Active_Investing_and_Passive_Investing_Debate
00:00:00.000 | Hello, everybody, it's Sam from Financial Samurai.
00:00:03.080 | And in this episode, I want to talk about active versus passive investing, because I
00:00:09.160 | got a pretty good comment from my post on how I'd invest a million dollars today.
00:00:15.540 | And the comment asked from Rijigo, "The financial advice media and literature affirm over and
00:00:21.360 | over that we should not try and time and outguess the market.
00:00:26.040 | They say that even experts and fund managers often underperform it.
00:00:29.800 | This opinion is so common, it sounds like a consensus.
00:00:34.080 | But we also have blog posts such as this one, which advocate the opposite.
00:00:38.480 | And they are received as just as sound advice as the other type.
00:00:41.960 | So what is the resolution of this apparent contradiction?"
00:00:45.120 | This is a very good point.
00:00:47.860 | And I've written before that passive index investing will outperform active fund managers
00:00:55.240 | for both equity and fixed income over time.
00:00:58.840 | It's very clear in the data, which is also why I recommend the majority, the large majority
00:01:06.120 | of your investable assets go into passive index funds or ETFs.
00:01:13.000 | This is for your public equity investments.
00:01:15.320 | But why don't I have 100% of my public equity investments or public bond investments in
00:01:22.640 | these index funds or ETFs?
00:01:25.240 | It's a conundrum, isn't it?
00:01:26.900 | So my response to this commenter was, "Well, that's why this post is not investment advice
00:01:32.320 | for you.
00:01:33.320 | It is how I'd invest a million dollars today and how I have invested a million dollars
00:01:39.200 | in the past.
00:01:40.200 | I'm a writer, not a wealth manager or financial advisor."
00:01:44.240 | Right?
00:01:45.240 | Let's make this clear.
00:01:46.240 | I write on Financial Samurai, my own site, to share my thoughts and my experiences.
00:01:52.020 | This is not investment advice to you because we're all different.
00:01:55.400 | We all have different risk tolerances, abilities to make money, different stages of our lives,
00:02:01.760 | different goals.
00:02:02.820 | So I told Rodrigo, the commenter, "If you want tailored financial advice for your household,
00:02:08.760 | I would just hire a fee-only advisor so he or she can look through your specific financial
00:02:15.760 | situation, look at your specific asset allocation and goals, and come up with a plan."
00:02:21.700 | This is the right way, I believe.
00:02:24.060 | And if you don't want to hire a fee-only advisor, talk to a trusted confidant, your friend or
00:02:29.580 | family member, and lay all your finances bare and your dreams and your goals bare so they
00:02:35.540 | can offer some objective, as objective as possible, feedback.
00:02:40.580 | Because when it comes to risk assets, there are no guarantees at all.
00:02:45.420 | 2020, a wild year.
00:02:48.580 | Tanking market in one month and then just rebounded quite quickly thereafter.
00:02:53.020 | 2021, a super bull market.
00:02:55.580 | 2022, a bear market.
00:02:57.300 | And 2023, a rebound.
00:02:59.140 | It's hard to figure out the short term, but over the long term, if you have a proper asset
00:03:04.180 | allocation and you have a consistent plan to keep saving and keep investing, I think
00:03:10.340 | you're going to be okay.
00:03:11.340 | I think we're going to be okay.
00:03:12.900 | So I thought my response was clear and good enough.
00:03:16.140 | However, Rodrigo responded, "Hi, Sam.
00:03:18.740 | I'm not sure I understand your reply.
00:03:21.000 | My point was not about my own investments or wishing to get financial advice from you.
00:03:25.700 | I was just pointing out an apparent contradiction that I note in the investment literature online,
00:03:31.080 | the constant affirmation that passive investment is better, but also the constant act of investing.
00:03:37.180 | Thank you for the link to your other post.
00:03:39.460 | It indicates that the apparent contradiction even in yourself, because you also say the
00:03:45.140 | passive is better, but are actively investing.
00:03:48.500 | To be fair, in that post, you do provide reasons for actively investing.
00:03:53.460 | One hope, two marketing, three pedigree.
00:03:56.340 | You also say we all like to dream, but aren't these kind of weak reasons?
00:04:01.420 | I'm trying to understand why you invest actively, not as a provocative or insulting question
00:04:08.300 | to you, whom I appreciate and very much respect.
00:04:12.660 | But just out of curiosity, why do you invest actively?
00:04:16.900 | Is it just a kind of fun?
00:04:19.420 | Isn't that kind of expensive entertainment though?"
00:04:22.100 | So this response is one of the reasons why I have to be careful responding to comments,
00:04:28.200 | because it can often go down a rabbit hole where I don't respond as thoroughly as possible,
00:04:34.060 | so it might be critiqued even more, and I've got to spend more time responding.
00:04:38.740 | And so it just goes on and on.
00:04:40.320 | And I'm trying to be really protective over my time, because we have so little of it.
00:04:45.220 | So as a result, what other people do in my situation is actually don't respond to comments
00:04:49.860 | at all, or remove comments.
00:04:51.940 | But I like the interaction.
00:04:53.260 | I like the challenge.
00:04:54.700 | And please feel free to criticize me as much as possible.
00:04:57.900 | And if I see something that is warrant of a response, I will.
00:05:02.680 | So my reasoning for why I still invest actively, a minority percentage of my investments, is
00:05:10.060 | due to the chance that I could outperform.
00:05:14.060 | When I was 22 years old, I turned $3,000 into $155,000 within six months.
00:05:21.140 | It was a company called Vertical Integration Systems, ticker symbol VCSY.
00:05:26.620 | And it was during the 2000.com boom while I was sitting at the trading desk at Goldman
00:05:31.300 | Sachs.
00:05:32.540 | It was a nascent Chinese internet company with a dial pad on the homepage.
00:05:37.340 | And I thought to myself, given I was sitting on the international equities desk, "Hey,
00:05:41.700 | the internet, China, sounds like a no-brainer.
00:05:44.060 | Let's buy $3,000 worth."
00:05:45.860 | I told my friends on the trading desk they bought.
00:05:48.660 | They talked to their friends on other trading desks at other major Wall Street homes.
00:05:52.460 | And then they bought.
00:05:53.620 | And then the stock just went up, up, up, and up.
00:05:56.860 | So at one point, the $3,000 position went to about $175,000, maybe $180,000.
00:06:03.000 | And then it started dropping.
00:06:04.700 | So I got out with $155,000 gain.
00:06:08.100 | I then parlayed that money into a down payment on a condo in 2003 that cost $580,000 in San
00:06:16.460 | Francisco.
00:06:17.960 | So these investments helped enable me to quit the rat race in 2012 at the age of 34.
00:06:25.100 | Because if I had just invested in index funds, I wouldn't have been able to.
00:06:29.820 | Why?
00:06:30.820 | Because the stock market was a lost decade from about 2000 to 2010.
00:06:34.740 | It just went nowhere.
00:06:36.140 | And I left in 2012.
00:06:37.920 | So my experience making active investments, stock picking, buying real estate, have been
00:06:44.780 | generally positive.
00:06:46.100 | I've definitely lost a lot of money as well trying to pick stocks like this one company
00:06:50.820 | called Gas Star that I think lost me like $50,000.
00:06:54.420 | I've had definite landmine blowups, shrapnel in my face.
00:06:59.340 | But because of these two specific investments, investing in San Francisco real estate in
00:07:04.500 | 2003 and investing in VCSY in late 2019 for four or five months, I'm going to continue
00:07:12.980 | to try to actively invest because I have this belief that I might strike gold twice or three
00:07:20.480 | times or four times.
00:07:22.080 | I know for a fact that I cannot outperform the masses who invest in index funds or index
00:07:28.740 | ETFs.
00:07:30.080 | And my clear goal is to outperform because if everybody is making a million dollars a
00:07:35.760 | year and has a 20% return every single year, and that's what you make and that's what you
00:07:41.000 | return, well, you're not improving your financial situation and potentially your lifestyle relative
00:07:47.160 | to others because in finance, everything is relative.
00:07:50.640 | So I'm willing to risk losing money by actively picking investments on some of my capital
00:07:58.920 | for the opportunity to outperform.
00:08:01.000 | And if I don't outperform, well, I only have myself to blame.
00:08:04.920 | I only have my poor decisions, my lack of due diligence, bad luck.
00:08:10.280 | Well, bad luck is blaming something else.
00:08:12.880 | So no, bad luck doesn't count.
00:08:14.840 | Other ways I could outperform and so can you is to increase your rate of saving, increase
00:08:21.480 | your investments in real estate, leverage up, invest in alternative assets, speculative
00:08:27.360 | assets.
00:08:28.360 | There are all sorts of risk assets out there to invest in.
00:08:32.960 | I mean, just in first quarter of 2023, you could have said, well, maybe regional banks
00:08:37.120 | have been unfairly punished and I'm going to try to step in there with some capital
00:08:41.880 | and buy, I don't know, PacWest Bank.
00:08:44.620 | If you did, you could have probably made a lot of money very quickly or you could have
00:08:48.520 | lost if you bought and sold at the wrong time.
00:08:51.440 | These are the risks we take as investors and we understand these risks and we don't invest
00:08:57.160 | more than what we can afford to lose and what we can afford to stomach losing.
00:09:02.400 | And I do want to draw your attention to one post I wrote and I recently updated and it's
00:09:07.320 | called the two levels of rich, one of which doesn't rely on index funds.
00:09:13.000 | Now that I'm 45 years old, I know a lot more rich people than I did when I was in my 20s,
00:09:18.000 | right?
00:09:19.000 | Because my friends have had over 20 years post-college to invest, to grind and to take
00:09:25.120 | calculated risks.
00:09:27.280 | And all of my friends who are very wealthy, we're talking 10 million plus, 20 million,
00:09:32.800 | 50 million, 100 million, 500 million, a billion, none of them got rich investing in index funds
00:09:39.960 | over their past 20 to 25 years post high school or college.
00:09:44.900 | They all got rich investing in their business, starting a business, right?
00:09:49.620 | Business equity or they were angel investors in other businesses that boomed.
00:09:55.660 | And so they basically use their capital to make active decisions and concentrated decisions
00:10:02.120 | in companies they believed in.
00:10:04.220 | Now a lot of their investments went to zero or lost them a lot of money, but that was
00:10:10.260 | the risk that we were willing to take.
00:10:12.400 | And I see this time and time again, folks, just go running in the most wealthy neighborhood
00:10:18.580 | during the day and check out the mansions and then go find out who owns these mansions.
00:10:24.580 | More than likely, they got rich through building a business or investing in amazing businesses,
00:10:30.900 | not investing in index funds.
00:10:33.820 | Index funds to me are almost like a safer, relatively safer way to preserve capital with
00:10:39.780 | a chance of beating inflation by 2 or 3% a year.
00:10:44.180 | That's how I view index funds right now.
00:10:46.740 | And remember, I'm 45 years old with two kids who is focused on capital preservation for
00:10:53.980 | the majority of my capital now.
00:10:55.740 | I don't really want to go back to work, although I am itching to go back to work for more of
00:11:00.300 | the camaraderie and social aspects to be a part of a team.
00:11:04.300 | I appreciate Rodrigo and other commenters' interest in how I invest my money.
00:11:09.980 | I'm sure it's interesting.
00:11:11.980 | But also remember, it may not be relevant to your situation unless you are very similar
00:11:17.860 | to me in age, in goals, in ability to generate income.
00:11:23.860 | What's way more important is yourself, looking at your own portfolio, your own objectives,
00:11:31.100 | your own asset allocation.
00:11:33.340 | You can look at mine, you can get some ideas of how I'm thinking because I do want to share
00:11:38.660 | my thoughts because this is real money for me.
00:11:42.660 | This is how I can't make huge mistakes now because I depend on my investments to live
00:11:49.000 | more than the average person who is focused on generating income from their day jobs.
00:11:53.660 | I also don't have some type of active investing course for you to buy for $9.99 or $2,000
00:12:00.620 | or whatever it is you see online to make extra money.
00:12:04.500 | That's just not me because I don't believe most people will be able to make or outperform
00:12:09.900 | actively investing.
00:12:11.420 | So in conclusion, please don't lose sight of the reason why you read Financial Samurai
00:12:17.780 | or listen to this podcast.
00:12:19.980 | The purpose, the main purpose should be to better your own financial situation and live
00:12:26.100 | a better life.
00:12:27.540 | I do appreciate when readers and listeners are interested and concerned about how I'm
00:12:34.420 | investing my money and what I'm doing.
00:12:36.700 | And if you see something egregiously wrong, please let me know in the comment section.
00:12:41.540 | It'll be really helpful.
00:12:43.100 | The more cogent and thoughtful your argument is as to why you think I shouldn't do something
00:12:48.820 | is very helpful because I always have blind spots and I'm always looking to learn from
00:12:54.580 | other perspectives.
00:12:55.580 | I really appreciate it.
00:12:57.000 | The great thing about investing is that it's pretty accessible to a lot of people.
00:13:03.780 | You either are satisfied with your investment results or you're not because the numbers
00:13:08.620 | don't lie.
00:13:09.620 | The returns don't lie.
00:13:11.220 | And in terms of money overall, you're either satisfied with the money you have at the age
00:13:16.840 | you are at right now or you're not.
00:13:20.540 | And if you're not satisfied, you're going to do things to increase your chances of being
00:13:25.620 | satisfied.
00:13:26.620 | Thanks so much everyone.
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00:13:40.980 | to engineer your layoff.
00:13:43.220 | And if you'd like to read a great personal finance book that's also a Wall Street Journal
00:13:47.980 | bestseller, check out Buy This, Not That at FinancialSamurai.com/btnt.