What About The Customers Yachts?

That joke is both funny and sad.

Felix Salmon did a short write up on a longer post by Nick Gogerty that was critical of active management. Candidly I had trouble keeping the monkeys and the clowns (read the article) straight.

It was very easy to understand that Nick made a compelling argument against actively managed mutual funds.

The active/passive debate has come up here quite a bit in the last few months. I am not a big fan of actively managed mutual funds for the primary reason that you do not know what is in them right now and cannot know what will be in them in the future which makes constructing a portfolio very difficult to do (no way to manage the overweights or underweights).

Obviously I believe in the concept of active management but prefer to use stocks and narrow based ETFs to get the job done.

One way that active management is judged is whether the manager beat the market. This is not really the primary objective in my opinion. I view the task of navigating the markets (actively or passively) as having the goal of achieving a different result which is having enough money when you need it. This applies to whether you hire someone or do it yourself. How you get there depends on the person's tolerances and situation.

My take on the task is to try to give someone the best shot of having enough money with the smoothest ride possible. As a matter of philosophy I believe smoothing out the ride reduces the chance of panic and selling at precisely the wrong the time. Obviously the notion of smoothing out the ride ties in with the concept of risk adjusted return. I think an easy way to have better risk adjusted numbers is to recognize that at times it makes sense to have more or less risk, and really volatility is a better word than risk, in the portfolio depending on what is happening in the world.

One aspect of active management that is criticized, and Nick does so in his post, is the lack of recognition of that there was any sort of problem brewing and then a lack of protection against the trouble. Nick at one point writes about not knowing what you don't know--I love that saying.

I obviously believe in defensive action and have written about it to the point of boring readers and I would hope that after two 50% declines this decade more active managers (professional or otherwise) will start to think in these terms. Maybe managers who offered no recognition or protection from the meltdown should be criticized but one thing is true of literally every manager is that they will know more about their job in the future than they do now. They know more now than they did in the past. Capital markets is an endeavor where the learning never stops. That is not much solace for someone who heeded a strategy that resulted in a 40 or 50% decline but it is a true statement even for you managing your own portfolio.