Investing — like life — is all about probabilities. While we don’t know what is going to happen with certainty in the future, we can at least predict a range of possibilities as to what might happen.
The ability to predict these possibilities and assign a range of probabilities to various situations is what separates the successful investors from the unsuccessful.
Now, the verdict is out that a passive strategy beats an active strategy for the average investor over the long haul. Active strategies don’t even come close over a 30 year period.
Passive strategies are great for retirement. Many of my friends have 401k plans through their work and when they ask me what mutual funds to put it in (usually a selection of 10-15 funds), I tell them to put it all in the S&P 500 index fund (if their plan offers it). The reason is that something like 90% of mutual funds underperform the S&P index after all the fees. And then for everything else beyond their 401k I tell them about the ideal passive investment mix and direct them to Wealthfront. You’re just far better off putting your leftover funds into a diversified mix of low cost index ETFs and adding to it on a regular basis (i.e. dollar cost averaging).
However the main problem with passive strategies for the short term is that when (yes, when not if) we get a deeper correction, all those people are going to ride the wave down too. Another 2008 comes along and you’ll see your mix drop by 50%. Whereas some good active managers could still average 10-15% up in those down years.
So I do believe there is a place for active management in addition to your passive retirement mix. And not just for the super rich few that can afford the high multi-million dollar minimum commitments at elite hedge funds like Ray Dalio’s Bridgewater Associates (his flagship fund Pure Alpha has been up an average of 14% a year since 1991). I think there’s a place for active management for the many who have extra cash outside of their 401k and IRA retirement funds.
In the interest of full disclosure, I’m trying to be an active manager. I treat it as a 2nd job. I love stocks. And I’m not ashamed about it. I invest in stocks actively not to keep pace with the averages but to crush them. And I have funds with other active managers who are trying to do the same.
Now there are many ways one can be successful in the markets, albeit they are all hard to find and carry out. The main way I try to is by being in strong stocks during market uptrends and reducing exposure during the downtrends. (I’m not a big fan of shorting because I feel it is too difficult and frustrating but that’s for another blog post).
Of course you can’t “time the market” — you can’t get in at the very bottom and get out at the very top. And you shouldn’t try. But you can catch the majority of the uptrend and avoid the majority of the downtrend. As Howard says: follow the money, you don’t need to be first and you should never be last.
In my opinion, here are the main skills it takes to be a successful active investor or trader:
One last thing I’ve noticed about the best investors, which is less of a skill and more of an attribute, is the motivation of the game. The best traders think of it as a game. They think of wins in terms of percentages, not money. Trading just to make money is always a bad idea.
No doubt this mix of unique skills is hard to come by. But that challenge is why I love investing. So I’m willing to put in the time and effort.
Parse grows even faster after Facebook acquisition -
I’ve mentioned before that I think Parse is one of Facebook’s best acquisitions yet. So I love seeing articles like this. This was no “OMGPOP acquisition” — Parse has grown even faster at a 25% growth after the acquisition.
Parse’s value to Facebook is clear. They have such a great brand and mindshare with app developers. And that will lead to so many more app developers using Facebook social for their sign-in and eventually, once they get big enough, Facebook’s app install ads. Which is where Facebook is seeing the bulk of their mobile revenue growth. A growth that is crucial in the eyes of public investors.
By the way, can we take a second to appreciate that growth? eMarketer is out with a new forecast today that projects Facebook’s worldwide mobile ad revenue to top $2 billion this year. That’s from a revenue stream that didn’t even exist a few quarters ago. Pretty damn impressive.
On Competition & Product Management -
Pandora’s own Jack Krawczyk had a great post up yesterday about competition, feature wars, and product management. Do yourself a favor. Bookmark and re-read this every time a new competitor comes along.
Here are the two parts that stuck out most to me:
The biggest lesson I’ve learned about new products coming out onto the market is that competition is the best reminder that you need to remain vigilant that you understand the aspirations, habits and pains of your users/customers.
Competition comes and goes. That’s the certain thing. Sometimes competitors succeed in teaching you something new about what matters, but that’s where the real fun lives: your success hinges on understanding your users/customers better than the competition.
It would be a lie to say nobody paid attention to iTunes Radio today around the Pandora offices. It would be an even greater lie to say that we didn’t do what we do exactly every day: continue to find a way to connect people with the music they love as fast as possible. I would say game on, but the game has been on for years.
The Risk Not Taken -
If you need a dose of inspiration this weekend look no further. This post by Andy Dunn is a gem. Here’s my favorite part:
Very little is obvious in the research on human decision-making and happiness. Very few things are proven. One thing that is proven is this: the only regrets octogenarians have are for the risks not taken.
If the risk taken does pan out, it is good. But if it doesn’t — and here’s the key thing — we find a way to justify the risk taken as learning.
Gretzky knew this:
You miss one-hundred percent of the shots you don’t take.
I got a lot of questions on my active vs. passive management post about the asset allocation model I use for my long-term and retirement accounts. Again, this is separate from my actively managed accounts where I do all of my swing investing.
The mix is mostly based on Wealthfront’s research which is largely derived from Modern Portfolio Theory. They have a fantastic whitepaper that digs deep into their methodology if you’re interested in learning more.
But it’s essentially 7 asset classes bought through low-cost index ETFs:
The data shows that over the long haul (i.e. 10+ years) the above mix with rebalancing and tax loss harvesting will handedly beat almost all actively managed funds.
“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
- Warren Buffett, 1993 Berkshire Hathaway Shareholder Letter
I love this quote from Warren Buffett. And I love this post from Josh on The Paradox of Dumb Money.
A lot of people ask me where I put my cash and savings that’s separate from the momentum/swing investing that I do. I’m going to start directing them to here and to Josh’s post.
As Josh mentions, it’s not that Warren thinks that active management doesn’t work and that people can’t beat the market. In fact, he believes the opposite. Unfortunately, just not by many people and certainly not by the average person.
For many years people thought they were smart by getting someone “above average” with the Midas touch to manage their money. The idea is alluring. But fortunately they have wised up.
What used to be a debate about which is better for the long term investor, passive vs. active management, is all but nonexistent now. Virtually every piece of empirical evidence shows that an investor is better off with passive management (i.e. periodically investing in low-cost index funds) over active management (i.e. paying someone to pick their stocks for them).
Indeed, just last year the “dumb money” investor in their S&P 500 index fund earned close to 16% while the “smart money” hedge funds (via the HFRX Global Hedge Fund Index) earned just 3.5%. If we look back at the last five years, the hedge fund index lost 13.6 percent, while the indices added 8.6 percent. And that’s just through 2012; it’s only gotten worse in 2013.
By becoming aware of their own limitations the average investor is showing itself to be smarter than ever before. The “dumb money” has started to become the “smart money.”
So no, I don’t invest in any active management funds. I’m sticking with the data and every month tucking some away into low-cost index funds. The asset allocation model I use is very similar to Wealthfront’s. Check out their great blog if you’re interested in learning more.
By the way, I do agree with Warren that the market can be beat though. Hence my heavy personal focus on swing investing. Finding the next Google or Tesla can certainly supplement your index fund returns. And if you do it well (proper risk management, stop losses, cutting your losers quickly and letting your winners run, etc.) it can push your total returns into the next stratosphere. Just know going into it that the odds are stacked against you.
Is a Yahoo-Owned Tumblr More Attractive to Brands? -
This is a great look at the deal from an ad agency perspective:
“It would give Tumblr an opportunity to expand their ad packages, and it certainly help them with the sheer organizational needs of ad sales,” said Paul Gunning, CEO of Tribal Worldwide.
This is a great point. Imagine that in 6-12 months, every Yahoo sales rep calling on a top Fortune 500 brand or agency can walk in and pitch Tumblr’s sponsored posts in addition to their regular media mix. The scale there will be immediately impactful. It will probably increase their sales team by a hundredfold. And importantly for users, it will lead to higher quality sponsored posts.
So I think this is a great move for all involved. Congrats to the whole Tumblr team. I really hope that we can believe Mayer when she promises ‘not to screw it up’.
Many people have called Bitcoin a bubble. They have compared it to the infamous tulip mania. In our four phases of a bubble chart, they would probably say that last April (when Bitcoin’s price hit over $200) was the “mania” phase and that we’re now in the “blow-off phase.”
But while many people are laughing at Bitcoin, others are leaning into it. Bitcoin startups are starting to attract serious investors.
Fred Wilson, who’s got a bit of a track record of investing in companies that seem too silly but later become mainstream, described his thoughts on Bitcoin in a post on the USV blog about their latest investment in Coinbase in this way:
“We believe that Bitcoin represents something fundamental and powerful, an open and distributed Internet peer to peer protocol for transferring purchasing power. It reminds us of SMTP, HTTP, RSS, and BitTorrent in its architecture and openness. Like what happened with those other low level protocols, entrepreneurs and developers are now building technology on top of Bitcoin to make it more useful, more accessible, and more secure.”
This makes a lot of sense to me. The benefits of a truly global, zero transaction fee, digital currency are too powerful to ignore. And the more people develop on top of the network, the more liquid, secure, and stable Bitcoin will become.
Fred is also quick to point out that it’s not just Bitcoin. If other or multiple digital currencies get massive adoption, then these startups will adapt and support them too.
And USV isn’t alone. Andreessen Horowitz, Jeremy Liew, and a lot of other smart people are thinking about Bitcoin, digital currencies, and the startups that will power them. Even Paypal is thinking about ways to work with Bitcoin.
The most exciting part of this ecosystem to me is the payment layer. And this is where Coinbase really excels. They are making it very easy for merchants to accept bitcoin payments.
I have no idea about the future price of Bitcoin and where it stands in the four phases of a bubble. But to me, this sure looks like the start of a long-term trend for Bitcoin startups.
I think Howard said it best:
“But, as a risk taker myself, I like to see this type of setup. Not too early for Fred, but way too early for Warren Buffett.
(My newly acquired Fitbit Flex)
As I expected, the early reviews for the Fitbit Flex are in and they are stellar.
My own review is forthcoming. That is, when it’s delivered in four weeks.