Author Topic: Believer in passive, but work in active management?  (Read 3374 times)

minimally

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Believer in passive, but work in active management?
« on: December 01, 2017, 08:43:10 AM »
Like many others on this forum, I am a die-hard believer in low-cost passive index funds and philosophically aligned with all things Bogle. All of my personal investment money is held in Vanguard and I can't imagine a day where I try to pick individual stocks, time the market, or pay high fees for some active manager/hedge fund, etc. But perhaps somewhat contradictory to this belief, I work at an active management company that tries to do all the typical no-no's people shun on this forum. While I ultimately view this goal/mission as a futile endeavor, I haven't had any internal struggles with this during my 4+ years at the company. I've always viewed it as different....work is work and it's a job. The investment analysis is still intellectually stimulating and interesting. There are also other aspects of the job, such as the relationship building with business partners and development of soft skills, that I am enjoying. And even though I am keeping all my money in passive, if someone wants to pay us (and pay us well) to try time the market, nothing wrong in trying right? (EDITED in response to some of the comments. I don't work in sales and marketing but yes and sales pitch is involved but we aren't lying or making any illegal claims to our clients).
Never really had any meaningful thoughts about this until now. What changed? I have outgrown my currently role in this investment team and looking to pivot to a new role. This requires a significant amount of time dedicated to self-directed learning of new skills. I am more than willing to invest the time for career advancement, but in my head as I am doing thing, I can't help but think things like "OK, this well get you get you the job and teach you how to do the work, but does this actually work or is it all just a lie? Aren't we just still throwing darts at the end of the day? Don't try and time the market!"

I am interested to hear how others in a similar position think about this in their own head. (Or even if you don't work in active management, any thoughts on this?)
« Last Edit: December 01, 2017, 11:12:31 AM by minimally »

keyvaluepair

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Re: Believer in passive, but work in active management?
« Reply #1 on: December 01, 2017, 08:53:24 AM »
Like many others on this forum, I am a die-hard believer in low-cost passive index funds and philosophically aligned with all things Bogle. All of my personal investment money is held in Vanguard and I can't imagine a day where I try to pick individual stocks, time the market, or pay high fees for some active manager/hedge fund, etc. But perhaps somewhat contradictory to this belief, I work at an active management company that tries to do all the typical no-no's people shun on this forum. While I ultimately view this goal/mission as a futile endeavor, I haven't had any internal struggles with this during my 4+ years at the company. I've always viewed it as different....work is work and it's a job. The investment analysis is still intellectually stimulating and interesting. There are also other aspects of the job, such as the relationship building with business partners and development of soft skills, that I am enjoying. And even though I am keeping all my money in passive, if someone wants to pay us (and pay us well) to try time the market, nothing wrong in trying right?
Never really had any meaningful thoughts about this until now. What changed? I have outgrown my currently role in this investment team and looking to pivot to a new role. This requires a significant amount of time dedicated to self-directed learning of new skills. I am more than willing to invest the time for career advancement, but in my head as I am doing thing, I can't help but think things like "OK, this well get you get you the job and teach you how to do the work, but does this actually work or is it all just a lie? Aren't we just still throwing darts at the end of the day? Don't try and time the market!"

I am interested to hear how others in a similar position think about this in their own head. (Or even if you don't work in active management, any thoughts on this?)

I think that what we think matters less than what the data says. I thought that TRBCX outperformed VTSAX (see recent thread) on the basis of eyeballing rolling returns. Turns out that while there might be some small difference, it wasn't enough to be statistically significant. Have you done the analysis against the index. If you need help on this, PM me and we can discuss that.
kv

Travis

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Re: Believer in passive, but work in active management?
« Reply #2 on: December 01, 2017, 09:07:26 AM »
If I were in your position (though you don't say what your specific role is, I would have a moral problem with this:

Quote
if someone wants to pay us (and pay us well) to try time the market, nothing wrong in trying right?

In my opinion, it's a problem if you're selling them on this concept by lying to them on your performance history, telling them index funds are the devil, you've got the inside scoop that they can't possibly have, etc.  One of the big reasons active managers get a bad rap on this forum is many of us have run into fund managers/salesmen who do this. If you're up front about your company's abilities and give them honest advice and information and they want to hire you, then drive on.

soupcxan

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Re: Believer in passive, but work in active management?
« Reply #3 on: December 01, 2017, 10:11:34 AM »
No way the market is 100% efficient. Passive investing couldn't exist without at least a few active investors helping with price discovery and arbitraging when things get out of whack. So look at it from the point of view that you are helping keep the markets efficient.

JAYSLOL

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Re: Believer in passive, but work in active management?
« Reply #4 on: December 01, 2017, 10:33:29 AM »
As long as the company isn't doing anything unethical, and you aren't lying to clients about what you can do for them, I don't see a problem.  I believe in doing all my own yard work, but I'm a landscaper so if people want to pay me for that service I have no problem with that, but I just wouldn't tell them that I'm the only person that could build a retaining wall and it could never be done DIY, that would be lying.

FINate

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Re: Believer in passive, but work in active management?
« Reply #5 on: December 01, 2017, 10:35:25 AM »
No way the market is 100% efficient. Passive investing couldn't exist without at least a few active investors helping with price discovery and arbitraging when things get out of whack. So look at it from the point of view that you are helping keep the markets efficient.

+1. The main reason personal investors should use passive investing is that they don't have the expertise, time or dispassion to invest as the pros (you) do. There's no free lunch: Put enough effort and you can "beat" the market, essentially getting compensated for your skill and work. If you outsource this then it eats into returns and adds risk... may as well index at that point.

So I don't see a moral dilemma with getting paid to actively invest, though I would have an issue with being the sales/marketing people for such products.

minimally

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Re: Believer in passive, but work in active management?
« Reply #6 on: December 01, 2017, 11:38:36 AM »
All good points everyone, appreciate the comments.

If I were in your position (though you don't say what your specific role is, I would have a moral problem with this:

Quote
if someone wants to pay us (and pay us well) to try time the market, nothing wrong in trying right?

In my opinion, it's a problem if you're selling them on this concept by lying to them on your performance history, telling them index funds are the devil, you've got the inside scoop that they can't possibly have, etc.  One of the big reasons active managers get a bad rap on this forum is many of us have run into fund managers/salesmen who do this. If you're up front about your company's abilities and give them honest advice and information and they want to hire you, then drive on.
The position is directly hands-on in the portfolio management process. I do not work in sales or marketing (others have commented on this too so I added it back to the original post as well), but yes there is some sales pitch involved required to win over the client. However, we don't promise anything (these types of claims are highly regulated) or present them with false data. I think you could definitely make the case that it is sales-y, but not lying. 

No way the market is 100% efficient. Passive investing couldn't exist without at least a few active investors helping with price discovery and arbitraging when things get out of whack. So look at it from the point of view that you are helping keep the markets efficient.
Very good point. Thanks for the reminder, I feel less nihilistic now!

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Performance has been totally all over the place (good and bad)

ChpBstrd

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Re: Believer in passive, but work in active management?
« Reply #7 on: December 01, 2017, 11:48:55 AM »
Is it wrong to work in a factory selling clown cars? Should construction workers refuse to build McMansions? Is the restaurant industry a scam? Are cable installers abusing people?

No to all. The Mustachian economy is much smaller than the consumer-sucka economy, and like migrant workers, many of us cross that border to both work and invest.

Also, some products cannot be had without active management. How does an individual run their own futures-hedged BB corporate bond fund or obtain leverage at super low overnight borrowing rates? Can you execute a covered call strategy more efficiently than Joe with his online brokerage account can do on lunch break through his cell phone?

surfhb

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Re: Believer in passive, but work in active management?
« Reply #8 on: December 01, 2017, 02:27:57 PM »
No way the market is 100% efficient. Passive investing couldn't exist without at least a few active investors helping with price discovery and arbitraging when things get out of whack. So look at it from the point of view that you are helping keep the markets efficient.

+1. The main reason personal investors should use passive investing is that they don't have the expertise, time or dispassion to invest as the pros (you) do. There's no free lunch: Put enough effort and you can "beat" the market, essentially getting compensated for your skill and work. If you outsource this then it eats into returns and adds risk... may as well index at that point.

So I don't see a moral dilemma with getting paid to actively invest, though I would have an issue with being the sales/marketing people for such products.

Ahem....of course one can beat the market....BUT ITS HIGHLY UNLIKELY OVER LONG PERIODS OF TIME (40-60 years for example).    That's why people who DO beat the markets over these long periods of time are celebrities in the financial world.   

SO!   The reason why people should be passive investors is because not even the best and brightest minds CAN OR WILL beat the index over long periods of time....Period!   That's just a fact



TrMama

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Re: Believer in passive, but work in active management?
« Reply #9 on: December 01, 2017, 02:59:00 PM »
Yes, active management can beat index funds. My dad does it for a living. I've had many, many investing and economics conversations with him over the years. Although I do my own research (he's the one who taught me how, and why it's so important), I still go to him regularly for advice. He's adamantly opposed to index funds, and not because they cost brokers commissions. He doesn't own any himself and has some very logical arguments as to why.

However, my own portfolio is almost 100% index funds. Why? Because my job isn't in active management; it's in a completely unrelated field. That means I don't have the enormous amount of time that successful active management requires. My dad is only able to beat the market by spending most of his waking hours researching. Since I'm not able to do that, I settle for index funds.

So no, I don't think all paid active managers are slimeballs. There's absolutely an ethical way to go about it so you can provide a valuable service to your clients. Don't sell them crap that's not in their best interests, don't churn their accounts and don't blatantly steal from them. This will probably result in you earning less than other brokers who're willing to do these things (and possibly a faster burnout rate if you tire from pressure to do otherwise), but as long as you're OK with that, there's no problem here.

surfhb

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Re: Believer in passive, but work in active management?
« Reply #10 on: December 01, 2017, 03:58:32 PM »
Yes, active management can beat index funds. My dad does it for a living. I've had many, many investing and economics conversations with him over the years. Although I do my own research (he's the one who taught me how, and why it's so important), I still go to him regularly for advice. He's adamantly opposed to index funds, and not because they cost brokers commissions. He doesn't own any himself and has some very logical arguments as to why.

However, my own portfolio is almost 100% index funds. Why? Because my job isn't in active management; it's in a completely unrelated field. That means I don't have the enormous amount of time that successful active management requires. My dad is only able to beat the market by spending most of his waking hours researching. Since I'm not able to do that, I settle for index funds.

So no, I don't think all paid active managers are slimeballs. There's absolutely an ethical way to go about it so you can provide a valuable service to your clients. Don't sell them crap that's not in their best interests, don't churn their accounts and don't blatantly steal from them. This will probably result in you earning less than other brokers who're willing to do these things (and possibly a faster burnout rate if you tire from pressure to do otherwise), but as long as you're OK with that, there's no problem here.

That's great and I'm sure he has some good advice.   It still doesn't take away from the fact that my FSTMX fund is HIGHLY likely to out preform all your Dads hard work within our lifetimes.    Its simple rules of math.  :)
« Last Edit: December 01, 2017, 04:01:02 PM by surfhb »

TrMama

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Re: Believer in passive, but work in active management?
« Reply #11 on: December 01, 2017, 04:26:36 PM »
Yes, active management can beat index funds. My dad does it for a living. I've had many, many investing and economics conversations with him over the years. Although I do my own research (he's the one who taught me how, and why it's so important), I still go to him regularly for advice. He's adamantly opposed to index funds, and not because they cost brokers commissions. He doesn't own any himself and has some very logical arguments as to why.

However, my own portfolio is almost 100% index funds. Why? Because my job isn't in active management; it's in a completely unrelated field. That means I don't have the enormous amount of time that successful active management requires. My dad is only able to beat the market by spending most of his waking hours researching. Since I'm not able to do that, I settle for index funds.

So no, I don't think all paid active managers are slimeballs. There's absolutely an ethical way to go about it so you can provide a valuable service to your clients. Don't sell them crap that's not in their best interests, don't churn their accounts and don't blatantly steal from them. This will probably result in you earning less than other brokers who're willing to do these things (and possibly a faster burnout rate if you tire from pressure to do otherwise), but as long as you're OK with that, there's no problem here.

That's great and I'm sure he has some good advice.   It still doesn't take away from the fact that my FSTMX fund is HIGHLY likely to out preform all your Dads hard work within our lifetimes.    Its simple rules of math.  :)

But that's exactly the point. You don't have to commit to either active, or passive, management for your entire life. You can choose a period of time (like the time you spend being paid by others to actively manage their money) to actively manage your stash. If you're any good at it, you'll give yourself a huge boost and can then go back to passive management when you get burned out and switch to surfing.

FSTMX is up 16.36% YTD. That's great. One of my stocks is up 116%. That's also great.

surfhb

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Re: Believer in passive, but work in active management?
« Reply #12 on: December 01, 2017, 04:30:59 PM »
Yes, active management can beat index funds. My dad does it for a living. I've had many, many investing and economics conversations with him over the years. Although I do my own research (he's the one who taught me how, and why it's so important), I still go to him regularly for advice. He's adamantly opposed to index funds, and not because they cost brokers commissions. He doesn't own any himself and has some very logical arguments as to why.

However, my own portfolio is almost 100% index funds. Why? Because my job isn't in active management; it's in a completely unrelated field. That means I don't have the enormous amount of time that successful active management requires. My dad is only able to beat the market by spending most of his waking hours researching. Since I'm not able to do that, I settle for index funds.

So no, I don't think all paid active managers are slimeballs. There's absolutely an ethical way to go about it so you can provide a valuable service to your clients. Don't sell them crap that's not in their best interests, don't churn their accounts and don't blatantly steal from them. This will probably result in you earning less than other brokers who're willing to do these things (and possibly a faster burnout rate if you tire from pressure to do otherwise), but as long as you're OK with that, there's no problem here.

That's great and I'm sure he has some good advice.   It still doesn't take away from the fact that my FSTMX fund is HIGHLY likely to out preform all your Dads hard work within our lifetimes.    Its simple rules of math.  :)

But that's exactly the point. You don't have to commit to either active, or passive, management for your entire life. You can choose a period of time (like the time you spend being paid by others to actively manage their money) to actively manage your stash. If you're any good at it, you'll give yourself a huge boost and can then go back to passive management when you get burned out and switch to surfing.

FSTMX is up 16.36% YTD. That's great. One of my stocks is up 116%. That's also great.

Market timing.    Again, the rules of math and statistics tell me I'm not to make those kinds of bets with my retirement.    The facts state that a very few active investors can be the index over an investing lifetime.   Something like  less than 1 %
« Last Edit: December 01, 2017, 04:34:28 PM by surfhb »

ILikeDividends

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Re: Believer in passive, but work in active management?
« Reply #13 on: December 01, 2017, 08:57:15 PM »
I am more than willing to invest the time for career advancement, but in my head as I am doing thing, I can't help but think things like "OK, this well get you get you the job and teach you how to do the work, but does this actually work or is it all just a lie? Aren't we just still throwing darts at the end of the day? Don't try and time the market!"
You are way over-thinking this.  If you were an executive assistant at the same company, would you have a moral dilemma?  If you worked at GM and drove a Ford; moral dilemma? Ran a McDonald's but preferred Burger King; moral dilemma?

Your personal choices for you own retirement are yours alone.  A job is just a job.  The two are entirely unrelated. I worked at Sun Microsystems for 18 years.  But I used a PC at home.  And when I worked from home for the last 5 years of my career, I still used a PC to get into Sun's network.  I never bought one of Sun's workstations.  Sun Microsystems wasn't my wife.  It was just a job that I couldn't wait to get rid of when the time was right.

Snap out of it!  If you're good at your job, and it is satisfying enough for you, and it has the advancement potential and compensation you are satisfied with, keep your personal opinions to yourself while at work, toe the line, and just do your job the best you can.  You are disposable to them anyway. And you will continue to be disposable no matter where else you go.  Kick them to the curb when you are ready, not because you have a philosophical disagreement with them.

And yes, I would say the exact same thing even if you were in sales.
« Last Edit: December 01, 2017, 09:43:13 PM by ILikeDividends »

Retire-Canada

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Re: Believer in passive, but work in active management?
« Reply #14 on: December 02, 2017, 08:17:30 AM »
"OK, this well get you get you the job and teach you how to do the work, but does this actually work or is it all just a lie? Aren't we just still throwing darts at the end of the day? Don't try and time the market!"

Well does it actually work? Presumably your company keeps stats on the performance of your investments so are you making money for your clients over many years and if so are you making more for them after fees than they'd get in an index fund?

aspiringnomad

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Re: Believer in passive, but work in active management?
« Reply #15 on: December 02, 2017, 01:45:50 PM »
"OK, this well get you get you the job and teach you how to do the work, but does this actually work or is it all just a lie? Aren't we just still throwing darts at the end of the day? Don't try and time the market!"

Well does it actually work? Presumably your company keeps stats on the performance of your investments so are you making money for your clients over many years and if so are you making more for them after fees than they'd get in an index fund?

If you define working as beating the market over the long term, then the overwhelming odds are that it does not actually work. But like all other businesses, active management funds ultimately define success by their bottom line which is typically tied to assets under management, not investment performance. Therein lies the OP's dilemma, but I'm with others who say that if you enjoy the work and it pays well, there's no need to look for a new line of work. We all have to deal with a certain amount of cognitive dissonance in our daily lives; I guess it's up to you if you feel like your job exceeds your personal threshold for it.

FINate

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Re: Believer in passive, but work in active management?
« Reply #16 on: December 02, 2017, 02:54:09 PM »
No way the market is 100% efficient. Passive investing couldn't exist without at least a few active investors helping with price discovery and arbitraging when things get out of whack. So look at it from the point of view that you are helping keep the markets efficient.

+1. The main reason personal investors should use passive investing is that they don't have the expertise, time or dispassion to invest as the pros (you) do. There's no free lunch: Put enough effort and you can "beat" the market, essentially getting compensated for your skill and work. If you outsource this then it eats into returns and adds risk... may as well index at that point.

So I don't see a moral dilemma with getting paid to actively invest, though I would have an issue with being the sales/marketing people for such products.

Ahem....of course one can beat the market....BUT ITS HIGHLY UNLIKELY OVER LONG PERIODS OF TIME (40-60 years for example).    That's why people who DO beat the markets over these long periods of time are celebrities in the financial world.   

SO!   The reason why people should be passive investors is because not even the best and brightest minds CAN OR WILL beat the index over long periods of time....Period!   That's just a fact

My point is, excluding the management fee, actively managed funds can beat the market on average (depending on the study, time period, and so on). Once you factor in the management fee, passive index funds win, no question about it. So active managers are consistently finding small bits of inefficiency in the market, but it requires constant work, and it's not enough on average to cover the fees. Active managers are essentially trading hours for dollars, I wouldn't really call it "investing." From a broad perspective then this serves a valid function helping to keep the market efficient. But I would never buy one myself.

Acorns

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Re: Believer in passive, but work in active management?
« Reply #17 on: December 02, 2017, 05:16:47 PM »
Some people really want or need an investment adviser. Maybe it makes them feel important to say they have an adviser, maybe they are really unsure of picking index funds and they need the emotional support an adviser provides. Maybe they need the adviser to be a cushion between them and their money or else they would spend it all. Whatever their reasons, some people just prefer active management, either in the form of choosing actively managed funds for their portfolio or employing the services of a financial adviser to pick funds and/or stocks for them. That's ok. You are meeting this need for some people. Don't over think this. It's a job. You aren't trying to sell oceanfront property in Arizona :-).

aceyou

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Re: Believer in passive, but work in active management?
« Reply #18 on: December 02, 2017, 08:45:38 PM »
I believe that climate change is right near the top of problems needing 100% focus and attention right now.  I do MANY things in my life to help with this.  That said...

- I own VTSAX, knowing that this means I own parts of oil companies. 
- I drive a Prius, which is an ICE, knowing that an electric car would be better. 
- I could spend lots of my savings to buy solar panels and  a power wall to get all my energy from the sun, but I don't. 

We make tradeoffs as we work towards our goals.  I'm not always comfortable with some of the tradeoffs I make.  I'm not saying that you are doing the right or wrong thing, only you can decide that.

Indexer

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Re: Believer in passive, but work in active management?
« Reply #19 on: December 02, 2017, 10:26:54 PM »
Quote from: minimally
I am interested to hear how others in a similar position think about this in their own head. (Or even if you don't work in active management, any thoughts on this?)

I also work in investment management, thankfully no longer in a position where someone else tells me which investments to use or research. However, I did work for one of the big firms in the past. I have also developed many friends in the industry over time and active VS index comes up in conversation.

Just off the top of my head I personally know 6 people at active shops who keep their own money in index funds. Roles vary, I think the most striking is that one of them is the manager of an active mutual fund, but keeps 100% of their personal assets in index funds. I also know of a company, who shall not be named, who sponsors 401k plans and provides advisory services for individuals. The 401k plans they sponsor are full of expensive active funds, and they normally recommend annuities to their individual clients. However, the 401k for their own employees is made up of Vanguard institutional index funds. They were afraid they were going to get sued by their own employees.

Which brings up something else. Employees at Fidelity, Wells Fargo, American Funds, BlackRock, etc. sued their employers because of their 401k plans. Many of these companies offered 401k plans that contained expensive active funds, they practiced what they preached, but their bright investment expert employees knew better. They wanted low cost index funds.

Summary: You aren't alone. I read a piece awhile back about the dirty secret on Wall Street, the people who sell active in public buy index in private.