Another terrific write-up by Dan Solin, titled “Investment Club” is an Oxymoron...his analysis conceptually, is also applicable to Indian investors because the fundamental logic of passive investing is valid for all geographies!
The success of active management is typically known in hindsight, is not predictable from past performance and is associated with randomness-as a result of market efficiency.
Dan Solin writes,
I was recently invited to debate active vs. passive management at an investment club. The club members, a group of wealthy retired men, refer to themselves as investment "gurus." They are absolutely convinced of the merits of active management (defined as the ability to pick stocks or mutual funds that will beat designated benchmarks).Read the entire article, the link is as under,
Dan Solin has written a wonderful book The Smartest Investment Book You’ll Ever Read and is a financial columnist with The Huffington Post
Sameer, many think that if someone has picked a winner 4 times in a row, the likelihood for him/her to pick a winner again is very high, as documented by low failure rate. But infact, the possibility to fail now turns higher and higher. Guess similar to the BLACK SWAN thought!
ReplyDeleteHi, not sure if it is fair to say that the possibility of failure turns higher and higher if you assume that the chance of failure or success of each event is equal.. much like tossing a coin.. however if you put into the equation behavioural finance (now this is where it gets interesting) - then overconfidence will build following each successful event (whether due to skill or luck) thus making the person more biased and likely to fail! Hence may be proved. I think the important takeaway is that you need to hunt for managers (tough job) that can keep their humility and control behavioural influences to the extent possible.
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