Friday, December 11, 2009
I wanted to follow up on yesterday’s video about active versus passive investing. In the video I made the case for a third path, really I’ve been making this point for a long time, of making an attempt to sidestep when markets go down a lot.
Throughout these conferences that I go to there is very little attention paid to things like defensive strategies or managing volatility when it is these things that many people care the most about. A couple of years ago I asked a question to a panel about how they manage volatility and none of the three did anything like that.
We can debate where the line is between art and science where investing is concerned but it is an evolving discipline. The tools at our disposal evolve, the relationships between various markets evolve as do the relationships between the various asset classes. It is likely that we are living through some sort of evolution of the US’ role in the world economic order right now.
In these types of posts there are invariably comments where the reader sees no need for whatever; country selection, defensive action, sector funds whatever. OK I guess, but to the extent you feel differently there are choices that can be made and tools that can be utilized that some folks do use but most do not.
If you somehow pull off Serrapere’s 75-50 in your portfolio (trying to capture 75% of the upside but only 50% of the downside) then you are obviously getting a fantastic risk adjusted result which will become very apparent after a full stock market cycle. The quest for alpha does not have to mean being up 80% in an up 20% world. Much to my shock not enough people get this.
I believe people lose sight of the really big picture which is that hopefully they have enough money set aside when they need it. The amount of money you accumulate for whatever your goal is will come from some combination of savings, growth and avoidance of truly stupid actions. That is the really big macro. A decent risk adjusted result, and what Serrapere targets is better than “decent,” or put another way smoothing out the ride goes along way to removing the most common obstacles to the desired result. You can either be open to the various tools that give a better chance for smoothing out the ride or not but the framing of how we look at passive versus active is, IMO, evolving into an antiquated discussion.
Posted by Roger Nusbaum at 6:22 AM