tag:blogger.com,1999:blog-8152901575140311047.post1992198781261205478..comments2024-03-28T12:49:46.624-04:00Comments on Musings on Markets: Active Investing: Seeking the Elusive Edge!Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-8152901575140311047.post-70597060838846606302017-01-04T05:02:01.750-05:002017-01-04T05:02:01.750-05:00Dear Dr. Damodaran, I am valuing GE and faced with...Dear Dr. Damodaran, I am valuing GE and faced with this challenge that I'd like you to shed some light on, though it is not related to your post. For net CapEx, should I include the value of dispositions of business (GE Capital) into the calculation for the years it is expected to take place? This one-off incident of course will not be part of my long-term cash flow projections. I just think that dispositions represent a source of cash flow that can be used to return to shareholders or fund growth initiatives and can thus have an impact on share prices. Please let me know your thoughts on this. Sincerely. Tung (Jerry) Hoang Anonymoushttps://www.blogger.com/profile/06656407281171426629noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-80626560052344440712016-12-30T13:38:31.155-05:002016-12-30T13:38:31.155-05:00Prof. Damodaran,
Commenting on the last 2 article...Prof. Damodaran,<br /><br />Commenting on the last 2 articles. I am in the industry and do bottoms up valuation on single stocks. Some will naturally cry bias but I truly do believe in the valuation approach. If it is what I believe, how else should I act? <br /><br />Now that my bias is exposed, I like to take things to the extreme to test a hypothesis. I am not going to cover all of the inherent headwinds faced by mutual funds and the managers such as cash limitations, style limitations, retail fear led redemptions or retail greed led share purchases, egos, bonuses tied to indexes (Active Share), consultants trying to earn their keep focusing on quarterly results, unnecessarily high fees, etc. <br /><br />I can't accept passive "investing' as a logical end-point although I do acknowledge the graphs and the data points in this article. As they say, the market is actually the expression of the average investor.<br /><br />Investing is putting money to work in a company that has the balance sheet, products, processes and management to generate a return. With passive investing you are throwing it in a pool expecting more successes than failures spread-out over say 500 companies on the premise that all known factors and assumptions are priced in. Your investing is more statistical based relying on probabilities and correlations. While I think statistical analysis and MPT have some places in portfolio management I think them more the tail than the dog. I don’t see the following always priced in: accounting of fear and greed, management, business cycles, responses to regulation, interest rates, long-term impacts of CAPEX trends, changing technologies, the over payment for acquisitions and share buy backs , etc..<br /><br />When buying stocks one should view putting the money to work as handing it over to a company to use that money to grow that company and generate cash flow. Analysis begins with establishing the base line of the business position, using numbers to try to gauge if there is a history of performing well and whether the numbers back up their rhetoric and claims and making assumptions on this historical picture. I can't believe that if I was looking to buy a private business to run that it is only blind luck as to whether I would pick a good business to purchase and that my better option is to get a syndicate together so that I could buy a bunch of businesses and hope some will work out.<br /><br />If there is no economic value (and placing no value on the joy of the work of valuation) in active investing then valuation and reviewing of financial statements is completely useless. While we are throwing out valuation, why not throw out economics? That discipline surely has had some doubtful calls. For the time and effort spent on financial and economic theory, I don't see the ROI (sorry to the finance and econ PhDs.). It should be basically a quasi-dead industry run only by custodians, 3 or 4 ETF providers and coders. I suppose investment bankers may have a place but what happens to the capital raise and IPOs if there is no view to the upside? Who will take the risk? Maybe private equity is the new King of the Hill. What will the landscape look like if capital formation has all but dried up? Where does the capital come from for business to form and grow in a 90% passive world? <br /><br />Now of course, I don't believe what I suggested above. I think that knowing the value of a company looked at from many angles enables you to act with conviction when the market overreacts.<br /><br />I welcome this wholesale move to passive investing. I can't wait until a Time Magazine cover says "Active Investing is Dead". I can see how strategy type investing loses its edge as others pick up on it. Value investing is not a strategy per se as it is a process of hard work where the ground beneath you is constantly moving.<br />Over the years I have thought many times about getting your perspective and I finally used this article as the catalyst. Should I sign this Don Quixote?<br />Anonymoushttps://www.blogger.com/profile/09678681071634052171noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-58931954977673732962016-12-29T13:40:26.545-05:002016-12-29T13:40:26.545-05:00Thank you for your post on the topic professor. Du...Thank you for your post on the topic professor. During school, I had an opportunity to delve deeper into this topic. I came across the concept of 'Active share' - percent of your portfolio different than the index - analogous in some ways to tracking error. It appears that the under-performance of active strategies is caused by 'closet indexing'. Funds with high active share do seem to create alpha. Now whether it is due to higher 'risk' depends on how one defines 'risk'. Sidakhttps://www.blogger.com/profile/06824566307098141891noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-2426794572789708802016-12-29T12:16:09.570-05:002016-12-29T12:16:09.570-05:00Elusive ? Yes. Impractical ? No. I think that chas...Elusive ? Yes. Impractical ? No. I think that chasing alpha in an era of diminishing returns -to use an analogy-is like hunting an animal that exists in fewer numbers than before. Also, large gains are being diluted by magnified losses. <br /><br />The active managers that do best in equities, it has been shown, are those with 20 or fewer holdings.<br /><br />It is just hard to do well with richly priced securities. When the prices will adjust to a more realistic level I think you can expect to have active managers shine at their craft. Max Cantorhttps://www.blogger.com/profile/16871211673519830841noreply@blogger.com