"How active management survives"

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Dinosaur Dad
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"How active management survives"

Post by Dinosaur Dad » Wed Jul 31, 2019 12:18 pm

I subscribe to a newsletter published by Harold Evensky, a longtime well-respected name in financial planning, whose articles over the years have been very helpful to me.

Among this months links: this research paper (see below) on the behavioral drivers behind why some people stick with active management. It's often based on a belief that to get better results, the work has to be harder/more "active." The idea of passive/static, to them, seems counterintuitive.

Interesting reading...I remember Warren Buffett writing something similar in one of his annual letters not long ago.

I guess to some the idea of "simple, passive" just doesn't jive with the perception of what's required for superior performance. Amazing how we all have some built-in biases that make it difficult to look at things objectively.

Anyway this might be of interest to some of you...since we all talk about this all the time.


https://onlinelibrary.wiley.com/doi/10.1002/cfp2.1031
"Take calculated risks - that is quite different from being rash." | General George S. Patton

HockeyFan99
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Re: "How active management survives"

Post by HockeyFan99 » Wed Jul 31, 2019 1:49 pm

Fantastic article, thank you for sharing.

I am in the process of attempting to finally move my parents away from an actively managed (and viciously complex and expensive) portfolio, and I think this will be quite helpful in making the case that, at least in investing, more (work, complexity, expense) is not always better.
"I'm spending a year dead for tax reasons." - Hotblack Desiato

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Re: "How active management survives"

Post by Jack FFR1846 » Wed Jul 31, 2019 1:53 pm

Don't do something.....just stand there.
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Re: "How active management survives"

Post by GmanJeff » Wed Jul 31, 2019 2:27 pm

I'd suggest that active management appeals to some investors because actively managed funds can outperform; even after their higher expenses, they do not all lag behind index funds. It's no simple feat to identify which funds, of any type, will outperform relative to a given index or other benchmark, so opting for index funds is the conservative and prudent option but it is not the only reasonable option for those willing to take on more risk.

Vanguard notes that actively managed funds can appropriately have a place in many investor portfolios, and of course offers such funds itself.
https://investor.vanguard.com/mutual-fu ... ly-managed

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Phineas J. Whoopee
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Re: "How active management survives"

Post by Phineas J. Whoopee » Wed Jul 31, 2019 2:50 pm

I think it's important to keep in mind the majority of ownership of stock shares, and the great majority of daily turnover, is among institutional investors that are not mutual funds.
PJW

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Re: "How active management survives"

Post by renue74 » Wed Jul 31, 2019 3:05 pm

I think sometimes we give people more credit than the deserve. "Why stick with active management?"

I had a meeting with a "wealth advisor" (independent guy) a few months ago. I was looking for a 1 time review, but he wanted a relationship.

This quote stuck out: "I don't like passive investing because I want to pick the winners, the cream of the crop companies and I can do that by active investing."

Mind you...this guy had no other secret sauce and we live in a relatively small 75K size town.

But, he really believed he could pick the winners.

And that ladies and gentlemen is how a sales guy makes a living.

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Re: "How active management survives"

Post by David Jay » Wed Jul 31, 2019 3:14 pm

renue74 wrote:
Wed Jul 31, 2019 3:05 pm
This quote stuck out: "I don't like passive investing because I want to pick the winners, the cream of the crop companies and I can do that by active investing."
It is a common behavioral theme (like Lake Wobegone, where all the kids are above average...). How many threads have we had over the years where someone suggests they can start with the SP500 and just get rid of the “losers”, thereby creating a better performing portfolio?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: "How active management survives"

Post by Fallible » Wed Jul 31, 2019 4:27 pm

Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
... this research paper (see below) on the behavioral drivers behind why some people stick with active management. It's often based on a belief that to get better results, the work has to be harder/more "active." The idea of passive/static, to them, seems counterintuitive. ... https://onlinelibrary.wiley.com/doi/10.1002/cfp2.1031
The "conjunction fallacy" would be one more reason some retail investors stay in active management, and it's probably used by some active managers to attract and keep them.

An irony I see is that investors falling for the work-ethic pitch of active management are failing the work ethic itself by not working to learn the true differences between active and passive, i.e., by being, well...lazy.

Thanks for the good link.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: "How active management survives"

Post by nisiprius » Wed Jul 31, 2019 5:23 pm

I think it is adequately explained by self-interest on the part of people who sell active mutual funds.

That and, of course, the fact that some funds that differ from the market will differ in performance in either direction; over the last fifteen years, 11.03% of all active funds outperformed the S&P 1500, SPIVA report, Report 1, p. 9, top row and it is easy to present only funds that were in that 11%.
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Re: "How active management survives"

Post by tennisplyr » Wed Jul 31, 2019 5:57 pm

As long as there is a profit motive, things like this will survive.
Those who move forward with a happy spirit will find that things always work out.

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Re: "How active management survives"

Post by MarkRLV » Wed Jul 31, 2019 7:25 pm

The other thing to remember about active management ... If it is true that 80% of fund managers underperform the market, then 20% perform at or above the market. But that is “for that year.” Show me the active manager that has outperformed the market every year for the past 10 years (if one exists). I would even like to find one that outperformed the market in total for 10 years compared to the market performance.

As the Warren Buffet bet for $2 million with the guy that picked a few hedge funds proved ... that guy could not pick some hedge fund managers that could outperform the market over a 10 year period.

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Re: "How active management survives"

Post by abuss368 » Wed Jul 31, 2019 7:42 pm

Thank you for sharing.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: "How active management survives"

Post by abuss368 » Wed Jul 31, 2019 7:42 pm

MarkRLV wrote:
Wed Jul 31, 2019 7:25 pm
The other thing to remember about active management ... If it is true that 80% of fund managers underperform the market, then 20% perform at or above the market. But that is “for that year.” Show me the active manager that has outperformed the market every year for the past 10 years (if one exists). I would even like to find one that outperformed the market in total for 10 years compared to the market performance.

As the Warren Buffet bet for $2 million with the guy that picked a few hedge funds proved ... that guy could not pick some hedge fund managers that could outperform the market over a 10 year period.
Wasn't that just awesome? Warren Buffett bet and the funds went to charity. Passive won!
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: "How active management survives"

Post by Vanguard Fan 1367 » Wed Jul 31, 2019 8:00 pm

It is not unusual for someone to say that you need help with your investments. I heard that in professional school and have heard that in finance lectures. People you trust say things like that. John Bogle's ideas are a breath of fresh air!

"You get what you don't pay for" with mutual fund investing.

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Re: "How active management survives"

Post by GCD » Wed Jul 31, 2019 8:55 pm

Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
Among this months links: this research paper (see below) on the behavioral drivers behind why some people stick with active management. It's often based on a belief that to get better results, the work has to be harder/more "active." The idea of passive/static, to them, seems counterintuitive.

https://onlinelibrary.wiley.com/doi/10.1002/cfp2.1031
On a slightly different note... This link took me back to grad school, not that I studied finance, but that I have a terrible time not running down the rabbit hole of footnotes. I'm coming back to post this after several hours of jumping from cited text to cited text and on into quarternary texts.

Thankfully I'm retired and have time for this.

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Re: "How active management survives"

Post by vineviz » Wed Jul 31, 2019 10:13 pm

Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
Among this months links: this research paper (see below) on the behavioral drivers behind why some people stick with active management. It's often based on a belief that to get better results, the work has to be harder/more "active." The idea of passive/static, to them, seems counterintuitive.
I suspect there is a quite a bit of truth to this.

Humans are quite expert at forming heuristics to deal with complicated situations or situations in which quick action is needed. Many of these techniques are fantastically useful in evolutionary terms (e.g. "fight or flight"), but we are prone to apply these techniques in situations where they aren't appropriate.

The common thread connecting many of the biases described in behavior economics is the application of a heuristic from one area of life (where it works well) to a different area (where it may be counter-productive).

In many human endeavors, skill and talent pay dividends: the best race car drivers reliably place ahead of weaker drivers; the best lawyers generally prevail over weaker ones; the top automotive painters consistently produce superior paint jobs; etc.

Investing is unlike most other fields in that luck or chance almost completely dominates skill or talents when it comes to outcomes. Investing is 90% roulette and 10% poker, but people often invest as if it is the reverse scenario.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "How active management survives"

Post by nick evets » Thu Aug 01, 2019 7:56 am

The thing is...let's say I know 6 people that are unquestionably "rich" -- one in the many tens of millions range. And I know them well enough personally to know that 100% use a financial advisor, or some sort of professional wealth management. All of them.

And at least some are involved in things I have no idea about -- investment clubs, private equity, real-estate venture with partners, complex things to mitigate tax, etc., etc.

If pushed, there is simply no way I can categorically declare -- "you people that I know personally, despite your millions, are foolish to pay for financial management/advice."

So then we get into gray areas. And if we're honest, we see that here, too.

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Re: "How active management survives"

Post by Dinosaur Dad » Thu Aug 01, 2019 9:51 am

nick evets wrote:
Thu Aug 01, 2019 7:56 am
The thing is...let's say I know 6 people that are unquestionably "rich" -- one in the many tens of millions range. And I know them well enough personally to know that 100% use a financial advisor, or some sort of professional wealth management. All of them.

And at least some are involved in things I have no idea about -- investment clubs, private equity, real-estate venture with partners, complex things to mitigate tax, etc., etc.

If pushed, there is simply no way I can categorically declare -- "you people that I know personally, despite your millions, are foolish to pay for financial management/advice."

So then we get into gray areas. And if we're honest, we see that here, too.
No question. Once you get into that level, there are other levels of complexity - legal, tax, etc. Not to mention small business owners. Much harder to keep it simple I suppose, and many just want someone else to do the planning, which is fine if you really don't have the inclination. My older brother's a real estate attorney and he deals with levels of complexity far beyond mine...while I sit here with my humble (but paid-off) house, and my carefully curated set of largely index funds. It's plenty for me to identify my tax rates, look at IRA conversions and TLH, and create a simple income plan now that I'm 63. It's also true that the simplest investing steps I took - like setting up a core of index funds ans sticking with it for 30+ years - have done by far the best of all my investments.
"Take calculated risks - that is quite different from being rash." | General George S. Patton

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Re: "How active management survives"

Post by tadamsmar » Thu Aug 01, 2019 10:02 am

There is a theory that Jeffery Epstein has been using active money management as a ruse to hide blackmail payments. The theory is that he collected documentation on billionaires that he lured into compromising situations and then took blackmail payments as money-management fees. Some have noted the curious lack of evidence that he did any hedgefund-style trading. They theorize that he just put the money in treasuries or in an S&P 500 mutual fund. If it's the latter, the billionaire's investments have been doing pretty well!
Last edited by tadamsmar on Thu Aug 01, 2019 2:15 pm, edited 1 time in total.

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Re: "How active management survives"

Post by beyou » Thu Aug 01, 2019 12:47 pm

There is another side to this topic not discussed.
They are also surviving by adapting to the competition from Vanguard.
Just as Schwab came out with cheap index funds, then Fidelity came out with free index funds,
other active managers are lowering their fees and cutting their own costs.
So even for those who really believe some MBA or algo can beat the market, they are gradually paying less for such services.
Whether they are worthwhile is the main debate above, but I ask Bogleheads, if active managers lowered their fees to be same as
index funds, would you "take the bait" ? For the sake of argument, let's say this is in a tax deferred account where taxes are not impactful
to your decision.

I have worked for active managers for most of my career (IT) and until last few years, nobody talked about lowering fees except for large
institutional clients who are smarter and negotiate fees. Now fund managers are moving to cheaper locations, cutting staff costs and accepting less fee income from funds. Often reduce income is due to lower assets, not lower ER, but in some cases the ER has been lowered on active funds.
In other cases ER has even been scaled to performance, a new concept for active managers of some new mutual funds (variant of how hedge funds work). Vanguard is helping both those who leave their active manager and those who stay with those funds. The real problem is those financial advisors who will steer you towards the worst (highest ER) of the funds. People need to learn how to do this themselves, or pay the high prices. But if on your own you go to lower cost active funds (Dodge & Cox, Vanguard active funds for instance) you aren't making that terrible of a decision.

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Re: "How active management survives"

Post by CedarWaxWing » Thu Aug 01, 2019 2:01 pm

Fallible wrote:
Wed Jul 31, 2019 4:27 pm
Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
... this research paper (see below) on the behavioral drivers behind why some people stick with active management. It's often based on a belief that to get better results, the work has to be harder/more "active." The idea of passive/static, to them, seems counterintuitive. ... https://onlinelibrary.wiley.com/doi/10.1002/cfp2.1031
The "conjunction fallacy" would be one more reason some retail investors stay in active management, and it's probably used by some active managers to attract and keep them.

An irony I see is that investors falling for the work-ethic pitch of active management are failing the work ethic itself by not working to learn the true differences between active and passive, i.e., by being, well...lazy.

Thanks for the good link.
"Failing to learn"... for years (decades) I read a great many things about personal finance and investing... and most of the REALLY good sound honest books we have in our wiki at Bogleheads... had not been written then. Most of the books I read decades ago.. were not worth the paper they were printed on, and some of them were written by very dishonest people who later were in trouble with the law.

Those books were not really giving actionable "information"... because what they said was not demonstrably true.

We now do have good books, written with data and references supporting what they say, so yes, now people can educate themselves pretty easily IF they can find the right books, and IF they can read enough to tell the experts from the frauds. If a person is a truly busy working person.. it is not all that easy to find your way without help (and thank you again to all you well written Bogleheads and moderators, and yes, to Jack Bogle especially.

Back to the work ethic...

I would venture to say that most "FAs"... themselves do not have the work ethic and intellectual honesty to educate themselves about how passive investing works, or to take an introspective look as what they do and how they do it. They themselves seem to be
"failing the work ethic itself by not working to learn the true differences between active and passive, i.e., by being, well...lazy".

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Re: "How active management survives"

Post by Tony-S » Thu Aug 01, 2019 5:08 pm

MarkRLV wrote:
Wed Jul 31, 2019 7:25 pm
I would even like to find one that outperformed the market in total for 10 years compared to the market performance.
T Rowe Price’s New Horizons and Blue Chip fund managers to name two.

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Re: "How active management survives"

Post by Fallible » Thu Aug 01, 2019 6:26 pm

CedarWaxWing wrote:
Thu Aug 01, 2019 2:01 pm
Fallible wrote:
Wed Jul 31, 2019 4:27 pm
Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
... this research paper (see below) on the behavioral drivers behind why some people stick with active management. It's often based on a belief that to get better results, the work has to be harder/more "active." The idea of passive/static, to them, seems counterintuitive. ... https://onlinelibrary.wiley.com/doi/10.1002/cfp2.1031
The "conjunction fallacy" would be one more reason some retail investors stay in active management, and it's probably used by some active managers to attract and keep them.

An irony I see is that investors falling for the work-ethic pitch of active management are failing the work ethic itself by not working to learn the true differences between active and passive, i.e., by being, well...lazy.

Thanks for the good link.
... Back to the work ethic...

I would venture to say that most "FAs"... themselves do not have the work ethic and intellectual honesty to educate themselves about how passive investing works, or to take an introspective look as what they do and how they do it. ...
You raise an interesting question about the work ethic of some advisors. And there’s another lapsed work ethic among investors who don’t take time, even when they have it, to learn how to find good advisors and, once found, learn how to judge their performance.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: "How active management survives"

Post by Taylor Larimore » Thu Aug 01, 2019 7:02 pm

Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
I subscribe to a newsletter published by Harold Evensky, a longtime well-respected name in financial planning, whose articles over the years have been very helpful to me.
Dinosaur Dad:

It may interest you to know that I first met Harold Evansky more than 50 years ago when I attended a meeting of the American Association of Individual Investors in Coral Gables, Florida. During this unforgettable evening at the local Holiday Inn, our guest speaker was Mr. Evansky who made a memorable speech and gave us a generous series of handouts about investing basics.

Mr. Evansky was the first person to teach me that we can determine our expected risk and expected return by adjusting our stock/bond allocation--perhaps the most important investment lesson I ever learned.

I have never forgotten that evening with Mr. Evansky to whom I owe so much. I will be forever grateful.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Dinosaur Dad
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Re: "How active management survives"

Post by Dinosaur Dad » Thu Aug 01, 2019 10:07 pm

Taylor Larimore wrote:
Thu Aug 01, 2019 7:02 pm
Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
I subscribe to a newsletter published by Harold Evensky, a longtime well-respected name in financial planning, whose articles over the years have been very helpful to me.
Dinosaur Dad:

It may interest you to know that I first met Harold Evansky more than 50 years ago when I attended a meeting of the American Association of Individual Investors in Coral Gables, Florida. During this unforgettable evening at the local Holiday Inn, our guest speaker was Mr. Evansky who made a memorable speech and gave us a generous series of handouts about investing basics.

Mr. Evansky was the first person to teach me that we can determine our expected risk and expected return by adjusting our stock/bond allocation--perhaps the most important investment lesson I ever learned.

I have never forgotten that evening with Mr. Evansky to whom I owe so much. I will be forever grateful.

Best wishes
Taylor
What a great story Taylor. - thank you. Way back when, writers like Mr. Evensky, Jonathan Clements, Jason Zweig, and Jane Bryant Quinn helped me to get started, and as you said, provided those important early lessons. Yes, I too sit here many years later, forever grateful.
"Take calculated risks - that is quite different from being rash." | General George S. Patton

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Re: "How active management survives"

Post by quisp65 » Fri Aug 02, 2019 8:05 am

GmanJeff wrote:
Wed Jul 31, 2019 2:27 pm
I'd suggest that active management appeals to some investors because actively managed funds can outperform; even after their higher expenses, they do not all lag behind index funds. It's no simple feat to identify which funds, of any type, will outperform relative to a given index or other benchmark, so opting for index funds is the conservative and prudent option but it is not the only reasonable option for those willing to take on more risk.

Vanguard notes that actively managed funds can appropriately have a place in many investor portfolios, and of course offers such funds itself.
https://investor.vanguard.com/mutual-fu ... ly-managed
Certainly true on some bond funds, though maybe this thread only assumes equity in the title. I note the corporate index bond funds in Vanguard are half full of the lowest tier of investment grade. I use short term corporate for my spending money and the index corporates feel too risky for an extra 1/2 a percentage point in annual interest.

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Re: "How active management survives"

Post by Fallible » Fri Aug 02, 2019 12:48 pm

Dinosaur Dad wrote:
Thu Aug 01, 2019 10:07 pm
Taylor Larimore wrote:
Thu Aug 01, 2019 7:02 pm
Dinosaur Dad wrote:
Wed Jul 31, 2019 12:18 pm
I subscribe to a newsletter published by Harold Evensky, a longtime well-respected name in financial planning, whose articles over the years have been very helpful to me.
Dinosaur Dad:

It may interest you to know that I first met Harold Evansky more than 50 years ago when I attended a meeting of the American Association of Individual Investors in Coral Gables, Florida. During this unforgettable evening at the local Holiday Inn, our guest speaker was Mr. Evansky who made a memorable speech and gave us a generous series of handouts about investing basics.

Mr. Evansky was the first person to teach me that we can determine our expected risk and expected return by adjusting our stock/bond allocation--perhaps the most important investment lesson I ever learned.

I have never forgotten that evening with Mr. Evansky to whom I owe so much. I will be forever grateful.
Best wishes
Taylor
What a great story Taylor. - thank you. Way back when, writers like Mr. Evensky, Jonathan Clements, Jason Zweig, and Jane Bryant Quinn helped me to get started, and as you said, provided those important early lessons. Yes, I too sit here many years later, forever grateful.
I'm always happy to express my gratefulness to those who helped (saved) me in my early years of investing, beginning with Jack Bogle in the late '80s and then Clements, Quinn, Zweig and others who kept me on track in the wild '90s and the even wilder beyond. They are among the best of the best and all have quoted Evensky in their books or columns. So Taylor, thanks for writing of your experience with Evensky.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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