{"id":1015,"date":"2011-08-05T01:59:09","date_gmt":"2011-08-05T06:59:09","guid":{"rendered":"http:\/\/www.holypotato.net\/?p=1015"},"modified":"2012-11-22T22:40:43","modified_gmt":"2012-11-23T03:40:43","slug":"active-investing-potatos-valve","status":"publish","type":"post","link":"https:\/\/www.holypotato.net\/?p=1015","title":{"rendered":"Active Investing – Potato’s Valve"},"content":{"rendered":"

I’ll jump on the active vs. passive investing posting spree. To sum up for those that don’t follow a hundred other blogs, there was something negative said about passive investing, in particular that it shouldn’t be attempted in a bear\/sideways market. Well, how do we know we’re in a bear\/sideways market? Passive investing is, IMHO, still a great choice then, as making that call on market direction is too difficult for most of us to even attempt (not that that stops us). So, good counters by Canadian Capitalist<\/a> and Michael James<\/a>.<\/p>\n

I’m a bit torn on the whole matter myself. For one thing, I’m not entirely an active or passive investor, having my portfolio split into the active half and the passive half (though the halves aren’t quite equal, with the larger half belonging to the active part). <\/p>\n

I completely see the logic of passive investing for the average person, and that’s all I recommend to people who ask what to do with their money. For the majority of people out there it is the right way to go: control your fees, be happy with “average” (though indeed, one can do better than the average investor with a passive approach), use your time to live your life. Or to put it another way, play to not make any errors.<\/p>\n

But at some level 1) I think that superior returns can be attained (e.g.: the superinvestors of Graham-and-Doddsville<\/a>) and 2) I don’t think that I am average, helped in part by 3) the fact that my dad is an active investor who has out-performed. The average investor\/mutual fund has a short time horizon, lack of patience, chases returns, trades too much, over-values growth, under-values strong balance sheets, and is emotional. So I don’t think it’s a wonder that the average investor actually underperforms a passive portfolio, and moreover, I think that even a diversified passive portfolio can be improved upon. The problem of course is the Lake Wobegone effect: the average investor believes they are above average, and then makes mistakes that leads to underperformance.<\/p>\n

There’s a tough line to walk there: value investors can and do underperform for long periods of time while waiting for the voting machine to turn into a weighing machine, so I want to be patient and stay the course if I have confidence in my analysis even when the market moves against me. But, I don’t want to brush away a lack of skill as a temporary underperformance. So I’ve created a set of rules for myself I call Potato’s Valve<\/strong>:<\/p>\n

The money flow for the passive portfolio is like a one-way valve: money only goes in (until retirement). It gets first crack at new savings to at least make the registered account contributions.<\/p>\n

The active portfolio started with most of my previous life savings, and can get a portion <\/em>of ongoing savings as long as it’s performing. When out-performance stops (as it did in the first half of this year<\/a>) the valve gets turned off and new savings go exclusively to the passive portfolio.<\/p>\n

That protects me against the hubris of continuing to think I’m above-average when the evidence says otherwise. The passive portfolio will continue to grow and will be there in the background, a cushion when I fall down, and only a tiny drag if I do make it big. Since I’m still young and very much in the savings\/accumulation phase of my investing career, my future contributions will be more than my current portfolio size, so even if I under-perform with my active portfolio (or even blow it up!) it won’t totally kill me, as long as I eventually put most of my assets into a passive portfolio that does work. Potato’s Valve should keep me investing in what has the best chance of giving me good returns in the future: my active portfolio if that continues to do well, or the passive if it doesn’t (assuming that active investing has any kind of chance — if it doesn’t, the valve will keep me from chasing that for very long with very much capital) while protecting me from myself.<\/p>\n

Part of this comes back to what Michael James mentioned in the comments: an active investor has to pick a benchmark and compare how well they’re doing, and have some idea of what poor performance is. It makes no sense to spend the time doing active investing just to get a poorer result than you could get with a diversified passive portfolio, and not even know it! More to the point: if you can’t track your own past investment performance, what chance do you have of projecting the performance of companies in the future?<\/p>\n

[Yes, this is the first time I’ve ever call that rule that, but I figure with a dumb name it might catch on]<\/p>\n","protected":false},"excerpt":{"rendered":"

I’ll jump on the active vs. passive investing posting spree. To sum up for those that don’t follow a hundred other blogs, there was something negative said about passive investing, in particular that it shouldn’t be attempted in a bear\/sideways market. Well, how do we know we’re in a bear\/sideways market? Passive investing is, IMHO, […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,16],"tags":[],"_links":{"self":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts\/1015"}],"collection":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1015"}],"version-history":[{"count":0,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=\/wp\/v2\/posts\/1015\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1015"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1015"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.holypotato.net\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1015"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}