Putting the spice back into investing.

Quick Note

Friday, October 08, 2004
Work ate into most of my blogging time this week. I hope that regular service will resume as soon as possible.

Expensive oil? No way!

Monday, October 04, 2004
Markets are all about expectations - you buy stuff which you think will increase in value and sell stuff which you think will lose value. This basic rule holds true in the real economy as well - if a purchasing manager thinks that some vital resource is going to get more expensive, he might just buy more than he needs at today's price to hedge against rising prices in the future.

If we follow this line of reasoning we might just assume that sales of gas-guzzling SUVs would decline if people thought that high gas and oil prices are here to stay. This is not the case
General Motors Corp said its September sales jumped 25per cent, boosted by strong demand for its pick-ups and sport-utility vehicles.
GM said on Friday it sold 458,799 cars and trucks last month. GM's light-truck sales surged 38per cent to 283,161, while car sales edged up to 171,670. Third-quarter sales rose to 1.3million, up 2per cent.
GM, which has been aggressive with its sales incentives, said full-size pick-ups and SUVs both set industry sales records, led by Chevrolet and GMC Sierra trucks.
Consumers are looking at aggressive rebating on the one side and high gasoline prices on the other - the rebates seem to be winning. Time will tell who made the right call here. I guess most car buyers think that oil is going through an expensive phase right now which will normalize over the next couple of months. Otherwise today's cheap car might turn out to be really expensive a few months down the road.

Active vs. Passive

Friday, October 01, 2004
One of the things that keeps me wondering is why people actually spend so much time discussing why active management is better or worse than passive management. The Hypertextual Financial Glossary tells us that
Active portfolio strategy
A strategy that uses available information and forecasting techniques to seek better performance than a buy and hold portfolio.
Passive portfolio strategy
A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities.
The great bull run (remember that?) led quite a few investors to conclude that passive management was the way to go - most active managers didn't manage to add any value, so why should the average Joe pay them anything? Much better to just ride the index up.

Needless to say: the investment empire stuck back during the past years. Passive investors learned that tracking an index means tracking up and down. Guess what also transpired - actively managed funds came right back into the spotlight.

I personally think that the entire discussion "active vs. passive" is flawed. I would contend that investment is work - i.e. decisions have to be made. The questions that you should be asking are:
a) Am I knowledgable enough to make these decisions myself?
b) What do I want to achieve?
c) Do I have time to implement and monitor my investment strategy?
d) What instruments am I going to use to implement my strategy?
Now most non-institutional investors will probably want to attain an asymetric return profile - i.e. avoid losses and participate in the upside. This kind of strategy is very difficult to attain via passive means as passive investing is about as far away from absolute return investing as you can get. So anyone who wants to avoid losses will not be able to do so without a modicum of activity.

Even someone who doesn't care about absolute returns and uses passive (index tracking) instruments to achieve his goals will not be able to implement pure buy-and-hold. There will have to be some measure of rebalancing over the years.

Investing requires at least some input from the investor. Period.