1/ Thread: Why I am an active investor
One of the questions most investors ask themselves at least at some point is whether they are indeed good investors, or all their past success are just random luck which by definition may not persist.
2/ My basic assumption is I am probably not a great investor. Even to be average, it will require a lot of work for me.
A common retort is why bother investing then? If I am so unsure of myself as an investor, shouldn’t I just index?
3/ This feels like equivalent of telling kids there’s no point in playing basketball because they’re never gonna make it to NBA.
I doubt most NBA players knew before touching the basketball that they are probably very good at it and it might be possible to make it a profession.
4/ What about all the kids who don’t end up in NBA?
Well, many of them still love the game just as much and follow the sport anyway because it’s so much fun even though they aren’t quite good at it.
5/ It may feel like a cavalier comparison, especially since investing is not a “game”.
There is a real cost to failure in this endeavor vs turning out to be a bad basketball player.
6/ I think about how I would feel if after 30-40 years I find myself underperforming index by 100-200 bps. Would I think I just wasted my life in investing?
It’s hard to know how you would *feel* beforehand, but I have at least convinced myself I wouldn’t consider it a waste.
7/ Investing is truly my lens to understanding the world.
Because of investing, I do feel more connected to the world around me. We interact with businesses everyday in our lives, and...
8/ ...understanding how they make money, their incentives, and who can survive and why are the kind of intellectual exercises that provide me an inherent utility that will be missing from index investing.
9/ I do believe if you don’t think such an exercise itself has value, individual investors should strongly consider indexing than actively managing investments.
10/ We can “democratize” investing as much as we want, but I don’t think alpha will ever be democratized. Margin Call got it right:
11/ “And there have always been and there always will be the same percentage of winners and losers. Happy foxes and sad sacks. Fat cats and starving dogs in this world. Yeah, there may be more of us today than there's ever been. But the percentages-they stay exactly the same.”
12/ In the long run, just like most professional investors, supermajority of individual investors will also turn out to be bad (or very bad) investors.
13/ What most individual active investors should attempt is increasing income and their savings rate so that they become somewhat immune from underperforming the index.
14/ People grossly underestimate how their lifestyle doesn’t change much when they generate 7% CAGR vs 15% CAGR return over 30-40 years although the difference can appear significant in absolute dollar terms.
Just make sure you don’t blow up.
End/ Of course, none of this applies to professional active investors. They made it to the “NBA” and they should all be playing for the championship.
If they underperform their *benchmark* over their career, it's only inevitable that they will feel deeply disappointed.
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