In Praise of Active Portfolio Management

As you know if you're a regular reader of Controlled Greed, I'm managing my own portfolio. The stocks I report buying on this blog are spread across my regular brokerage account and two retirement accounts. It's the majority of my liquid net worth and not some theoretical model portfolio, or some side money that doesn't really impact my finances.

I do this because I'm confident I can match or beat the S&P 500 over the long term. What is less certain, much less, is if I can perform at the benchmark of inflation plus 10%.

Why do it then? Because I find value investing intellectually challenging, rewarding in a variety of ways, and, well, a lot of fun. (I think having fun is incredibly important, BTW.)

Tom Stevenson writes in the Daily Telegraph and argues for active fund management:

So why should things be different now for active fund managers and why should investors think twice before running to the apparent safety of a passive or exchange traded fund (ETF)?

One reason is that active investors tend to do well when there is a big difference between the returns of the best-performing and the worst-performing stocks. Over the past 20 years there have been two periods when there has been a big gap between the market's winners and its losers – during the 1990 recession and again during the latter stages of the tech stock boom. In both cases, the best fund managers shot the lights out. The good news is that the difference is as high as it has been for 10 years and so, therefore, are the rewards for getting it right.

If there really is such as thing as stock-picking skill, then it's likely to be most obvious when the benefits of picking winners are greatest. During the period between 2003 and 2007, although markets rose steadily, there wasn't so much difference between the best- and worst-performing stocks and the difference between the tracker fund and the star stock-picker was far less clear.

Read the whole thing.

Comments

[Daniel M. Ryan]

No argument from me on that point, even though I use a mock fund for practice. I'm one of those people who has to resort to substitutes for the nonce.

I don't think I'll be believed if I say what I'm doing with the money I have in my hands.

[John]

@Daniel: No argument from me on mock funds. BUT using real money, and your own, makes a difference in real-time decisions of pulling or not pulling the trigger, so to speak. (Same goes for people who "back test" money management styles.)

With regards to what you're doing with your money, remember the wise words of John Templeton. Namely, you can buy what others buy and expect better results. Of course, buying different stuff doesn't guarantee success, either. Best of luck to you. And me, too, BTW. We'll need it going forward ;-)