Active(enterprising) vs Passive(defencive)

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Active

Passive

• What is “Active” management?
– Trying to add returns above the market

What is “Passive” management?
– Equal the market return

Active management refers to the investment style in which a portfolio manager builds a portfolio out of handpicked, specifically chosen securities.

Passive management refers to the investment style in which the manager seeks to mimic or track the performance of an index

Active management is the art of stock picking and market timing.

Passive management refers to a buy-and-hold approach to money management.

the market failure hypothesis. According to this view, prices react to information slowly enough to allow some investors, presumably professionals, to systematically outperform markets and most other investors.

efficient market theory which says that the prices are always fair and quickly reflective of information

Active fund managers will generally aim to hold the stocks that are likely to make money and are not compelled to own stocks with poor prospects."

passive investing is a more risk-averse approach The trouble with trackers is that the majority will hold all or most of the stocks in their respective indices, even if there are valid reasons not to hold certain stocks. This can actually make trackers more volatile,"

the active fund management approach is better than passive for the average high risk tolerance investor.

the passive fund management approach is better than active for the average low risk tolerance investor.

Good active management is clearly of great value, but it really only makes sense for inefficient asset classes. If you want to be a good active manager, find an inefficient asset class and then work your tail off! Good active managers outperform their benchmarks over the long-term and every good active manager knows how hard this is to achieve.

Indexing is likely to achieve better net results in efficient asset classes.However, the more efficient an asset class is  the harder it is to consistently outperform over the long-term.

There are many sources of inefficiency which can create opportunities for active managers: Inefficient asset classes are found where it is hard to get access to the market or to the deals themselves, difficult to obtain information or prices, hard to negotiate or trade the assets successfully, or generally hard or expensive to develop the skill or technology necessary to participate.

It is also the case that many asset classes simply do not lend themselves well to passive investing. Imagine how one might try to construct an investable passive index for investing in venture capital, low-cost housing, Missouri farm land, or sculpture. This does not mean such things haven’t been tried, but the products have not done much in the marketplace.