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December 10, 2012


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Great feature, thanks for sharing. Disappointing, but good to know.

Very in depth! This just reinforces my thought that I don't have the time or skills to pull it off. I will still learn more but for now I am buy and hold. When I know more and have more time I may try to time the market a little bit but I think buy and hold is best for my situation right now.

Even if you are the next Warren Buffett you need over half a million to invest before it is worth your time.
-Rick Franics


"Personally, this is disappointing to me, but not surprising. I had hoped that active investing was available for the masses (or at least a good sub-section of the population)"

Active investing may be available for some people but the hope that it could be available for the masses is mathematically impossible. When it comes to the masses, it doesn't actually have anything to do with the difficulty of it, it's simple math.

The idea of active investing is to beat the market. The market is the average of everyone's results. If the average was a 10% return and 75% got a 13.333% return the other 25% would have to get 0% to get a 10% return average for the market. I think most active investors are trying to do better than and extra 3.333% too.

If 50% of the investors got a 20% return then the other 50% would have to get zero and of course if 50% are getting zero they would eventually quit playing.

If 25% got a 20% return then the rest would get a 6.666% return. I suppose that is a possible scenario but likely 25% don't do this. 1% do it and then the other 24% struggle with it doing little to nothing and the other 75% get about a market return.

People need to realize that out performance by definition must be for a minority. Hard work combines with unique talents to allow it to happen. That is true of nearly every incidence of vast out performance.

Do you have what it takes to put in the huge amount of work and do you posses the right talents to put you in that upper echelon.

Probably, many of us overestimate our abilities in both areas. How much work is hard work? More than you think. How much of the unique talents do I need? More than you think.

Wow, that sounds super stressful. It's like another full time job, but I guess if you're good at it, it would be worth it.
At this point, I would be happy with 6-7% gain over the long haul and enjoy my life with my family.

Good post and very keen insight. I would agree that it takes a very unique individual to be successful at this. I think it also takes someone who is strongly able to separate emotions from their investment decisions.

Apex --

And when you factor in post-cost returns (which is the "real money" part of investing), the chances to do well in active investing look even worse.

Have you not heard of the whole quant revolution? Algorithmic trading? Dark pools? All of that is new and makes it much much harder if not impossible to beat the house.

I've finally come to the conclusion that investing in public markets is merely a matter of find a good risk versus reward point for ones situation (accepting potential higher reward means higher risk precisely as averages and Standard deviations relate them).

An investment has a price, one that factors in future potential, that the market has come to an agreement on. To assume I know that price is incorrect, and in what direction, given the size of the markets and the amount of time and effort put into them, just doesn't seem realistic. I think Old Limey alludes to this when discussing how things have changed, the information to determine value used to be much harder to come by and maybe those that worked hard enough could gain an edge. But know I think that would require inside information above and beyond what is legal.

Your math fails to account for leverage and makes a number of basic assumptions that can adjust the analysis. For example: not every player is 100% invested everyday.

($10mm 10:1 leverage, 3% return= $3mm = 30%. SPY YTD return of 25%. The portfolio under performed, but still out performed.)

Post cost- sure its a very really expense, but its pretty minor. $7 per trade (expensive TV add), 100 shares, $30 stock.. Stock has to move 14 cents or .5% to break even.


I understand what you are saying regarding leverage, but that doesn't have anything to do with active trading and is irrelevant to the basic math that I was pointing out.

Leverage is used by people to try to get better returns but that is not the same as active trading. Certainly people using margin are probably often active traders but that doesn't make margin an active trading strategy. You could use margin without being an active trader.

It's also the case that the use of margin does not change the math of average returns. If the average returns of the market are 10% and there are people who are getting 20% returns by being active traders (based on their trades not based on margin because this post is not about margin. To my knowledge Old Limey never used margin in his active trading). Then to account for those 20% returns other people have to get less than 10% in order for the market to average 10%. That is simple math and it is irrefutable. If 50% of the money invested in a market returned 20% the other 50% has to return 0% to get a 10% return.

In regards to margin, notice that if someone uses 50% margin to put 10K of their money into 20K of stock then 20K is invested in the market, not 10K. The fact that they borrowed the other 10K to use leverage to increase their returns has nothing to do with active trading. The fact that their return on their original 10K is higher doesn't change the fact that 20K is invested in the market, not just their 10K. In order to outperform the market based on active trading, the margin trader has to beat the market on the 20K that they put in the market, not just based on the 10K that was their original money.

Their increased returns are because of leverage. If you want to make an argument for increasing returns via margin accounts, that is a separate argument and one you can try to make, but that is not what this topic is about.

None of this has anything to do with active trading. Using active trading to increase your returns gives the math results that I already laid out.

I think Old Limey was spot on, not just abuot active inesting, but the state of the world in general.

I agree with the basic point here from Limey that success in active investing is difficult and rare. I mean I think Limey's own results would put him above >95% of the mutual funds out there. The vast majority of people can't hope to emulate such great success.

We all like to think we have what it takes to beat the average but about half of us don't.

Tyler, I think most people would be really stupid to combine leverage with active stock trading.

One factor that some people overlook when comparing "Active" investing with "Buy and Hold" investing is the volatility and maximum drawdown that their portfolio will experience.

For example let's just look at the last 5 years and compare Vanguard's S&P500 fund called VFINX with my portfolio.

Near the end of 2007 the chart patterens of the indicators of market health for the NASDAQ and the NYSE that I use were looking really ominous with a pattern of lower highs and lower lows. I immediately decided that the Risk vs Reward was not worth it to stay in funds that invested in the stockmarket so I moved entirely into bonds and bond mutual funds.

First I need to explain two simple market quantities.
ANN is the Annual percentage rate of return for a portfolio over the period being examined.

MDD is the Maximum possible DrawDown of a portfolio over a period assuming that you bought it at the highest point of the period and sold it at the lowest point of the period.

Here's the comparison of VFINX with my portfolio for the last 5 years.
VFINX --- ANN= 0.81% --- MDD= -53.96%
Me -------- ANN= 4.41% --- MDD= -0.81%

What would you rather be? A Buy and Hold investor that is agonizing over a 53.96% drop in the value of his portfolio and not knowing what the fture holds. Or would you rather be an Active investor that did his homework, didn't like what he saw, and moved from a volatile stock portfolio into a far lower volatility bond porfolio until his indicators gave him the confidence to get back into a fund that held a basket of stocks.

OK! My portfolio only gained 24.11% over the last 5 years but it was a worry free 5 years and I still made a lot of money.
On the other hand the Buy and Hold VFINX investor only made 4.87% over the last 5 years and was worried sick all through 2008 and maybe even threw in the towel near the bottom of the market.

There is a lengthy learning period for becoming an active investor but once you have acquired the skills, it takes very little time to look at the parameters you are following and decide what to do. In my own case I have never got back into stocks because I am making plenty just being in bonds and the chart of my portfolio over the last 5 years looks like a straight line going up at the rate of 4.41% per year and I only follow the stockmarket out of curiosity.

I don't have the time for very active investing. But, I've been able to beat the market by a combination of value-oriented investing, special opportunities, and looking in areas where most people don't. Most of my bad investments have resulted when I've strayed from that approach.

My first stock purchase was Philip Morris right after it crashed down 50% because of the big tobacco settlement. As much as I hate smoking, I knew the company would still make gobs of money.

Another early hit for me was buying "dual-purpose closed-end funds" when they were to be legislated away. They were little-known and trading at big discounts. The funds were going to be forced to liquidate or open, either way eliminating the discount. Their stock holdings were pretty conventional, so I was practically guaranteed to beat the market by the amount of the discount.

Another example was with the Clinton health care proposal. Health care stocks crashed. Just buying health care stocks then would have been pretty much a no-brainer, since health care is only going to grow in an aging country. But, instead, I bought a closed-end fund of health care stocks. It was at a huge discount, plus it had enormous tax loss carryforwards, both almost guaranteeing that it would beat health care stocks in general.

Nowadays, my main recommendation is master limited partnerships (MLPs). Most are in relatively safe slow-growth parts of the energy industry, but they come with two big tax advantages. First, the companies themselves don't pay taxes. Second, while they pay out lots of cash to investors, you get to defer taxes on most of that.

As a mostly buy-and-hold investor, I've ridden most of the crashes down and then back up, for better or worse. With the 2008 crash, that meant I was down big. But, I was also reinvesting my MLP distributions at prices where they were paying up to 21% yields.


You have been a proponent of funds like PIMIX/PONDX or PTTDX in the past. Presumably you are still in PIMIX, is that correct? Do you intend to just stay in a fund like that and ride out any bumps or do you consider it risky enough to watch it with respect to 50 day EMA etc with plans to cycle out of it if it pulls into a downward trend?

We are discussing a complex system with numerous variables. The basic math used, leads to basic assumptions that only work on paper.

Money flows in and out of global markets every second of everyday and returns for market participants is not bound by simple math presented as irrefutable. Returns are not as cut and dry as only n participants can be in the top 25%. It’s far more abstract that your standard distribution of returns allow. For your math and conclusions to be valid, at the very least you need to prove markets are zero sum and deal with the variable time.

I think this assumption is at the core of the problem "The market is the average of everyone's results". If we have n investors, I agree with your math when they are compared to each other. But this statement and math does not hold true when you compare all of the investors to the market average.

Specifically, active trading can play with the assumptions of time. What is the annualized return (are we dealing with annualized returns?) of a one tick trade in a millisecond? Even if we agree on year end results, one short term trade (day, week, month) can be bought then sold and change the distribution of year end performance.

What about a market maker who buys from a client outside the bidxask and sells at the bid ask? How does an arb position factor into the distribution of year end returns?

Regardless, you do discuss market returns and then discuss investor returns so my point was not as off topic as you make it appear. Leverage among other variables will cause a dislocation between the two. In order to outperform the market, a leveraged investor does not have to outperform the market returns. (You should know this... you deal with one of the most absurdly leveraged asset class on the planet.) The returns to the investor are not market returns.

I might agree with you if everyone bought and sold at the same time, shorting wasn’t allowed, and there was a clearly defined holding period.


I think most people would be really stupid to combine leverage with active stock trading.

What if they could lower their volatility by actively trading? What if they had a 15 Sharpe ratio? Whouldnt they be foolish not to add leverage at that point?

Let me stress, I am not make any argument that people should or should not actively trade. I think Old Limey's analysis is sufficient.

I said "most people". Most people lose money when actively trading stocks and leverage would just compound their losses.

Sure if you're a good investor then leverage might make sense. "most people" are not good investors. They don't have the time, knowledge, patience, luck .etc. Borrowing money won't help the matter.

The true test of skill is replication. Limey himself says it is unlikely he could replicate his prior return history.

this post alludes more to luck and being in the right place (retired) at the right time (beginning of a record bull market). As is mentioned. skill is impressive, but all cars are fast going downhill.

Further, it seems Limey's business venture played a major part as well.

And the most important aspect of this post is not the accrual of assets, but the cash flow it provides. There are several investment options that do not require market participation, yet still offer two important distinctions.

They create a similar cash flow.
They can be replicated even now.

That is what I am interested in.

"What would you rather be? A Buy and Hold investor that is agonizing over a 53.96% drop in the value of his portfolio and not knowing what the fture holds. Or would you rather be an Active investor that did his homework, didn't like what he saw, and moved from a volatile stock portfolio into a far lower volatility bond porfolio until his indicators gave him the confidence to get back into a fund that held a basket of stocks."

That presumes that you can unambiguously determine the market health really know it is time to get in/out of the market. From what I've read on market timing- it is just as hard to time the market as it is to pick superior stocks.

If market timing wasn't so hard then shouldn't the research departments for the actively managed mutual funds been able to detect the impending market crash? If they did predict the crash then the funds should have sold all of their long holdings and shorted the market just in time to make a huge killing.

Even if it is really hard at least some of the research departments should have been able to accurately predict the downturn. Yet, I haven't heard of any funds doing that... and reaping the insane returns. Have you?

-Rick Francis


Even if they could predict the market sell off, they are not allowed to go to cash or sell short. Most funds are at best allowed to hold 10% cash. Not saying the overpaid geniuses could predict market sell offs, only that they are really unable to do anything about it if they could.

Market timing is not a perfect system by any means. For example, when the Nasdaq peaked in March 2000
I obviously didn't sell everything on the first really bad day.
My portfolio at the time peaked at $3,369,053.
The next day it dropped to $3,350,936 so I sold the smallest of my four funds.
The next day it dropped to $3,229,379 and I sold another fund.
The day after that it dropped to $3,144,898 so I sold a third fund.
The day after that it dropped to $3,021,835 and I sold my last fund for a four market day loss of $347,223.

The Nasdaq 100 index followed the bubble the best.
On 3/24/1997 it was at 802
On 3/27/2000 it was at 4704 ---- A classic peak formation.
On 10/4/2002 it was at 815

By getting out completely within the 4 days after the peak I captured most of the big gain, went on to make more in conservative bond investments and finished that period with a gain of 297.75%.
If I had been a Buy and Hold investor I would have loved the ride up, then lost it all on the way down finishing the period with a loss of 21% instead of a gain of 297.75%.

That's why I like Buy and Hold for income investments where you get all your money back when they mature while earning interest, paid twice/year. However I have a very low opinion of Buy and Hold for funds or ETFs that follow a market index.

I still have PIMIX and PONDX in the 4 IRAs that I manage and will be adding to them as some corporate bonds will be either called or will be maturing in the near future. In the three Trust accounts I manage for myself and my son and daughter I am starting to put new money into a good muni and bond fund so that there will be money that is readily available when needed. The fund I have chosed is BCHYX pricipally because it's a hi-yield muni and is tax free for Californians.

I like concept of "level of effort". There is a cost to our time and energy, which can be described as level of effort. For what one would put into being an acitve investor, what guarantees are there that you'll do better than a market index?

I suspect that for most people, not just the average investor but even onse who are very interested in markets, the expected long-term value of active investing might not be so great. May be better to focus on one's work in order to have more money to invest in the first place, even if the so-called boring index funds.

@Old Limey

Do you track them with plans to get out if they appear to move into a downtrend by some measurement of yours or do you not do that with bond funds due to low historical max draw downs?

With individual bonds, when I buy them my intent is to hold them to maturity when I receive their par value of $1000/bond whilst receiving their interest for as long as I live or until they are called. Thus there is nothing to track since it doesn't matter to me whether their actual value goes up or down.

With bond funds it's quite different. Since I may sell some shares if I need cash I like them to be in uptrends even if I buy them principally for income.

The three I own are doing very well for the year to date.
PIMIX Ann=22.19% MDD= -.89%
PONDX Ann=21.88% MDD= -.89%
BCHYX Ann=13.14% MDD= -.91% free of federal tax

I would love to know how the returns and volatility on these three bond funds compare with the performance of the Buy and Hold community's stock based ETF funds. VFINX for example has ANN=15.91% but an MDD of -9.6%.

@ Old Limey

I see at least one area where innovation has not died and that is in Biotechs. A vast amount of discovery has come and will continue to come for many more years. In addition, Health insurance companies must be getting a big bump in the next two years. I wouldn't be surprised if Cigna makes many shareholders wealthy in a few short years.

@Old Limey,

I appreciate your response, but I am not really getting an answer to the question I am asking, so I am going to try one more time.

The explicit question I would like to know is if you actively today use some metric such as 50 day EMA to determine when these funds move out of an uptrend and if that would then cause you sell the entire position or at least large portions of it to move out of that fund until such time as you think it is safe to put money back in?

Maybe you simply don't want to answer that question which is certainly your right. But if you are not opposed I am curious if you still employ active trading strategies to these funds or if you have gone totally passive. The reason I ask is that the returns on these funds do not seem to indicate they are the types of funds that it would be safe to be passive with so that is why I would like to know.


I don't use a set trading strategy on any fund I now own. As long as I feel happy about its performance and that it is still close to its uptrend I don't worry if it drops as much as 1% over several days. Once I start to be concerned about it I immediately go to my database and use it to rank the ALL-BOND family and see if there's another fund that I want to change into. That's the great thing about bond funds, they have such low volatility that you have plenty of time to make up your mind what to do - this is the complete opposite of an individual stock and also far easier to deal with than volatile stock funds that can turn on a dime.

You're quite right about the innovation that has taken place in the medical field. This is my wife's 4th. surgery in 17 years and each time the improvements are very dramatic with new IT devices, new drugs, new surgical procedures, new patient care devices and new techniques, several of which I had never heard of before. This is of course a very new, first class hospital not far from Stanford University, so obviously there are benefits from living in a hi-tech place like Silicon Valley that wouldn't exist in a small town in rural America or one of Hawaii's outer islands. Another thing that you never think about when you are young are the great benefits to be had in your latter years from living in a single story home, close to all the amenities and services that you need.

Old Limey's strategy was a momentum strategy, in other words one that took advantage of the uptrending markets of the eighties and nineties. In more recent years markets have been trading sideways, which seems indeed less suited for Old Limey's strategy. However, that doesn't mean active investing is dead in this market, only that we may have to use a different strategy than Old Limey did.

I've been an active investor for the last 2-3 years. My performance isn't as good as the general market, but I'm learning from my mistakes, and this is not a sprint, it's a marathon. I do agree active investing isn't for everyone - it takes a dedicated and a bit of a contrarian person, I believe.

I generally don't experience stress from drops in the market if and only if I based my purchase on a thoroughly researched and conservative valuation for the company. The market would drop and I wouldn't mind - because I KNOW the stock will more than recover. It's when you start hoping that you're doomed. And you start hoping when you're not sure because you didn't do your homework properly. Ask me how I know :-)

One more thing that very few people are aware of: regular buying and selling triggers a tax event every time. If you buy and sell once a year after a few decades you're 30% or so worse off than the person who buys and holds an index fund. So show restraint in your transactions.

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