Active investing and passive investing each have its strong suit. What is best for you and how do you adjust your investing philosophy to maximize your wealth?
Hello everyone and happy fourth of July to you, you know aren’t you glad we are living in a country that is free or we can have opportunities, really the sky is the limit, I know there is a lot of negative talk about America and certainly there is a lot of politician who like to you know maybe sound like we are the worst people in the world but what a great country to live in to be able to really be or do anything that you want to do in life. I mean it is really exciting and I am so grateful for this country.
[00:01:04] You know when I listen to some of those patriotic songs, some of them really get to me, one of them that gets to me is America the beautiful world, it talks about the soldiers and it says something to the fact that they love liberty more than life, I mean who are these guys, I mean the life of our soldier who love liberty more than life and willing to give their life for our freedom. I mean those guys are just amazing to me and I am really grateful for them and I hope today, independent day, hope you just take a second and look at all the wonderful things that we have in our country and then take advantage of it.
[00:01:58] So anyway have a great fourth of July and enjoy the fireworks. You know today I want to talk about the difference between active and passive investing, what I don’t think a lot of even financial advisor understand is really what that means. When you look at active portfolio manager, basically what they are trying to do, active being the keyword here, they are trying to actively beat the market or a specific index which is called the SNP 500.
[00:02:34] Active portfolio management is all about moving money, trading, getting in and out of things, riding the wave up, getting out before it heads back down and trying to actively manage that money so that it outperforms the index or a benchmarks or the market as a whole.
[00:02:53] Passive portfolio management, what it tries to do is mimic the investment or the index, so try to just do as well as the index. And although those might be accurate description of active and passive portfolio management, it is just not what we like to do when it comes to active or passive management. The reason is this, I think both those things are really different to achieve, now certainly if you want to just be a passive investor, go by the index, get it as cheap as you possibly can, don’t pay fees, don’t pay advisors, don’t pay a broker, just get a least expensive ETF or portfolio of the index and just leave it, then you are probably going to do pretty close to the index.
[00:03:57] But don’t ever expect that you would do better than the index and for some that might be okay. Active portfolio management is much tougher to be able to think that you are going to jump in and jump out of things and actively manage that money and then eventually outperforms the index after the fees and the cost and commission that goes along with active portfolio management, that is a little bit more difficult to do.
[00:04:23] what I like is what I call being actively passive, active in the sense that you know what is going on, active in the sense that you know what you have invested in, active in the sense that you know why you invested in it and active in the sense that you are following along and making sure that the investment that you put your money into is still doing what you thought it would do.
[00:04:53] let me give you an example, let just presume I want to own a particular stock, we are just for fun we will call it Apple, so what I first want to do is really understand Apple and I want to make sure I am capable of understanding that. You know Charlie Monger who is Warren Buffet partner, he talks about this pretty succinctly, the first and foremost thing that you should do is make sure you have the capacity to understand investment.
[00:05:26] so let’s just assume I understand Apple, I use Apple and I am very comfortable with Apple. Now, we won’t talk about price at this juncture because there is a difference between price and value, price is what you pay and value is what is worth and some of those sometimes those things there could be quite a spread in those prices. So we won’t talk about that but let’s say I am into Apple at a price that I am comfortable with, there is value there, now I want to stay active in the sense that I kind of want to read news about Apple, I want to know what is going on, I certainly want to read the annual shareholder report, I probably want to watch anything that the CEO is talking about.
[00:06:15] I definitely want to see what is going on in the new product launches and how those are accepted, so I want to stay active in the sense that I know what is going on with Apple but I want to be passive in the sense that I don’t want to trade it in and out, up and down with charts looking at moving averages, I want to eventually hold that as long as I possibly can for life maybe, certainly for the next ten years.
[00:06:47] You know Warren Buffet said he won’t own a stock for ten minutes that he wasn’t willing to own for 10 years. So in that regard we want to be extremely passive, we’d like to just get in and hold that thing forever and as long as the company is still doing what we thought it was supposed to do, as long as the company is still good management, the different things that will go a long way to helping that company grow. Then we want to stay involved but we want to be actively passive.
[00:07:22] so that is a big difference between what happened when you have access to a capital, when it is time to invest, you certainly going to want to invest when price and value and at least that parity or hopefully prices below value, that is even better. And then again we just want to stay active in terms of understanding and knowing what is going on in the world.
[00:07:49] so those are big differences, when you walk into a traditional financial planning firm and they throw out to you a bunch of mutual funds, they are hoping that you will stay passive and not really know what is going on but yet the mutual fund managers are very active, so that is what I call passively active, you are passive, you are doing nothing to learn, you are doing nothing to understand, you don’t have any idea what these mutual funds are buying and why they are buying them.
[00:08:21] yet the mutual fund over here is very active, I mean the turnover ratio in mutual fund sometimes getting to the 100, you know when they are turning over that portfolio, you know 100% of a time in a given year and maybe even much higher. So they are very active and that is maybe not so good for you, maybe not so good for the fund but that is how most mutual funds are built. There are some that do more of a buy and hold strategy but for the most part, they are very active in and out of stuff and when they hear just even the slightest bit of news that might be negative, they are out of that thing and because they can’t afford to have a bad quarter.
[00:09:04] Every time you get your mutual fund statement don’t you expect it to go up and if it is not at least going up a little bit or staying flat, you are wondering what is going on and it could be easy for you to be swayed to pull your money. Yeah, you are very passive and I am not saying you, I am saying most traditional financial planning company’s clients are very passive, they don’t know what they have, they don’t know why they have five or six or eight different funds, they just know that you know it is just diversify and that their financial advisors is taking care of them.
[00:09:37] so they are very passive, they are not reading about the stocks that they own and they are not keeping up on the company news and new launches and products and as a result that is a dangerous place to be in, first and foremost you are going to be the type that panics quickly when market starts to crash because you don’t know what you have and why you have it, you just know that your advisor picked a lousy fund.
[00:10:03] and meanwhile that manager over there in the fund is moving and try to sell out and keep your profit as best he can. As a result, mutual funds typically way underperform the index over time, there might be a year or two where they beat the index but after you add in fees, commissions, all the trading course and then eventually taxes, you are lucky for mutual fund can even come close to just passively investing in the index.
[00:10:33] so that is kind of a good snapshot of the difference between active and passive investors. Now you got to ask yourself what type of investor are you, what type of investor do you want to be? You know you don’t have to be full time, all addict, everyday 24/7 to be a good investor, all you have to do is you have to have capital and that is where cash value often times comes in then you just have to be able to understand what you are investing in, why are you investing in it and whether or not price is at least equal to value at the time you get involved.
[00:11:14] now this is real estate, this is gold, this is oil and gas, this is stock, this is the corner business that you might be interested in, this is any kind of investment. Here we do a lot of real estate right now and it is actively passive, we are certainly active and making sure that we are going to the right location, that the subdivision looks like it is going to be you know marketable, that it is in a good area. They say location, location, location.
[00:11:47] so all that is very active then we, because we are very active, because we are the builder as well, our building companies then take a vertical but investors who are with us, they are very active in the beginning and then they are a little bit more passive while everything is going vertical. In the meantime, they might be reading everything from what is going on with mortgages and interest rate to the community that has been built in.
[00:12:16] I mean they might want to be much more active and just understanding what is going on. So again whether it is real estate, individual stock, businesses, whatever your interest is, you want to be actively passive, you want to be very active in understanding what is all about and then very passive in trading it, getting it out and trying to get the next thing on board. And this has been proven, you don’t have to go out and try to say, well is Dan right on this, all you had to do is look at guys like Warren Buffet and Charlie Monger and Charlie Icon, [00:12:51] I mean these guys all have very similar philosophy.
[00:12:56] Warren Buffet just killing them all in this actively passive perspective. So alright there you go, that is it for this week, again go out and have a great holiday and thank a soldier if you see one, be grateful you live in this country and then take sometimes and just really understand and be involved in your investment and the things that you are interested in, that is it means, that is first and foremost, only invest in things that you are interested in and then understand it and you are going to be just fine and you are going do so much better than those who sit down were traditional financial advisors and buy an array of mutual funds and then crush your finger and hope your market goes up.
[00:13:45] you will never know what is going on you will always be in the panic mode if things are correct. So any question that you have always reach out firstname.lastname@example.org and I will be happy to answer them just as quick as I can and in the meantime make sure you subscribe to the videos, to the podcast, don’t miss an episode and we will try to do this together. Alright till next week, take care.