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The Active Investor (DOA)

November 20, 2012

“Active Investing” has to do with “stock picking” buying, holding and selling in contrast to “bold moves” (sic) such as simply buying a piece of entire markets such as the Dow Jones Industrial Companies, the NASDAQ 100 or the S&P 500 NYSE, all of which can be bought by buying blocks of shares in each company or, more commonly, by buying a mutual fund or hedge fund that is supposed to track the Index.

The latter (Index Funds or ETFs) have never made any sense to us. They ought to be a “money machine” for the vendor because to run one all that they need to do is buy appropriately weighted blocks of shares in each of the companies of the subject Index at the beginning of the year (say) and sell it all at the end of the year, or pro rata according to what disbursements are required, returning any gains or losses to the consumer or investor. In the meantime, they collect all the dividends (and fees and loads) which are typically 2% to 3% of the capital – which is not theirs – with no risk at all other than the marketing, sales and administration expenses. But, in the wrong hands, even that simple-minded model is not fool proof. And “hedge funds” so styled tend to be just a gamble and one should not expect to get anything back that is not convenient to the managers. It’s in the contract. Please see our Post, Hedge Funds Bushwhacked By Volatility, November 2012.

An active investor, on the other hand, can buy and sell anything that they want on their budget – and they might have some “rules” or quaint “method” – and, having done so, will almost surely obtain an objectively “random” result which might be good sometimes but in the long run the “casino” will always win, won’t it, and it is expected that this year as last year, four out of five (or 80% or 800 out of a thousand or 80,000 out of 100,000) active managers will fail to make their mark which might be an Index but is generally something a lot less than 100% Capital Safety™ Guaranteed and a hopeful return above the rate of inflation (CNBC, November 19, 2012, Why the Days of Stock Picking May Be Ending). But that’s our benchmark and we must be among the sixty of three hundred (Thermopylae 400 BC) that lived to tell their story and, as far as we know, we are the only ones who can tell this story.

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

Please see our Post, Investor Angst, November 2012, for how we’re doing so far with our “quaint rules and methods” – The RiskWerk Company.

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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