Active investment management

Traditional investment strategies include active investment management, the predominant model for investment strategy in large financial services corporations, brokerage firms, insurance companies, banks, wirehouses, mutual/hedge funds and other investment companies.


Active management might best be described as an attempt to apply human intelligence to find "good deals" in the financial markets. 

Active managers try to pick attractive stocks, bonds, mutual funds, time when to move into or out of markets or market sectors, and place leveraged bets on the future direction of securities and markets with options, futures, and other derivatives. Their objective is to make a profit, by doing better than they would have done if they simply accepted average market returns. They believe the market is inefficient and that inefficiencies can be identified and exploited. In pursuing their objectives, active managers search out information they believe to be valuable, and often develop complex or proprietary selection and trading systems. 

Active management encompasses hundreds of methods, and includes fundamental analysis, technical analysis, and macroeconomic analysis, all having in common an attempt to determine profitable future investment trends.

Americans pay millions every year to financial advisors, psychics, forecasters, & assorted hucksters & gurus claiming to have some insight into the future. People seek financial forecasters in a desperate attempt to avoid confronting the black hole of an unknowable & uncertain future. They want to believe these soothsayers have enough foreknowledge about financial events to make a meaningful difference. Unfortunately they don’t.

There is overwhelming evidence that the application of expertise and diligence in efforts to predict or "beat the market" ordinarily promises little or no payoff or even a loss of principal after taking into account research and transaction costs. 

The vast majority of active fund managers do not beat the benchmark market indexes they are compared with over a sustained period of time. Studies indicate only a minuscule percentage of active managers have been able to accomplish this (e.g. Peter Lynch - Fidelity Magellan Fund 1978-1990 or Bill Miller - Legg Mason Capital Management Value Trust 1991-2005). Considering the tens of thousands of managers trying to best the market over time, it can be easily argued that this performance is no more than could be expected from the laws of chance (or random luck). And even in the cases that do occur, there is no way to identify these individuals in advance in order to profit from it. 

“Thousands of experts study overbought indicators, oversold indicators, head-and-shoulders patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of constellations through the heavens, and the moss on oak trees, and they can’t predict the markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”   ~Peter Lynch

Stock-picking, market timing & attempting to predict future investment trends are essentially games of chance active portfolio managers play.  The odds for success are long. This is simply gambling or speculating with your hard earned money. When an active manager materially underperforms a benchmark, the investor ends up with less wealth needlessly.

Investing in a professional, business-like fashion has nothing to do with picking hot stocks, predicting the future, guessing, taking hot tips or any of the other typical approaches that pass for financial advice. Instead, it is about following a disciplined, methodical investment strategy based on a known, positive, mathematical expectation. 

Successful investing is about probabilities – not prediction. Decisions should be based purely on known facts with the objective of managing risk & maximizing mathematical expectation to provide a level of statistical certainty where the odds work for you rather than against you. 

We don't forecast anything other than uncertainty, because being wrong can hurt our clients by reducing their wealth. Unlike Wall Street's casino culture, we won't bet our clients' lifestyles on the slim chance that we can be right (even 50% of the time).