you the full picture. Morningstar studies have shown that investors' actual gains frequently pale in comparison to reported total return numbers. This phenomenon frequently plays out among funds that attract assets after streaks of hot performance, only to see some investors get skittish at the first signs of underperformance . After a moment's though, even a novice investor will realize that this behavior is just the opposite of the mantra -- buy low and sell high. This practice can be more broadly attributed to bad behavior and lack of a plan or philosophy when it comes to investing. Investors are human and humans are emotional. As much as the logician in me would like to believe my left brain is working to drive my decision making, logic comes in after emotions are experienced to provide context for how we are feeling and not the other ...

The Cruel Psychology of the 1,000-Point Drop

If you don't already read Jason Zweig's regular column in the Wall Street Journal, you should. He is one of the few financial journalists worth reading. His recent article on the psychology of the recent market drop is rational and instructive. ==== Click here to read the article in it's entirety: http://blogs.wsj.com/moneybeat/2015/08/24/the-cruel-psychology-of-the-1000-point-drop/ See below for a snippet: Experiments have shown , for instance, that people believe cancer is riskier when they are told that it kills “1,286 out of 10,000 people” than when they hear that it kills “24.14 out of 100 people.” Hearing “1,286” immediately brings a large number of victims to mind, while “24.14” is simply a much smaller number. To notice that the first number is less than 13%, while the second is more than 24%, you have to focus on the denominators of the fractions and do some quick division. But your emotions will likely hijack your brain long before you get to that poi...