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Passive is the New Aggressive (Part 1)

Key Points

  • According to theory, on a forward-looking basis, stocks are priced such that each stock should offer its investors with the same risk-adjusted return as any other stock, irrespective of past performance.
  • Based upon this line of reasoning, outperforming the market is exceedingly challenging.
  • Given this, passive investing aims to keep investment choices to a minimum with the goal of selecting an appropriate benchmark and aligning investments as closely as possible to said benchmark, with minimal fees and cost.
  • Alternatively, active investing involves making purposeful decisions regarding the selection and timing of investments, in an effort to nevertheless outperform the market.

Continue reading → Passive is the New Aggressive (Part 1)

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Why invest in one thing over another? (Part 4)

Key Points

  • The Efficient Market Hypothesis has plenty of criticisms that are not only important to understand, but also have strong validity, and therefore should not be dismissed.
  • Boom and bust cycles provide strong evidence of pervasive market irrationality; nevertheless, this is not the same as knowing when irrationally exists and knowing when it will go away.
  • It is not enough to be able to spot irrationality because, “the markets can stay irrational longer than you can stay solvent”.
  • Rational and irrational investors may be unduly influenced by behavioral biases leading to the sustained, yet unpredictable mispricings of securities.

Continue reading → Why invest in one thing over another? (Part 4)

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Why invest in one thing over another? (Part 2)

Key Points

  • Whether you agree with it or not, having a sound understanding of the Efficient Market Hypothesis (EMH) is critical.
  • Making active investment decisions requires factoring in all relevant and available information that may influence future performance and risk. This is a daunting task.
  • Nevertheless, according the EMH, the market is able to do this seamlessly and instantly.
  • According to theory, the markets have a way of equalizing prices such that all investment opportunities provide similar risk-adjusted returns on a go-forward basis.

Continue reading → Why invest in one thing over another? (Part 2)

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Why invest in one thing over another? (Part 1)

Key Points

  • Fundamentally, investing is just putting money to work for future use.
  • When choosing between two investment choices of similar risk, pick the one that is more likely to lead to a greater return over your investment horizon.
  • However, according to the Efficient Market Hypothesis, consistently making the right decision on this is far easier said than done.

Continue reading → Why invest in one thing over another? (Part 1)