# A Long Bet



## craft (3 July 2017)

A thread to discuss Ative vs Passive.




The 10 year passive vs active bet between Buffett and Protega Partners finalises end of this year. Looks like passive will easily win this bet.


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## craft (3 July 2017)

...


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## craft (3 July 2017)




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## craft (3 July 2017)

skc said:


> FWIW... I think this advice will become problematic sooner or later.
> 
> It's not a bad idea when index investing represents only a small portion of total funds flow.
> But when index investing turns mainstream, it takes on a different life form.Index investing is an investor conceding that he/she cannot pick the right stocks to beat the market... and implying that the other market participants can better pick the winners.
> ...




Worth thinking about.

How much of the funds flow control needs to be value aware before unaware funds can causes bubble havoc.

Most technical analysis is value unaware. Is funds flow from technical any different to fund flow from value unaware ETF Investing - should the two be lumped together when thinking about the funds flow issue.

How effective is averaging over time?  so as to ensure entry on both sides of the swing. Does the magnatude of the pendulum swing matter? it certainly does if you only get one part of the swing - but what if your investment horizion is greater than a few full swings.


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## kid hustlr (3 July 2017)

Isn't that incredible that none of the funds beat the index.


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## skc (3 July 2017)

craft said:


> How much of the funds flow control needs to be value aware before unaware funds can causes bubble havoc.




I don't think anyone can work out an exact answer, but my anecdote observation of individual stocks trading is that, it doesn't take a lot of volume on one side to offset the balance. I don't know where's the tipping point but I think there should be some evidence showing up if we do reach that point. Some of these may include low overall market volatility and low relative volatility between stocks (i.e. weighting remains stable). We are seeing these in equity markets but they are certainly not sufficient proof. There are probably more evidences that I haven't thought about.



craft said:


> Most technical analysis is value unaware. Is funds flow from technical any different to fund flow from value unaware ETF Investing - should the two be lumped together when thinking about the funds flow issue.




True when the market goes up. But ETF investing is predominately long only while technical analysis presumably can go long and short. So technical flows can be counterbalancing in nature, provided that there's something to trigger the direction change in the first place.



craft said:


> View attachment 71693




Some pretty average performance there by the funds. I do suspect that Buffet picked easier targets in Fund of funds. Let's say 20% of funds outperform the index, the chance of a fund of funds with say 8-10 separate funds to outperform the index has to be infinitely smaller, even before accounting for the additional layer of fees.


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## skc (3 July 2017)

skc said:


> Some pretty average performance there by the funds. I do suspect that Buffet picked easier targets in Fund of funds. Let's say 20% of funds outperform the index, the chance of a fund of funds with say 8-10 separate funds to outperform the index *has to be infinitely smaller*, even before accounting for the additional layer of fees.




I had to do some Google search to brush up on probability theories on this... but using some assumptions for illustration purposes:
- Each individual fund has a 20% chance to outperform the index
- A fund of funds held 10 investments
- The magnitude of overperformance is slightly better than the underperformers, such that if the fund of funds picked 5 overperformers and 5 underperformers, it will out perform the index after fees. 

=> The chance of picking 5 outperformers = ~2.64% in any one year
=> The formula is 10c5 x 0.2^5 x 0.8^5 (It's called binomial distributions - sure prompted some very faded memory of highschool maths)
=> The chance of picking 5 outperformers over 10 years quickly approaches infinitely small... not to mention the fact that if you underperformed one year, you will need to catch up on the underperformance last year before you can outperform over 2 years.

Buffet was never going to lose this wager.

P.S. This of course doesn't take into account that one absolute runaway winner gets selected which dwarfs the other 9 underperformers... but by definition the runaway winner would be even harder to pick.


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## Gringotts Bank (4 July 2017)

If I recall correctly, the last time craft posted so many times on the topic of being long in the market, there was a a strong run up.  I think the delay was about a month or so.


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## Value Collector (4 July 2017)

Here is Buffett explaining the bet and the results at the Berkshire annual meeting.


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## skc (4 July 2017)

Value Collector said:


> Here is Buffett explaining the bet and the results at the Berkshire annual meeting.




Thanks for the link.


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## kermit345 (4 July 2017)

skc/craft, I work in the financial planning industry and over the last few years our view on investing has changed dramatically given the guidance of a predominant international funds manager that is essentially of a passive nature. The stats on what proportion of active funds outperform the index net of fees are astounding and that's only over specific timeframes. 

For instance some materials I have access to but can't actually quote on here for confidentiality reasons (so take it with a grain of salt if you wish) basically states that for the period ending 31 December 2015 the following applied. Note this is for US equity funds but its very similar in Aus:

3 Year performance - 87% of the active funds around 3 years ago survived, 36% outperformed index
5 Year performance - 76% of the active funds around 3 years ago survived, 29% outperformed index
10 Year performance - 59% of the active funds around 3 years ago survived, 21% outperformed index
15 Year performance - 43% of the active funds around 3 years ago survived, 17% outperformed index

The stats are even worse for fixed income based fund managers.

Further to this here are some other stats. In the period ending 31 December 2010:

3 Year performance - 31% of funds outperformed the index to 31 Dec 2010, of that 31% only 35% of those funds continued to outperform in the following 4 years.
5 Year performance - 27% of funds outperformed the index to 31 Dec 2010, of that 27% only 33% of those funds continued to outperform in the following 4 years.
10 Year performance - 20% of funds outperformed the index to 31 Dec 2010, of that 20% only 37% of those funds continued to outperform in the following 4 years.

So even picking the very best 10 year performers only give you a very marginal increased expectation that they will even continue to outperform over the next 4 years.

Basically the research shows that the main sector that active fund managers add some value is smaller companies but even so, a fund manager that outperforms in this space experiences increases in FUM and will eventually conform to the norm.

It sounds boring to invest in passive funds but the stats, returns and minimal fees speak for them self as far as I'm concerned. However by using a passive approach it means you're extremely unlikely to do worse then anyone else and it also gives you a chance to concentrate on other strategies or areas of your financial position that can further enhance your lifestyle. 

I'm not surprised at all the Buffet won the bet. Even the very best active fund managers are unlikely to repeatedly outperform net of all fees.


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## peter2 (4 July 2017)

Buffett et al seem to think that the poor performance of the hedge funds are due entirely to their fees. 

I don't think so, as their performances are much less than the 2%pa they gouge. I think they chase rainbows, hold their losers too long and don't know their portfolio risks (LTCM). They're basically incompetent traders (IMHO). 

I realise that huge funds can't move as quickly as they'd like, but they've got the financial markets of the whole world to play with and the computing power to do it.


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## Value Collector (5 July 2017)

peter2 said:


> Buffett et al seem to think that the poor performance of the hedge funds are due entirely to their fees.
> 
> I don't think so, as their performances are much less than the 2%pa they gouge. I think they chase rainbows, hold their losers too long and don't know their portfolio risks (LTCM). They're basically incompetent traders (IMHO).
> 
> I realise that huge funds can't move as quickly as they'd like, but they've got the financial markets of the whole world to play with and the computing power to do it.



when looking at them as a group, the performance of the good ones is offset by the performance of the poor ones, which puts their returns at about the market rate, then you deduct the fees, and that drags the performance below the market rate.


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## skc (10 July 2017)

craft said:


> Worth thinking about.
> 
> How much of the funds flow control needs to be value aware before unaware funds can causes bubble havoc.




Here's a good article articulating my thoughts on passive flows far more eloquently than I ever could... and with numbers to demonstrate what is already happening in the US market.

http://www.thebull.com.au/premium/a...the-rise,-but-is-it-a-sensible-strategy-.html

Reading this has me reasonably convinced that the passive-overwhelms-all point has been reached in the US. The question now is how can one make use of this information.


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## kermit345 (12 July 2017)

skc, without giving it a huge amount of thought my assumption would be (and that article eluded to it) is that the big companies will simply get bigger.

For example as the aus market has nowhere near the level of ETF's or stocks as the US, think of the big 4 banks. They are in almost every passive ETF for the aussie market and are always in the top 10 holdings due to their size. My assumption would be that all these passive flows that MUST be directed to the banks because of their mandate's would simply mean the natural progression of the banks share price even without any major increases in profit, revenue, etc etc (similar to amazon in the article).

Now the banks are just one example but my guess is it essentially applies to majority of the largest stocks on the ASX and is further compounded by the natural flow of funds from our super system.

Note the above is all just guesswork on my part based on the article skc posted and thinking of a method to take advantage of it. My thinking would be find the biggest stocks that are in the most index's and/or passive funds and make them your core holding whilst possibly eliminating or allocating less to those that are more cyclical or likely to suffer from adverse headwinds. 

i.e.:
CBA
ANZ
WBC
NAB
CSL
TLS
WES
WOW
WPL

That would be my starting point for an aussie version although not sure if passive style investing and ETF's are still too much in their infancy here compared to the US.


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## Value Collector (12 July 2017)

Here is an article by the guy that lost the bet.

https://www.bloomberg.com/view/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett


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## skc (13 July 2017)

kermit345 said:


> skc, without giving it a huge amount of thought my assumption would be (and that article eluded to it) is that the big companies will simply get bigger.




Yes I agree. And the fact that this hasn't been observed in the ASX means the active/passive probably hasn't quite hit the tipping point yet. However I think it's definitely happening in the Gold space where GDX/GDXJ are causing havoc and throwing relative valuations out of whack.



kermit345 said:


> Note the above is all just guesswork on my part based on the article skc posted and thinking of a method to take advantage of it. My thinking would be find the biggest stocks that are in the most index's and/or passive funds and make them your core holding whilst possibly eliminating or allocating less to those that are more cyclical or likely to suffer from adverse headwinds.




Yes this would be one way to take advantage... literally to go with the flow. However, if the passive dominance becomes a problem and whatever prevailed has to unwind... you would obviously act in the exact opposite manner.

Here's another great article on this issue.
http://www.barrons.com/articles/man-vs-machine-how-has-indexing-changed-the-market-1499491233


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## kermit345 (13 July 2017)

Value Collector, that article wreaks of someone trying to save face. Of course its in his interest to defend why he lost the bet and not only that its almost as if he claims having a larger universe of stocks/options to invest in is actually a negative to an active managers performance. Found it quite laughable to be honest.

SKC, any idea what say the top 10, 20, 30, 40 or 50 stocks on the ASX have returned (without including cyclical's like miners) vs the all ords for instance? I had a quick look yesterday when doing my reply above and the 9 stocks I mentioned outperformed the all ords by 2% over the last 12 months and thats ignoring dividends.


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## Value Hunter (13 July 2017)

Kermit345, I agree the article by the loser is hogwash. I bet if they made another 10 year bet immediately after this bet ends Buffett would most likely win again. 

He even admits that when he compares his performance to the MSCI which he deems as a more relevant benchmark they still did not achieve much "the MSCI All Country World Index, almost exactly matched hedge-fund returns during the same nine-year period of our bet".


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## skc (13 July 2017)

kermit345 said:


> Value Collector, that article wreaks of someone trying to save face. Of course its in his interest to defend why he lost the bet and not only that its almost as if he claims having a larger universe of stocks/options to invest in is actually a negative to an active managers performance. Found it quite laughable to be honest.




Yeah... everything he said made sense, but collectively it's pretty garbage.



kermit345 said:


> SKC, any idea what say the top 10, 20, 30, 40 or 50 stocks on the ASX have returned (without including cyclical's like miners) vs the all ords for instance? I had a quick look yesterday when doing my reply above and the 9 stocks I mentioned outperformed the all ords by 2% over the last 12 months and thats ignoring dividends.




No I don't have the figures handy but the way to do it is to work out the returns for all the stocks and see if the top performers are over represented in certain size categories.

But the ASX market is really narrow so even if you find interesting observations you can probably come up with several different explanations to rationalise them.


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## Quant (14 July 2017)

kermit345 said:


> SKC, any idea what say the top 10, 20, 30, 40 or 50 stocks on the ASX have returned (without including cyclical's like miners) vs the all ords for instance? I had a quick look yesterday when doing my reply above and the 9 stocks I mentioned outperformed the all ords by 2% over the last 12 months and thats ignoring dividends.




given half are XFJ constituents I think the answer may lie in
a xfj/xjo spread or ratio chart  . XFJ was way oversold 12 months ago . Cheapest it had been in around 3 years , was pretty well bound to outperform XJO on any market rally , not to mention the incredible run by XLF in US which would have likely helped banks here also . I pointed out in a blog here last june where NAB was trading $24 on a 10 x 2017 multiple and would have been close to a 10% gross yield , was a no brainer .




lower band orange represents 10 x 2017 multiple and the upper band is 15 x 2017 multiple in NAB , with Divs damn close to 50% return in a boring old top 20 bank in 12 months  . when opportunity knocks you got to answer the door

ANZ was even better trading well under 10 x 2017 mult and had a gross return with divs well north of 50%


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## craft (14 July 2017)

skc said:


> Yes I agree. And the fact that this hasn't been observed in the ASX means the active/passive probably hasn't quite hit the tipping point yet. However I think it's definitely happening in the Gold space where GDX/GDXJ are causing havoc and throwing relative valuations out of whack.
> 
> 
> 
> ...




If passive dominance becomes a problem – what unwinds it and when?

What unwinds it and when is always the question for an active market participant whenever he sees an opportunity to be on the other side of prevailing wisdom.

The point with passive investing should be to take both stock selection and timing out of the equation so that all that matter is expenses.

You take stock selection out by buying the broadest ETF to match you long term expense exposures.

You take timing out by dollar cost averaging over a full cycle of sentiment swinging from passive being in fashion to out of fashion.

If the criticism of passive investing is timing or breadth related – the bigger point is probably being missed.


I would certainly tell anybody young who asks me:

Unless you are passionate about investing yourself.

From your very first pay check, have your super paid (and resulting investment cash flow re-invested) into the lowest cost broadest ETF you can and never change or even think about it again.  This will undoubtedly produce a higher confidence level of retiring well than paying for active managers.

Hopefully most industry superanuuation funds now have broad based low cost ETF options.


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## craft (14 July 2017)

Value Hunter said:


> I bet if they made another 10 year bet immediately after this bet ends Buffett would most likely win again.




Maybe not.

He’s saying he’s too old to collect on another bet but Berkshire is perpetual, so take that with a grain of salt.

Buffett is an active investor, an extremely good one.

However he wanted to show a certain demographic the power of passive investing and the difficulties of picking consistent active managers.

That demographic wouldn’t be aware of the difficulties of ensuring the passive outcome when you have a single lump sum a single start and single finish date to deal with. He couldn’t really afford to lose because had he got the timing wrong he would mis the opportunity to influence the debate. 

Buffett had to outsmart other active investors – so his start point and valuation was critical because he didn’t have control over the endpoint. That he doesn’t jump into renewing the bet now should tell you something about current valuation and the point SKC advances at least in USA.


No way he would have taken the passive bet without some active valuation perspective to back the timing up.

Buffet wanted to show the attributes of passive to the market he is aiming the message at, but he didn't have the time to put all the attributes into place to make it a certainty. It takes a unique active manager to make a muppet of the other active managers whilst promoting passive investing.


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## Ves (14 July 2017)

craft said:


> If passive dominance becomes a problem – what unwinds it and when?



Haven't thought about this in much detail and haven't researched it at all,  but I'm a bit cynical of this debate and the voices in the media/industry who benefit from pushing it.

It's not like passive investment is going to completely cure 'human emotions' or de-couple the relationship between cashflow & long-term return.  There's going to be booms and busts,  and times where active will be more popular again  and vice versa.

Probably a bit of hindsight bias in a lot of the 'expert arguments'  because that always makes it easier to fit an agenda.


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## Value Collector (14 July 2017)

Ves said:


> Haven't thought about this in much detail and haven't researched it at all,  but I'm a bit cynical of this debate and the voices in the media/industry who benefit from pushing it.
> 
> It's not like passive investment is going to completely cure 'human emotions' or de-couple the relationship between cashflow & long-term return.  There's going to be booms and busts,  and times where active will be more popular again  and vice versa.
> 
> Probably a bit of hindsight bias in a lot of the 'expert arguments'  because that always makes it easier to fit an agenda.




Buffett knows (probably more than anyone), the study and effort it takes to be an active investor and beat the market over time, and he knows the "average person" isn't going to do that (hence why they want to pay hedge funds to do it for them).

So he recommends that the person not willing to put in the time and effort simply go the inactive route, because he believes the active route on average won't beat the market once the fees are taken out.

His recommendations are

1, Be active and put in the time and effort yourself

2, be passive and accept the market rate of return

he doesn't recommend 3

3, Be passive, but pay a high fee to some to be active on your behalf.


He explains it pretty well here, it goes back to Ben Graham,


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## craft (14 July 2017)

Value Collector said:


> Buffett knows (probably more than anyone), the study and effort it takes to be an active investor and beat the market over time, and he knows the "average person" isn't going to do that (hence why they want to pay hedge funds to do it for them).
> 
> So he recommends that the person not willing to put in the time and effort simply go the inactive route, because he believes the active route on average won't beat the market once the fees are taken out.
> 
> ...




To achieve 2) he specifies
A (broad, low cost) *index* fund bought *consistently* over a *long period* of time.
All three elements are important.


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## willy1111 (14 July 2017)

craft said:


> If passive dominance becomes a problem – what unwinds it and when?
> 
> What unwinds it and when is always the question for an active market participant whenever he sees an opportunity to be on the other side of prevailing wisdom.




Maybe yield?

Continous funds going into passive pushes up the stock price but it doesn't increase earnings of the share or ability to pay out more dividend/yield.

If dividend yield goes significantly below yield on fixed interest, there may be a change in flow from stocks to fixed interest.

Probably more likely in Aus as we derive great yield, which can replace personal exertion income. US seems to have more of a reputation for paying out lower dividend yield, retaining earnings to grow the business, so maybe yield may not be a catalyst for the unwinding in US market?


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## Value Collector (14 July 2017)

craft said:


> To achieve 2) he specifies
> A (broad, low cost) *index* fund bought *consistently* over a *long period* of time.
> All three elements are important.



Absolutely, because if you don't do all three and you begin to try and "time the market", you are not taking a passive position.


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## Value Hunter (15 July 2017)

craft said:


> Maybe not.
> 
> He’s saying he’s too old to collect on another bet but Berkshire is perpetual, so take that with a grain of salt.
> 
> ...




Craft, if after the conclusion of the bet another identical ten year bet started and you were forced to pick one side to bet on (lets say you placed a $10,000 bet) would you back Buffett or his opponent?


In regards to Buffett not jumping into renewing the bet, the current bet is not yet even officially over, lol. Besides he has already proved his point why would he need to prove it again? Also would his opponents take the same bet if it was offered again? I am going to say no. 

In terms of hedged funds having the potential to outperform during a really weak market, the argument is nice in theory but in a typical ten year cycle you will usually have weak and strong periods. Yes if in the ten years immediately after the current bet ends we have one of these relatively uncommon ten year periods where returns are really low say 1 or 2% per annum compound, its possible.

That is the important point that Buffett would not necessarily win the bet in every single ten year period but in the vast majority he would.

Also I am not convinced that hedge funds always outperform during bear markets. If you look at what typical hedge funds might do aside from bottom up long stock picking, things like shorting, currency trading, derivatives, macro investing, etc lets address them all one by one.

Shorting will likely do well during a bear market but most long-short funds have much smaller short portfolios than long portfolios. For example they might be 75% long, 15% short and the rest in cash. However, given that most fund managers suck at stock picking the long portfolio might under-perform by so much that it overwhelms the profits from their short portfolio. 

Currency trading is notoriously difficult and very few people can do well out of it in the long-term. Too many unknowns and variables involved.

Derivatives, apart from the people using derivatives for hedging, for the other participants its probably 90% + losing money and 10% of them making big profits. As for macro-investing I would say the odds of making a good return long-term are about the same as currency trading. Its very tough due to the complexity and number of unknowns and variables involved. That is why there are very few George Soroses (plus his politcal influence certainly can affect outcomes in some cases).

Yes during the start of the bet Buffett was losing to the hedge funds but one brief bear market period is not enough evidence to suggest that hedge funds reliably outperform in bear markets. We need to see a lot more evidence of this.

Also on the final paragraph Craft, you yourself are an accomplished active investor and you also promote passive investing for the majority of people, just as Buffett does. So how are you different from Buffett other than that you did not go out of your way to publicly humiliate the active funds management crowd?


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## Value Hunter (15 July 2017)

craft said: ↑
To achieve 2) he specifies
A (broad, low cost) *index* fund bought *consistently* over a *long period* of time.
All three elements are important.

Craft would the same concept of buying consistently over a long period of time not apply to active managed funds for a passive/"defensive" investor? Every fund active or passive will go through bad periods, so if we are talking about "the average person" I do not see how that changes. I remember reading somewhere that Magellan (in the U.S.) later did a study of investors who invested into the Magellan Fund when Peter Lynch was the fund manager. Over that roughly 13 year period where his funds produced something like 29% annualized returns, apparently the majority of his investors lost money investing in Magellan funds. Most likely because they had a short term time horizon and picked the wrong times to enter and exit the fund.


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## kid hustlr (15 July 2017)

I find this passive / active investment discussion strange. Even the articles I'm reading don't actually outline the discussion.

Are people suggesting passive investment is bad because:
1. It's leading to higher valuations as retail investors pile in unaware of risks? or
2. It leads to some type of systematic risk within the system and ultimately financial meltdown as financial products behave outside of a way they were designed/expected to.

If the answer is 1 - I don't see a problem with this. Bull markets and bear markets happen and if retail investors are being drawn in at the wrong time this is completely standard behavior. If risk appetite was growing for active managers it would lead to increased P/E's anyway so for me this point is irrelevant.

If the discussion is point 2 then this is slightly more complex. Are people implying that ETF's make up such a large portion of the market that active / aggressive selling will lead to ETF selling and a self fulfilling prophecy? This just created volatility but the passive ETF is doing it's job. Perhaps slippage during hugely volatile times as they try to re balance could lead to under performance?

I think during hugely volatile times ETF's which aren't passive (aka derivative based or managed in such a way to provide exposure without holding the underlying) may be at risk but I'm not sure why passive ETF's which hold the underlying would be influenced (except simply being more volatile).

I think Buffet's bet was great, put simply, giving someone your money and asking them to manage it, along with a couple of other billion, whilst letting them take 1-2% a year fee, it's hugely unlikely they will beat the market.



craft said:


> To achieve 2) he specifies
> A (broad, low cost) *index* fund bought *consistently* over a *long period* of time.
> All three elements are important.




This is great and what people need to realise. Constant re-investment, stick to a plan, don't panic.

"If you want to be hear for the good days, you've got be here for all the days"
"Everyone has a plan until they get punched in the face"


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## Value Collector (16 July 2017)

Even though Buffett is an "Active" investor, he is still pretty passive in a lot of ways.

I mean compared to Buffett, you would have to describe the hedge funds and most traders as "Hyper Active"

Buffett claims that his Berkshire subsidiaries will never be sold, if he buys 100% of a business, it will spend the rest of its economic life in his portfolio, Even some of his Share holdings are looked at the same way, and for the stocks he does finally sell, turnover is slow.


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## craft (16 July 2017)

kid hustlr said:


> I find this passive / active investment discussion strange. Even the articles I'm reading don't actually outline the discussion.
> 
> Are people suggesting passive investment is bad because:
> 1. It's leading to higher valuations as retail investors pile in unaware of risks? or
> ...




Good thoughts KH.

If passive is done by the math, ie. Broadly and consistenetly over the long term then it must beat the average of active participants by the amount of expenses incurred by active participants. 

Active should be able to acknowledge the above. Its the bench mark above which you have to measure yourself to see if you are winning at the less than zero-sum active game.

Active is aslo probabily right in thinking consistently over the long term is going to prove toublesem to some who are jumping on the band wagon now (jumping on the band wagon is contridiction of cosistency required of passive in the first place) but will eventually fail to stay the course of passive investing - setting up varying fund flows which can be actively exploited. That is not a failing of passive investing theory, as you alluded its a failing of implementation.


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## craft (16 July 2017)

Value Hunter said:


> craft said: ↑
> To achieve 2) he specifies
> A (broad, low cost) *index* fund bought *consistently* over a *long period* of time.
> All three elements are important.
> ...




There are only two components to altering your return from the market. Selection and timing. Selection is made passive by goint broad and cheap. Timing is made passive by consistency over a long period.

So yes if you want a active manager making the selections for you and think they will justify their  costs, you probably should still dollar cost average your entry and exit to make your timing as passive as possible unless you have some timing skills. With out a framework emotions make most people bad timers.


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## craft (16 July 2017)

Value Hunter said:


> Craft, if after the conclusion of the bet another identical ten year bet started and you were forced to pick one side to bet on (lets say you placed a $10,000 bet) would you back Buffett or his opponent?
> 
> 
> In regards to Buffett not jumping into renewing the bet, the current bet is not yet even officially over, lol. Besides he has already proved his point why would he need to prove it again? Also would his opponents take the same bet if it was offered again? I am going to say no.
> ...




VH seems a bit of a ramble here, some points seem to contradict each other, but to answer your specific questions to me.

Would I back Buffett if he entered another bet?  I would have to have a look at the details to make up my mind. We are at a different point of the resource vs value add technology cycle and demand vs consumption cycle then when the original bet was made.

I don't expect another bet to be made although if he could find a counterparty who promoted another layer of costs so as to trade in and out of the fund of fund managers based on a technical overlay, to improve the outcome - you never know.

There was  clearly an active component to the bet because of the single entry and exit point. I think he's wedded enough to showing the benefits of passive investing to not make a lower probabilty active call and undermine his point - especially now that the original worked out well.

I don't necessarily promote passive - I just think everybody should be able to acknowledge the reality of the math so they can make an informed decision on what best suits their passions and skills. 

_[perhaps the real reason I talk about passive investing is that I have made a lot of money beyond what passive would have delivered. I prefer that money comes from arrogant knobs that knowingly enter the battlefeild rather than nice people that naively and unpreparedly enter the lions ring]._


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## Value Collector (16 July 2017)

I was reading buffets 1979 annual letter this morning, and the top paragraph of this page shows how his style of "active management" is still quite "inactive" the hedge funds would be rushing to sell or hedge or some other hyper active behavior, they couldn't stand the thought of having a slow year. Buffett meanwhile just took it with a grain of salt and stuck to his plan.


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## kermit345 (17 July 2017)

I'd back Buffet (passive) again and again if the bet was done in the same manner. My understanding is that the bet was Passive (low cost index ETF) vs fund of funds. As I stated in an earlier post over a 10 year period approximately 21% of active funds outperformed the index in the US and whilst you can say its only relative to that start and end point - from my readings this % stays relatively consistent across rolling 10 year periods. This is based on singular funds outperforming the index, so as soon as you take a fund of funds approach you're almost certainly going to underperform the index over 10 year periods.

Lets say each 'fund of funds' contains 5 active managers, there's a good chance that 4 or even all 5 of these will underperform the index whilst its highly unlikely that 2 or more will outperform. The higher the number of funds within the fund - the more chance it underperforms as it will become less and less likely that the fund concentrates on the active funds that outperform.

I don't think Buffet got lucky or was smart with the timing at all and its highly likely he would've won the bet no matter when it was taken. Without knowing what funds were used within the fund of funds its impossible to test alternative start dates but you can even look at the results at the moment and only one of the 'fund of funds' are even within cooee of the passive investment.

I assume we all somewhat agree that passive over the long-term will outperform active managers and in particular a group of active managers (ignoring picking stocks yourself). Therefore the questions I ponder like SKC posed are:

1) How do we take further advantage of this assumption? - i.e. like I suggested do the biggest stocks simply get bigger at an accelerated rate to the broader market as they are typically constituents of the most passive funds AND have the largest market caps which therefore increases their weighting within the passive funds.

2) How will it potentially come undone and what would be the consequences (a lot of guess work involved here)

Personally I think they are the two important questions.


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## Faramir (16 October 2017)

http://www.thebull.com.au/premium/a/70113-the-case-for-active-asset-management.html

Playing devil's advocate here. I do not believe in this article. So I am looking for counter arguments to put my mind at ease.

*The case for active asset management*
Something that got my eye:


> We also find that some of the benefits of active management have been overlooked. Active managers:
> • Hold companies to account
> 
> • Help to direct capital into faster-growing industries
> ...




The last paragraph:


> However, investors need to recognise that active performance is cyclical: selling out of a strategy with a strong philosophy and process after a short period of underperformance risks locking in that underperformance. But the potential value added from active management remains a critical tool in maximising return from a broad portfolio, and we believe that active management will in time start to regain share from passive.




I actually do not have any EFTs and I have 9 stocks. If I knew what EFT to buy, I will probably buy it and save myself much angst. Also I have been stung by a manage fund before and I feel very resentful or should I say regretful in making a decision to put money into a MLC product. So I believe in passive over active.

So please provide some counter arguments in the above article link. When I read it last night, I thought this can't be 100% true. OR someone can tell me this article is very valid and I choose active over passive. (Actually I won't, I prefer to choose my own stocks). At least please tell me what is good about this article or what has been overlooked.

Thank you.


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## kermit345 (20 October 2017)

I'll dot point my reasons for preferring passive over active these days with a side note, there are some good factor investing funds out there now which seems to be the new flavor that tries to take the best from both worlds and with good reason. Note i'm not going to refer to any articles or back up my statements with direct facts, its just based on what i've read and learnt along the way, but if you search around enough you should be able to find articles or data that support my notes in some way.

- Only around 20-30% of active funds outperform passive funds in the equities space when talking 5 or 10 year return periods. It's also been shown that of these 20-30% only about 30% continue to outperform, so picking the best active manager right now essentially only gives you a 30% chance he will continue to be for the next 5 years.

- Active funds cost more, typically passive funds will cost you around 0.20% whilst active funds are typically anywhere in the 0.80% to 1.50% range (particularly higher for international managers). That's a lot extra to pay in fees for a fund that only has a 30% chance of outperformance.

- Active funds can often vary the level of their investment considerably, for example you may want 50% of your portfolio in aussie equities but your active manager may think there aren't enough opportunities around in the moment and holds 20% in cash, thus only 40% of your funds are ACTUALLY in aussie equities, thus you might not even be taking the level of risk you actually wish to - never an issue with passive. 

- One area active managers can provide better returns is small companies due to the ability to sort out majority of the unprofitable junk that an index doesn't do, however once an active manager in this space has any form of success their FUM grows and they typically have an inability to move in and out of the small companies anymore. Hence either capping off to new investors or becoming large cap centric just like all the other managers that underperform.

- The above has focused on equities but essentially many of the same stats and views apply to property and fixed interest / bonds.

My view - Use passive or factor investing for your fixed interest, property and large cap equity positions  within your portfolio and either invest yourself or find a quality manager in the small cap space. The passive part of the portfolio is incredibly easy to do with the range of vanguard or other ETF's available.

Anyhow thats all just my view, people will differ in opinion and thats fine but after the research and data i've seen i can't see my view being swayed anytime soon. The only way I can see active potentially becoming appropriate again is when the passive investment has got to the point that it makes up a huge chunk of the market which provides some opportunity via active maneuvering. That's yet to happen in my view but it could in the future as passive continues to be where the majority of funds flow.


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