Thread by @borrowed_ideas

1/ Thread: The Future of Active Investing

Let’s run a thought experiment.

Imagine a pharmaceutical company declared two major breakthrough drugs, namely A and P, to cure aging. Both drugs need to be taken on a quarterly basis for the rest of your life.

2/ P promises to increase both your youth-span and lifespan by 5 years.

A, on the other hand, promises to expand your youth-span and lifespan by 10 years.

Given the potential, A costs higher than P. But there is a catch.

3/ P is highly likely to be effective for most people. While nothing is guaranteed, it usually accomplishes what it initially promises.

A, however, doesn’t seem to work on most people. Even worse, in many cases your lifespan can even decrease by a few years by taking A.

4/ For the people the drug A works, it can be quite wondrous.

For a small number of cases, not only your lifespan increases by 10 years, your body may remain at age 25 for your entire life.

You will indeed die “young”.

How much more do you want to pay for A compared to P?

5/ The answer will vary from person to person.

Some may be willing to pay 5x or even 10x higher than what P costs. Some may not want to take the increased risk of dying earlier at any price.

6/ But it is pretty intuitive that while some people may want to buy A at 10x P’s price, more will buy when it’s only 5x, and even more when it’s 2x.

What if given the risk, A comes up with a different pricing model?

7/ The company says, okay fine! You can pay the same for both A and P.

But if you are one of those lucky ones, you will be charged a lot higher price. If you are one of those unlucky ones, we are just sorry.

8/ Again, some people will stick to P because of the higher risk in A. But I imagine a lot more people will switch to A from P if the new pricing model is introduced.

Of course, A is Active, and P is Passive in this thought experiment.

9/ One obvious flaw is while aging is “democratic” in nature, capital most certainly is not.

Besides, successful people who have most of the capital may be prone to be risk takers and may be hardwired to choose A even at exorbitant price given the possibility of eternal youth.

10/ Jack Bogle was to active investing what Sam Walton was to consumer retail in the US. Active management hasn’t seen its “Bezos” yet.

It is likely that there will never be one Bezos who will systematically destroy all bad active managers.

11/ Even Bezos would not be able to generate sizable alpha if he had to deploy $5 trillion. He too would be victim of his own success.

Given the nature of the business, active management can never be winner-take-all business.

End/ But it is becoming increasingly difficult to demand a 10x price for a drug that, despite the rosy promises, has a high probability of decreasing your "lifespan".

That drug, especially at 10x price, cannot, and perhaps should not succeed in the long run.