“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
Warren Buffett
Investors may have recently heard negative reports on active investments; the sound-bite from Standard and Poors that 74% of Australian active equity funds under-performed over 10 years after costs. Investors may also have heard Warren Buffett, the richest investor in the world who made his money in active investments, has advised his wife to switch her investments to passive index funds in the event of his death.
This may be happy news to some as it seems to neatly resolve the conundrum of active versus passive investment. It would seem the safest, more profitable and easiest option is to place ‘set and forget’ investments in passive index funds.
However, both of these negative reports needs to be understood in context:
- Superficially it may seem Buffett doesn’t have faith in active investments yet he does. He made his fortune using an active value investing approach. In making this statement he’s saying passive is also good depending on the investor and the circumstances; and
- Within the S&P statistic that 74% of funds under-performed there would be a high number of supposedly ‘’active funds” that “hug” the index and are not truly actively responding to market conditions yet charging their clients higher fees for purposive active fund management.
- While 74% of funds under-performed what about the other 26%, how to identify those funds? Value investors, like myself, can identify the 26% of active managers who do outperform.
If you’re insightful enough to be able to identify and invest for the long-term with the 26% who outperform passive funds than you’re in a better position.
In the short term, an active value investment strategy can under-perform especially in boom markets. Even Buffett, the King of Investment, was thought to have lost his Crown and been behind the times during the ‘tech bubble’ in 1998-2000. Over that period he wasn’t achieving the returns of other fund managers who were investing in technology and all the future hype. Yet, when the bubble burst, there was Buffett achieving the sort of long term returns that are an investor’s dream. How did he do it? Active investments with a judicious, selective VALUE investing philosophy.
The essence of value investing is buying stocks at less than their intrinsic value that you believe will outperform the broader market surroundings. When you are with a financial planner or active fund manager who has a value investment philosophy and understands the long-term market cycles you are in safe hands.
You will see more articles from me about value investing. Most people I see are looking to invest for the long-term and grow their investments. They may have a savings nest-egg or want to make the most of the opportunity to grow their superannuation.
The simplistic view of active versus passive investments is that if don’t know what you are doing and you don’t want to be bothered, putting your funds in a low cost index fund and leaving it there for the long term is an acceptable way to invest and certainly better than leaving in cash. However, if you want your money to have the potential to outperform the average then you need the advice of an experienced, qualified expert and to spend time understanding exactly what you are investing in.
If you are unsure of which style of investing is right for you, or would like financial advice on how to get started, contact us.