Passive investing: a pointless exercise

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To the question of active versus passive investing.

It’s time to scrape the barnacles off this particular boat, as I do not believe that you can do both. You know what happens to people who stay in the middle of the road - they get run over!

One quick point before we start.

My starting point as an investor was using funds, and that’s what I’ve stuck with throughout my investing career, and when developing the Saltydog system. Funds are the investment vehicle we use with Saltydog.

So when I talk about active versus passive investing here, I’m referring to funds.
Having said that, the principles apply equally to investing in individual shares.

The experts and advisors who advocate passive investing all tend to repeat the same thing: active investing is too difficult and time-consuming for the average investor.

They would have you believe that successfully controlling and running your own investments requires the expertise of Warren Buffett, the cunning of Nick Leeson and a tall skyscraper in the City of London full of analysts leafing through reams of investment data.

Is this true? No, it isn’t. At least not for an averagely intelligent, motivated person, prepared to devote a little time to it.

As an amateur I have proved this to be the case. And I hope you will come to the same conclusion.

But let’s give the passive (fund) investing experts their say. What they will tell you to do is choose a good fund manager in a growing sector of the market, and then stick to him through thick and thin.

That sounds all well and good. But the fact of the matter is that sectors that are performing well don’t conveniently go on performing well indefinitely. At some point they go out of fashion and become loss making. And then what do you do?

The passive investor will say that a good fund manager will recover his losses when his sector returns back into fashion, and what goes around comes around. (Whatever that means).

But in my view this is just silly. If you really believed that, why on earth would you want to see your investment lose some of its previous gains, even if it was going to recover them back sometime in the future? To me that is a pointless exercise, when my money could be elsewhere making a positive return during that time.

Common sense surely dictates that you would go elsewhere whilst the fund was on the slide and return back to the fold later, when it started to recover again.

“Fine”, I can hear you saying, “but how do you know when to make these changes?”

Yes, this is the vital question, and most people have no idea how to answer it. But successful trend investors have answered it. With the Saltydog system I have answered it. And the market-beating performance of the Saltydog portfolio proves that I’m not deluding myself. (As does the feedback from other private investors using it).

The critical thing is to have a constant supply of up-to-date information on the performance of the funds from which you choose your investments.

Since I started out investing in this way in the year 2000 my portfolios have never had less than double digit growth, whilst taking very little risk.

If I can do this, so can you.

Though I will repeat: you must have access to continuous, up-to-date, accurate information. Your decisions cannot be based on rumour, hearsay or vague hunches.

An example of the importance of this goes back to the days of sail. Clipper ships returning from the Far East before proceeding up the English Channel to London, would call in at the port of Falmouth at the western end of England. From here they would send coded messages by horseman to the ship’s owners in London, this being the fastest method at the time.

These messages not only gave the details of the ship’s cargo of spices, teas and exotic goods, but also international news. The traders with this information then had a head-start on their competitors, and would be making their decisions and fortunes based on facts.

In my earlier working life I had a similar experience of how important up-to-date information can be.

Fifty years ago I was the navigator on a Jamaican Banana boat plying between London and Kingston Jamaica.

During the hurricane season, if we were unlucky enough to be caught out by one of these tropical storms, the most important thing was to have accurate information on the storm’s size, speed and direction. This was supplied to us by the brave men of the American Coastguard who flew their planes into the eye of the storm and kept us informed of its progress.

Armed with this information we would then alter direction, slow down, even turn around and do anything within our powers to keep the ship in the South West quadrant of the storm. This is the safest sector, as the hurricane should in theory move off to the North leaving us able to continue to our destination.

This was an early salutatory lesson in the importance of good information.

Read next > All at sea: how I got started with trend investing