Warren Buffett is a smart guy and has ascended to near immortal [status] amongst the investment community due to his superior stock picking skills and boundless wealth. [That being said,] listening to his views on portfolio management and diversification could cripple your financial health and may make him one of the most dangerous men in finance. [Let me explain.] Words: 720

The reason why I think this is an important book that deserves to be among the ten investment classics I’ve selected is that the time in which Loeb wrote it is very much like our own time. I believe that, to every thing in the stock markets, there is a season. A time to buy and hold and a time when buy and hold will destroy your ability to recover. There are vocal advocates for buy and hold and there are vocal advocates for being willing to be nimble and trade – but both biases stem from the type of market in which the proponent spend his or her “formative years” and neither are appropriate for “the other” type of market. Words: 1440

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Joseph Shaefer’s (http://www.stanfordwealth.com/) original review* for the sake of clarity and brevity to ensure a fast and easy read. Shaefer goes on to say:

[I must confess, up front, that] “The Battle for Investment Survival”, by Gerald M. Loeb (1935) is not well-written and well-organized but that’s not to say it isn’t worth reading; it is! It is just that it’s sort of like visiting a farm where the wheat has been cut but not yet threshed or winnowed: you have to slog through a lot of stalks and chaff to find something you can digest. Once you do that, however, you’ll find it was well worth the work.

Loeb on Buy and Hold
Secular bull and bear markets typically last a minimum of 10 years and may last as long as 20 years. So if you are an analyst who cut your teeth on investing in the secular bull between 1982 and 2000, you may well believe that the current interregnum is an aberration and that buy and hold is still the way to go. It was – back then but, taking the long view, you can see it might really hurt you now.

That’s why “The Battle for Investment Survival” is worthy of your time today. Mr. Loeb wrote it at a time very similar to our own. Forget the “gurus” telling you that buy and hold will come back. Of course it will come back – in the next secular bull market but if you listen to them now, I believe you could lose a fortune. Why not listen to someone facing the same up and down ratcheting markets that we have faced since 2000 and are likely to face for at least another year or two? If you do that, I believe the “wheat” that you will find – not without a little effort – in this tome will be quite wholesome for your portfolio.

Loeb on Making Money and Safe Havens
Writing with the lessons of the early 1930s uppermost in his mind, Mr. Loeb disabuses the reader right away of the notion that:
a) there is easy money to be made. This is work. More fun than digging ditches or picking cotton or laying brick, maybe, but work, nonetheless
b) there are safe havens or safe investments when markets decline pointing out that, even in the best of times, bonds lose value because our government needs a steady depreciation of the dollar in order to pay back creditors in ever-less-valuable currency. What a dollar bought in 1965 now takes nearly 7 dollars to buy.

Loeb on Diversification
Loeb tells us diversification is not all it’s cracked up to be advocating instead fewer stocks to keep track of, but gaining depth or understanding on the ones you do hold. His point, verified by virtually every investor during last year’s plunge to 6000 on the Dow, is that when people panic they sell everything, so a diversified portfolio will fall just as much as an undiversified one. Moreover, a diversified portfolio will reduce the attention you can pay to individual stocks and he believes, no matter how solid the company, if its stock goes down, sell it. Better to take more very small losses than one or two devastating ones. Again, the recent experience of The Crash is clearly in evidence in his strategy.

Loeb on Liquidity
Beyond the investing principles I mentioned above, some other takeaways from the first 153 pages include:
Rule #1 – Buy only something that is quoted daily and can be bought and sold in an auction market. Liquidity is key! If you’re going to slowly accumulate 10,000 shares of a $1 stock and expect to sell for $1 in a rapidly-declining market where that is the alleged bid, I have some oceanfront property in Nebraska to sell you. That “bid” may only be for 1000 shares, or 100. The market-maker will eat you alive as you try to sell an illiquid security – as you watch your sale go from 1000 at $1 to 3000 at 92 cents to 2000 at 89 cents, and so on. Stick with quality names, well-followed, current in their reporting, and in an auction marketplace.

Loeb on Speculation
Mr. Loeb does not fear the word speculation. He uses it quite differently than I would but, once you understand his definitions, his strategy makes sense. To him, speculation simply means to take advantage of a capital gain opportunity with a high probability of reward – whereas investing means to seek a slow steady return that is bound to bite you if one thing goes wrong with the company, since your capital gain will likely provide a smaller cushion for error than in those items you bought that moved more.

Loeb on What to Buy and When to Sell
Too many investors buy a stock they hear touted and fervently hope it goes up — but they have no target in mind in terms of duration to get “there”, nor any concept or where “there” is. Loeb implores you to understand “why it was opened, what one expected to make, how long it was expected to take…” Selling – and knowing why and when to sell – is more difficult, and perhaps therefore even more important, than buying.

Loeb on When to Buy
Forget relative momentum and greater fool claptrap and buy when:
a) Sentiment is bearish
b) Prices are low relative to historical norms
c) Current business conditions are poor (not good!)
d) The particular company you are reviewing is out of favor
e) Dividends are non-existent or at least lower than normal
f) The stock is undesirable to others, and sell when the majority believes the quality has reached investment grade.

More Investment Advice from Loeb
In addition to avoiding penny stocks, sucker mailings, Internet and e-mail touts, etc. build in-depth knowledge in a limited number of venues that you can stay on top of. Even further, he advises that it is better to stay in cash than to reach for yield. Even the best dividend-payers will often plunge right alongside the most rankly speculative stocks. Why? Because some people are loathe to admit their mistakes, so they sell the positions least down at that moment, but then create a waterfall of selling as everyone else does the same thing.

“The Battle for Investment Survival” is well worth reading – especially for today’s investors. If he was right about the times in which he was writing – and he seems to have been – and I am right that this time is similar in direction or, more accurately, lack of direction, then:
this may be one of the best books you could possibly read to protect what you have and be prepared for the next time buy and hold will make this game a whole lot easier.

*http://seekingalpha.com/article/200373-timeless-investment-classics-part-ii-understanding-the-hopes-fears-greed-of-crowds (Joseph Shaefer is author of the investment primer ‘Bringing Home the Gold’ and editor of Investor’s Edge®.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.

The debate over deflation/inflation continues as some of our most astute economic observers take sides. Frankly, I think that both sides are missing part of the picture. The debate concentrates on the after shocks of inflation/deflation: prices instead of the money supply and the demand for it. Words: 621

In further edited excerpts from the original article* Paul Mladjenovic (mladjenovic.blogspot.com) goes on to say:

“Prices” are the visible barometer that both sides of the debate gauge. The inflationists see (or warn about) “rising prices”. The deflationists see (or warn about) “falling prices”. There are very convincing cases by both sides.

At the present time the deflationists seem to have the upper hand. They point out that we have a “deflationary economic environment” due a variety of factors that are contributing to falling prices (such as deleveraging and unemployment). Inflationists see the current stage being set for future rising prices due to factors such as expanding money supply and a weakening dollar. What is the real deal?

First, let’s set the record straight on the terms…

Inflation:
Is the condition where more money (such as a paper currency) is created by the issuing authority (the government’s central bank) and this growing supply of money is chasing a fixed basket of goods and services (and/or assets). Inflating the money supply (“monetary inflation”) is the problem and the symptom is usually rising prices (“price inflation”). Inflation is not the price of things going up…it is the price (or value) of money going down.

Deflation:
Generally the opposite… The money supply is stable or shrinking relative to the supply of stuff we
buy and subsequently there is less money chasing goods and services. In this case, the “value” of money usually increases.

Therefore, for prices to rise there needs to be more (and growing) money supplied to the market relative to what is being bought. Two things need to happen for prices to rise from an inflationary perspective:

1. More money needs to be created.
This money needs to “chase” what is being purchased (Think “circulation” or “velocity”). This is a crucial point. Prices won’t go up just because the money supply expands; the money has to be actively “chasing” those goods or services (or assets) for the prices to see upward movement.

2. For prices to go up (“price inflation”), you need monetary inflation (increasing the money supply) and velocity (the money is chasing goods, services and/or assets).

In recent years, the money supply has indeed expanded dramatically…but…relatively little “chasing” has been going on. If the Federal Reserve instantly created $10 trillion dollars and gave it to you, that is definitely monetary inflation but… if you merely put it in your sock drawer and hoard it, then it would not circulate (chase stuff) and therefore you wouldn’t see “price inflation”.

This is where part of the confusion and controversy is. Inflationists point out that money supply is growing dramatically and they are correct. Deflationists point to falling prices in many areas of the economy and they are also correct. Here is what we should be aware of…

The prices of goods, services and assets are most affected by 2 fundamental factors:
1. The money supply (primarily enacted by government)
2. Demand and supply (primarily enacted by the marketplace)

Understanding the money supply (its growth or shrinkage) coupled with understanding “demand and supply” will give you a better picture of the economy. This, in turn, will make you a better analyst, money manager or investor.

Regardless of what side of the debate is proven correct the bottom line is that precious metals should be considered in a balanced, diversified wealth-building strategy. Paper currencies can be produced at will but precious metals can not. Therefore, any investor or money manager interested in diversification and safety should consider precious metals.

*http://mladjenovic.blogspot.com/2009/10/part-i-deflation-or-inflation-here-is.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

Charlie Munger says “Wide diversification, which necessarily includes investment in mediocre businesses, only guarantees ordinary results” says Charlie Munger [and he is not alone in that view]. Words: 515

In further edited excerpts from the original article* Wade Slome (www.InvestingCaffeine.com) goes on to say:

Burton Malkiel, Princeton Professor, economist, and author, summed it up succinctly, “Diversity reduces adversity.” Diversification acts like shock absorbers on a car – it smoothens out the ride on a bumpy financial road.

Jason Zweig, Wall Street Journal writer, acknowledges the academic findings that underpin these diversification benefits by stating the following: “As many studies have shown, at least 40% of the variability in returns can be reduced by moving from a single company to 20. Once a portfolio contains 20 or 30 stocks, adding more does little to damp the fluctuations in wealth over time. If you want to pick stocks directly, put 90% to 95% of your money in a total stock-market index fund. Put the rest in three to five stocks, at most, that you can follow closely and hold patiently. Beyond a handful, more companies may well leave you less diversified.”

Don Chance, a finance professor at the Louisiana State University business school asked more than 200 students to consecutively select stocks until they each held a portfolio of 30 positions. Here are two of the main findings:
1) On average, for the group of students, diversifying from a single stock to 20 reduced portfolio risk by roughly 40% – just as would be expected from the academic research.
2) After the first few initial stock picks, for each individual portfolio, were made from a list of large cap household names (e.g., XOM, SBUX, NKE), Professor Chance found in many instances students dramatically increased portfolio risk. These students juiced up the octane in their portfolios by venturing into much smaller, more volatile stock selections.

Gur Huberman, a Columbia finance professor, also points out a tendency for investors to clump stock selections together in groups with similar risk profiles, thereby reducing diversification benefits. Diversifying from one banking stock to 20 banking stocks may actually do more damage.

Statistically, Zweig points out that, “Thirteen percent of the time, a 20-stock portfolio generated by computer will be riskier than a one-stock portfolio.” Professor Chance found similar results according to Zweig: “One in nine times, they [students] ended up with 30-stock portfolios that were riskier than the single company they had started with. For 23%, the final 30-stock basket fluctuated more than it had with only five stocks.”

Warren Buffett says, “Diversification is protection against ignorance.”

Peter Lynch has referred to diversification as “deworsification,” especially when it came to companies diversifying into non-core businesses.

Charlie Munger says “Wide diversification, which necessarily includes investment in mediocre businesses, only guarantees ordinary results.”

As you can see, there are different viewpoints regarding the benefits. Indeed, it would seem that putting more eggs in your basket may actually crack your portfolio, not protect it.

*http://investingcaffeine.com/category/asset-allocation/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

Why should you invest in the precious metals sector? How much of your investment dollars should you allocate to precious metals? Should it be invested in bullion, ETFs, mutual funds, individual mining/royalty stocks or warrants? Words: 1407

In further edited excerpts from the original article* Jeff Nielson (www.BullionBullsCanada.com) goes on to say:

Use the Gold:Silver Ratio to Determine your Mix
For those of you who would like a very simple means of allocating your precious metals dollars let the gold/silver ratio dictate where your dollars go by purchasing silver related investments in a percentage equal to the current ratio. With the current ratio ranging somewhere between 60:1 and 70:1, this would dictate putting 60% to 70% of new dollars into silver/silver mining stocks, and the remaining 30-40% into gold/gold mining stocks.

The next decision to make is in what form of precious metals holdings you should invest i.e. bullion, ETFs, mutual funds, individual mining stocks (and either producers, developmental or exploration), royalty stream companies or the warrants associated with each.

ETFs
For those who are adamant about using bullion-ETF’s rather than holding the “physical” metal directly, you must do your homework. Examine the prospectus carefully, and automatically shun any fund which does not hold/store all of its own bullion. Keep in mind that the “custodians” of the vast majority of ETF “bullion” are the same bullion-banks who are currently holding the largest short positions in gold and silver in history. Do you really think these bankers want to help small, retail investors enter this market (and undermine their massive “short” positions)?

Physical Bullion
Assuming investors allocate 100% of their precious metals dollars in real bullion or precious metals mining companies, the percentage to assign to those two categories is partially a function of risk-tolerance and partly an issue of time-horizon.

I can certainly understand after the events of 2008 that many investors are much more concerned with maximizing the safety of their investments, rather than simply seeking to maximize profits. I would not fault any investor for choosing to invest all of their precious metals capital into bullion. This is especially true for investors only wishing to focus a small part of their portfolio into this sector. For more elderly investors with a short investment horizon, it would also be prudent to focus on bullion, itself.

Precious Metals Mining Company Stock
For those investors who are wishing to invest 20%, or 25% (or even a greater percentage) into precious metals, I would strongly urge investors to put at least ¼ of those dollars into the stocks of quality precious metals miners. Even in the event of a complete breakdown in the global monetary system (which remains a distinct possibility), the worst-case scenario for holders of these equities is that they could become completely illiquid for an indefinite period.

However, with gold and silver as the best “stores of value” of any asset-class, clearly the companies that produce these hard assets would be favored above any other class of equity – and would thus be first to regain their value as markets returned to normal.

For more aggressive investors, or those with a longer investment horizon, I would suggest that at least 50% of their precious metals dollars be invested in the miners – since they will always outperform bullion over the course of any bull market in precious metals. As I have detailed previously, it is the “junior” miners (and especially junior producers) who provide the best risk/reward profiles amongst the mining companies.

Trading
Of course, placing your investments in this sector is literally only half of the task of managing your precious metals portfolio. Regular profit-taking is an essential part of any long-term investment strategy, so deciding how/when to take profits is a critical determinant in the long-term performance of your investments. As a firm believer in the KISS principle (“keep it simple, stupid”), again I would suggest a very basic strategy: do not sell any of your bullion holdings.

Given that the mining companies offer superior performance to bullion, itself, trading and profit-taking exclusively through buying and selling these shares provides ample opportunities to lock-in gains – with the greater volatility of the mining shares giving investors the best opportunities to re-invest their profits on the inevitable dips which occur in even the strongest sectors.

As for when to take profits, in this case precious metals are no different than any other asset class. Many investors strongly favor selling half their positions on a “double” (a 100% gain), so that your remaining investment represents “free shares” – already fully paid-for through profit-taking. Personally, I don’t like to be that rigid with my own buying and selling.

With my favorite holdings, I rarely sell more than ¼ at any time. On the other hand, with companies which I don’t regard quite as highly, I’m quite happy to sell 100% on any short-term spike – as there are no shortage of quality, under-valued companies to pick from. For those who are investing in the junior miners, do not allow yourself to “fall in love” with any of these companies.

Diversification
Seeing some of the spectacular gains which these companies have achieved just in this current rally, the temptation for novices to this sector is to look for a “home run” – and put most/all of their precious metals capital into one or two companies which they see as “can’t miss” prospects. Never forget that there is always risk with these companies, no matter how competent or conservative is the management team.

Accidents occur, governments change, and there are always the dreaded “Acts of God”. You must distribute your dollars into a basket of these companies. As I suggested earlier, for those only wanting to put a small portion of their capital into this sector, you are much better off to stick with buying bullion, rather than placing a “bet” on just one or two mining companies.

I personally have more than ¾ of my own portfolio concentrated in this sector – with that ratio having risen substantially due to the outperformance of this sector. I am fully conscious of the conventional wisdom of “diversifying” into many sectors/asset-classes under normal conditions, however, “this time it is different”.

This Time is Different
The last forty years is the first time in history that the entire, global financial system has been completely detached from a gold-standard. In every individual instance of purely “fiat” currencies (i.e. money backed by nothing), this banker-driven adventure has ended badly. Now, for the first time, the current system is facing the imminent risk of collapse.

As is always the case, the cause of this instability is the grossly excessive (and extremely unstable) mountains of debt (created by the bankers), combined with recklessly “easy” monetary policies (also courtesy of the bankers) which are fueling a rapid expansion of these mountains of debt. Unless an investor truly believes that you can “put out a fire with gasoline”, there is only one way this recklessness can end.

This doesn’t mean that everyone should put 100% of their investments into precious metals (or even close to it). What it does mean is that investors must be focused first and foremost on protecting their wealth – and only once that is accomplished do we have the luxury of seeking to maximize returns.

The precious metals sector is not the only place for people to make their investments, it’s simply the best sector. No other category of investment offers the combination of wealth preservation with superior up-side, investment potential. However, this does not mean that those investing in this sector can afford to be lazy or complacent.

The generational shifts taking place in our societies, economies, and markets means that we will see unprecedented volatility – and no shortage of “shocks” to markets. Because there are so many major stresses at work in the global economy (mostly derived from excessive debt/leverage), there are a near-infinite number of possible calamities ahead.

Focusing a significant portion of one’s portfolio into the precious metals sector provides a realistic strategy for small investors to protect themselves – versus the option of leaping from sector-to-sector as various crises unfold in the years ahead. As with all investment cycles, those who engage in such preparation first will be amongst those who benefit most from this strategy.

*http://www.gold-eagle.com/editorials_08/nielson120109.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

What is surprising to me these days is how quickly investor mindset has shifted from the sheer uncontrolled fear they felt in October or November of 2008 or March of 2009. They have forgotten that they made impulsive decisions; that they made big decisions when they should have been making small ones; that, instead of making incremental adjustments to portfolios, instead of rebalancing at the margin, they bailed out of asset classes entirely or moved completely into cash. That’s very troubling to me and it suggests that we’re nowhere near out of the woods. It worries me so much I think we’re probably in for another big surprise before we have a full recovery. Words: 1489

In further edited excerpts from the original article* Jason Zweig (www.morningstar.com) goes on to say:

There’s been an enormous amount of performance-chasing. Part of it is that humans are a hopeful species. We want to believe that the worst is behind us and that happy days are here again and because of that, people are already doing some very foolish things that they will come to regret later. Instead, they should stop and reflect on what has recently transpired and take action to better invest in these difficult times.

Following are a few suggestions on how to do just that:

1. Practice Staying Calm and Making Sound Decisions
To prepare for times of financial turmoil it is important to deliberately create an environment that makes rational decision-making difficult and then develop a series of portfolio decisions. You need to consider those decisions while the lights are flashing and the bells are clanging and CNBC is full of red arrows pointing downward and all the stock charts are going through the floor. You have to come up with a way of calmly arriving at a decision that makes sense. I think one of the ways you need to do that is that you need to imagine the future. You need to frame the decision as “Let’s make sure we do something today that we won’t regret six months, a year, five years from now.”

This kind of exercise is that it’s practice for the real world because as we saw last fall, and this past spring, that’s what it was like. People made decisions every day under those circumstances, and a lot of those decisions were bad, because people had never been in circumstances like that before.

I would close this observation with a reminder to everybody, which is now part of American folklore. Think of Sully, the famous captain of the US Air flight bringing his plane down into the Hudson River and having every single passenger survive. What enabled him to do that? Not his superior knowledge, not knowing more about his airplane, or the Hudson River, than anybody else. What enabled him to do it was practice.

If you’ve never really practiced what it’s like to make a decision in a global financial panic, you can make panicky decisions in a global financial panic, and you’ll crash your plane and you’ll kill everybody but if you’ve practiced how to stay calm and make a good decision, you stand a better chance of being able to do it. Repetition is the key to calmness.

2. Understand Diversification
A lot of investors have been saying of late that strategic asset allocation is dead and that tactical asset allocation is the way to go. I don’t think that is the case. I think people have confused a whole bunch of factors. One, people really misunderstand what diversification means. People think diversification means that if you combine uncorrelated assets you end up with a portfolio that won’t go down in value but that’s not what diversification means.

First of all, you’re not diversified unless you own something that hurts to own and the second thing is that at a time when it seems the whole world is going to hell in a hand basket, everything goes down. That’s what happened this time, that’s what happened in 1973-74, and it happened in 1929 and it happened in 1907. It happened numerous times in the 19th century and as far back as you care to go.

So diversification is really powerful, but it’s not magic. It’s a very good thing but it doesn’t work miracles. So that’s a problem I have with this argument. When people say diversification failed, they’re defining failure in a very strange way. They seem to be saying if, when most assets went down, something didn’t go up, then diversification didn’t work but that’s not what it ever meant. All it ever meant is that if you have assets that are statistically not highly correlated, putting them together will give you a better trade-off of risk and return.

If you look at what happened in the financial crisis, that’s what you got. People who owned some stocks and some bonds did better than people who owned all stocks. People who had some other assets in there did better still. The fact that the U.S. market went down 37% and foreign stocks and emerging markets stocks went down also doesn’t mean that diversification didn’t work, because they didn’t all go down exactly 37%.

Diversification did work for exactly that reason–you got different rates of return. People want diversification to produce a positive return out of some asset when their favourite asset is down but there are no guarantees. Diversification isn’t a form of insurance; it’s just a form of risk control.

The problem with this whole “asset allocation is dead” argument is that, while asset allocation hasn’t worked in certain years nothing else has either. That’s the problem I have with this whole debate; it’s easy to say what hasn’t worked well lately, but it doesn’t mean that all the things that never worked have suddenly started to work.

3. Consider Indexing
There are many many reasons why I favour indexing and believe it makes sense for most investors:

a) Human life is finite, so if I find a fund manager I love, I have to ask myself if he or she is still going to be around in 30 years when I retire or 100 years from now when my kids or grandkids inherit my shares in this fund, and what confidence do I have that he’s as good at picking successors as he is at picking stocks? That would be the first.

b) In a taxable account, it’s hard to argue for active management at all. If an active manager is doing his or her job and being active, then capital gains are going to be generated. In fact, the better a person is at doing his or her job, the larger those gains are going to be over time.

c) Indexes minimize some of the worst aspects of human error. In the case of short-term bond funds in particular, a lot of the managers just yielded to the temptation of chasing yield and putting in a lot of mortgage garbage because they could goose the yield. If you bought a short-term bond index fund, you just didn’t get that sort of thing. There are short-term bond ETFs, and none of them blew up because the computers–the machines–didn’t have much interest in mortgage derivatives. The humans running active funds, on the other hand, were hell-bent on earning a bonus based on how much yield they could produce.

d) The overriding reason is that, in my opinion, it’s extraordinarily difficult to pick individual securities that will outperform a market benchmark and even harder to select managers who will outperform a category average.

e) It’s extraordinarily difficult to pick a great manager who will still be great and the most basic reason for it of all is that luck is really the driving force, to the extent that most investors don’t appreciate and can’t appreciate because it makes people uncomfortable, but it happens to be true.

I’m not saying that active management is bad or futile, or that I think everyone who invests in an actively managed fund is an idiot. What I am saying is that it’s extraordinarily hard to get it right, and maybe the best reason of all to do it is if you can find a manager whose view of the world is really similar to your own. Because then you’re a lot more likely to go along for the ride.

Index funds don’t have personalities. A great active manager can be a magnet for loyalty, and that’s really important and I would never denigrate that. In fact, most investors would probably be better off putting their money into a mediocre fund they could be loyal to than a whole series of great funds that they go barging in and out of at the worst possible times.

*http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?id=313708

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.