passive investing

Average Is Not Good Enough

© Can Stock Photo / vinnstock

There is a split in the investment world. One camp believes people should just buy passive products that seek to mimic the investment universe at low cost. They think it is not possible to gain any advantage by actively managing portfolios. The other camp believes there IS a benefit to actively managing portfolios and choosing particular investments.

You know where we fit: investment research, the selection of securities, and managing portfolios is about all we do—except talk to you. We are in the “active” camp, not the “passive” one. The debate rages on.

One thing is certain. The passive camp enjoys lower expenses, because they ordinarily only do a fraction of the work that we do: we research about individual companies, read annual reports, sell this and buy that to try to gain an advantage.

When you think about it, the whole universe of active investors cannot all deliver above-market returns—with their higher expenses. So the idea is the whole universe of passive investors must therefore do better than the whole universe of active investors, due to lower costs.

Our view is that the average performance of active investors is determined by some investors who are above average and others who are below average. So it is imperative for us to be above average—to be worth more than our freight—to have a sustainable business.

Once upon a time an active manager purchased a bond that had declined after it was issued, for 50 cents on the dollar. It was purchased from another active investor, who took a 50 cent loss. The bond later matured for a dollar, so the bargain-buyer had a 50 cent gain. On average, active investors broke even. But one active manager did better than average, and one did worse than average.

We do a whole lot more than manage investments, of course. Planning to help you work towards your goals, putting market action in context, answering your money questions, coordinating with your legal and tax advisors… these things are also part of our work. But striving to grow your bucket is why we get up in the morning.

Average (ordinary, middling, mediocre, unexceptional) is not good enough. Active investors need to be above the line over the long term. We have no guarantees to offer. But our goal is to be exceptional.

Clients, if you would like to discuss this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly.

All investing, including stocks involves risk including loss of principal. No strategy assures success or protects against loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.