kastnna wrote:
- quote -


I don't get your point...what is ADCDX?

-Tad

On Oct 19, 12:40 pm, Tad Borek <bore...[at]pacbell.net> wrote:
- quote -

Tad I think investopedia's definition of "active management" is pretty
accurate. Most non-index funds are actively managed. Standard & Poors
thinks so too. The SPIVA report is created to show how those "actively
managed" funds do in comparison to the benchmark index.

For most funds there are managers that buy and sell within a given set
of guidelines in an attempt to outperform the benchmark index against
which the fund is judged. If I hold ADCDX fund for 40 years, I would
say that I have been passive, but the fund may have bought and sold
thousands of investments in that time. How is that not "active"?

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

You quoted Investopedia's definition for "active investing."
Look instead at its definition for "active management." It's
similar to your definition of "active management."

Still more grist for the semantics mill: Chris Lott's
interesting, investing FAQ site has a good, applied
discussion of active vs. passive at
http://invest-faq.com/cbc/mfund-index.html .

"Beliavsky" <beliavsky[at]aol.com> wrote
- quote -

I agree the "barrier to entry" for application of a
systematic strategy is now lower, but this is not because
the traditional approach has been fallen by the wayside.
It's simply that the traditional company information that
brokers of, say, the 1970s and earlier sought is more
readily available via the internet and other, near instant
tele-yada-communications. (The internet not being flawless
of course. Then again, greater information access applies to
regulatory yada agencies as well, so with greater
transparency in general, maybe the info we have about
companies is more legitimate these days than in decades
past.) Also, I would not call the traditional approach
"qualitative." A good broker decades ago did sift through a
company's financial numbers, weighing what the numbers said
about the company's health. That's exactly what folks (at
least those who make stock decisions based on fundamentals)
do today when they read those numbers on the net.

Maybe the one wrench in the system that recent decades have
introduced is legitimizing the application of numerology to
stock picking--the use of so-called "technical analysis."

Then again, those employing TA probably are in part
responsible for some of my good fortune. Their losses can
often be my gains.

Just a clarification, at least from where I am sitting.

Beliavsky wrote:
- quote -

What about VBISX, Vanguard's Short-term Bond Index Fund? Turnover: 106%,
Category average: 93%. Is that not a passive fund, despite having
above-average and > 100% turnover...?

I don't think turnover is dispositive to categorizing a strategy as
active or passive. "Does the firm employ securities analysts?" tells a
lot. As an example, all of DFA's funds are passively managed, and they
don't have any securities analysts (at least, none doing typical
securities analysis). But few of the funds track any index. Arguably
they're nothing more than quant funds based on a specific set of
academic research...quant = mechanical.

Investopedia's definition of "active management" just plain stinks: "An
investment strategy involving ongoing buying and selling actions by the
investor. Active investors purchase investments and continuously monitor
their activity in order to exploit profitable conditions." Any small-cap
value fund constantly monitors every one of its holdings and spits it
out when it's no longer small-cap or value, per the criteria set by the
fund (which might be membership in a small-cap value index, or just a
criteria based on market cap and book-to-market value). And it watches
the rest of the universe of stocks and adds in stocks when they meet the
criteria.

-Tad

On Oct 19, 7:39 am, Beliavsky <beliav...[at]aol.com> wrote:
- quote -

Yes, perhaps "mechanical" was not a good choice. My thoughts haven't
been completely formulated, but I think I like Tad's differentiation.

- quote -

I agree that the next person to employ your strategy will not
invariably fail. That wasn't my intention and I apologize. I also
agree that barriers to entry COULD be lower than other approaches
(including mine), but it would be dependent on the specifics of each
situation. Short and long term capital gains, expense ratios of
investments, and brokerage fees would all factor into which strategy
would be most efficient (ignoring actual returns).

- quote -

Again, agreed that my method could not be followed by all (especially
uninformed) investors.

To me, there are two independent choices. One is frequent
vs. infrequent trading, and another is self directed investing (buying
individual issues or commodities) vs fund based investing.

These two distinctions should not be mixed, and the terms active
vs. passive, unfortunately, are conducive to that.

I am personally a self directed investor (do not own funds outside of
401K), but I trade infrequently. Most of my liquid assets are, in
fact, in one stock (about 33% of the total wealth and about 50% of
total liquid assets).

i

Beliavsky wrote:

- quote -

I agree, that's why I had the caveat "any mechanical system that
does not involve frequent trading" in the part you quoted above. My
point was that if your strategy was implemented with trades once per
year (although you stated in your last post that trades could occur more
frequently) it would be no more active than a risk-based asset
allocation stategy that rebalanced once per year. Thus if the asset
allocation strategy is passive, then I would think that the low P/E
strategy could be considered passive. I don't think either are
particularly passive, however. But the distinction is not that
important to my point, just the relative equivalence of the activeness
of the two strategies.

-Will

TB wrote:
- quote -

I think this is what I said when I wrote, "I would then posit that any
mechanical system that does not involve frequent trading is passive."
No? Further, a system that depended on non-mechanical analysis of
securities would be active as long as the turnover is significant. I
add the turnover caveat since at least one "index", the DJIA, is
essentially actively managed - these stocks are selected. But the index
is changed infrequently, so that a fund based on the DJIA would be a
passive fund, not an active fund IMO.

-Will

On Oct 18, 7:53 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

I don't really know what I think yet (I thought I did, but now I am re-
evaluating my position). Like I said, I have always thought of using
index funds to create an asset allocation as being passive. I think
perhaps Tad did a better job of explaining my stance than I have so
far. Its not necesarily the investments or the frequency of investment
(within reason) but the reason for investing that differentiate active
from passive.

On Oct 18, 4:30 pm, kastnna <kast...[at]auburnalum.org> wrote:
- quote -

Both of you have equated "passive" with "mechanical". I don't agree. A
strategy that bought at the close each day stocks that had fallen from
the previous close would be mechanical, but since it would have
turnover exceeding 100, it would not be passive. The strategy I
mentioned of buying low P/E stocks and holding them as long as they
remain low P/E is somewhat active, because stocks would be sold when
their P/E's rose too high.

<snip
- quote -

Yes, but that does not mean that the next reader of MIFP that tries to
do so will fail. My point is that the "barrier to entry" of a
systematic strategy -- one that can be computerized -- is lower for
many individuals than the traditional qualitative approach requiring
in-depth knowledge of the fundamentals of hundreds of companies.

Your approach of periodic rebalancing of asset classes is reasonable,
but it could *not* be followed by all investors. Suppose that the
dollar-weighted optimal allocation of all investors is 60/40 stocks/
bonds, but that ratio of market caps of stocks to bonds is not 60/40.
Clearly not everyone can have the optimal allocation. Looking at the
problem dynamically, suppose that in a bear market the market cap of
stocks falls by 40% while the market cap of bonds rises. Your
rebalancing approach would tell people to sell bonds and buy stocks,
but if everyone rebalanced, who would be there to buy bonds and sell
stocks?

Neither your method nor the low P/E strategy can be profitably
employed by every investor, but that does not mean that either
approach is wrong for the *marginal* investor.

On Thu, 18 Oct 2007 20:42:34 -0500, TB <borekfm[at]pacbell.net> wrote:

- quote -

How would you classify investing using a defined strategy with yearly
re-balancing; such as the various strategies discussied by O'Shaughnessey
in What Works on Wall Street?
--ron

Will Trice wrote:
- quote -


In the institutional-investor world there's a distinction between
"tactical" and "strategic" asset allocation.

Tactical AA is an active strategy, where the investor makes frequent
shifts among the asset classes based on subjective assessments of their
relative value. One could nitpick about what constitutes "frequent" so
use the obscenity definition, "you know it when you see it."

Strategic AA is what most people think of as "asset allocation"...coming
up with the pie chart, filling in each slice with some type of
investment that serves as a proxy for the asset class, and changing the
mix only to rebalance the mix back to the target percentages, or when
circumstances change.

A strategic asset allocator has to make some subjective decisions that
involve assessments of the asset classes, and even the choice of asset
classes isn't driven entirely by the Invisible Hand (example: are REITs
a separate asset class or do you just own them as part of a broader
index like the Russell 2000?) But that doesn't make them "active" --
unless you just want to do away with the concept of passive strategies.

At the investment level, the active/passive distinction hinges on
whether selection criteria involve security analysis or something rote.
"Stocks whose names begin with the letter G" is a passive investment
strategy, so is "largest 1000 US stocks, by market cap." Something lost
in translation is that a passive investor wants to use criteria that
have meaning. If someone created the "letter-G index", that wouldn't
make it an asset class, and some of the ETFs coming out these days are
based on "indices" that make about as much sense.

-Tad

kastnna wrote:

- quote -

The page links further to a definition of Active management, which
offers "The opposite of active management is called passive management,
better known as indexing."

Now this would strike me as suggesting that any definable, rules based
system which at any point can define the stocks to be purchased, can be
forged into an index fund, and would be considered passive. And asset
allocation, which is rules based, to adjust back to a given percent mix
either based on the time or deviation from the initial target, would be
no different.

Am I off base here?
JOE

On Oct 18, 10:56 am, Will Trice <wwtr...[at]paragondynamics.com> wrote:
- quote -

No need to apologize. I think you are correct in your assessment of
how we/I invest. We use about a dozen ETFs that encompass something
like 99% of the market thus closely representing an efficient
frontier. Based on the investors risk tolerance we then move them
along the efficient frontier to determine the percent composition that
each ETF will have in the portfolio. We then rebalance back to those
%s annually. You are absolutely right that if one's risk tolerance
changed we would change the composition %s of the portfolio.
Realistically, we only make minor adjustments every 3-5 years. Of
course, if a major (usually unexpected) life event occurs, an investor
may find that his/her risk tolerance has radically changed over-night.
In that event we would likely change someones asset allocation even if
we had rebalanced the day before. The ETFs do not change, but there %
composition certainly could/does.

Maybe that is active trading by some definitions. I have never really
considered it thus because the investment changes are not made based
on the fundamentals of the investment or current market trends, but
rather the needs of the client. I think your use of "mechanical" is
pretty good way of looking at it. Under that rationale I also think
its possible that the OPs method could be mechanical/passive, but its
pushing the limits (there is alot more lilkelyhood of trading in and
out of positions to exploit pricing phenomenons). I don't personally
have a problem with the OPs methods. The thesis of my early posts is
that based on EMT and demand-pricing economics, ceteris paribus, ANY
method that attempts to take advantage of investments based on their
over or under valued status MAY work, but if they become widely know,
understood, and/or engaged-in their success margin will decline,
possibly to negative numbers. Think about how much more success an
investor would have if he were the only person in the world that knew
about the low p/e phenomenon. Less people competing for those stocks
means lower purchase prices. That's why I contend that every investor
out there, even the uninformed, could not realistically make money
this way.

kastnna wrote:

- quote -

Yes and no. It seems to me that active investing depends on making more
than trivial decisions on when to buy and sell. Passive investing
implies using an index fund (I realize that these are not conventioanl
definitions of these terms). So the arbitrary decision to buy two index
funds and allocate say 80% of investment funds to an S&P 500 index (for
example) and 20% to a total bond index (for example) requires an active
decision. So what? This is probably a trivial decision, so still
should be considered as non-active investing.

However, as I recall from your previous posts, you use a risk-based
approach to asset allocation. Meaning that you are using a
non-arbitrary method of determining your allocation, attempting to get
close to the efficient frontier by using asset volatilities and expected
returns. Presumably this allocation will shift over time as new data
comes in and will be affected by what I would consider to be non-trivial
decisions about your model. Even if implemented with indices, it seems
that this strategy is at least as active as say a strategy that
overweights the lowest P/E stocks in an index and then reallocates once
a year.

I apologize if I have misrepresented how you allocate, but the above
makes a good example for discussion nonetheless. Perhaps allocation as
described above should be considered "mechanical" as opposed to
"passive." If true, I would then posit that any mechanical system that
does not involve frequent trading is passive. Active strategies would
then be those strategies that are not mechanical (or, thus, passive).
The strategy presented by the OP would then be essentially passive (for
purposes of discussion).

Maybe.

-Will

On Oct 17, 7:53 pm, Will Trice <wwtr...[at]paragondynamics.com> wrote:

- quote -

I guess we could argue definitions and technicalities but I think the
short answer is no. At least not in the sense to which I was
referring. I buy once and rebalance annually, that's it. According to
investopedia, this is a "buy and hold strategy" which is often
associated with passive investment. Investopedia acknowledges there
are asset allocation methods (like Tactical AA and Dynamic AA) that
more resemble active investing however I do not recall anyone on MIFP
ever referring to those methods when discussing "asset allocation",
nor was I just now.

http://www.investopedia.com/articles/04/031704.asp

Will, your question implies that if you ever buy and or sell a stock
other than the original stock purchased you are engaging in active
management. Is this really your perspective or have I over-read your
statement?

kastnna wrote:

- quote -

Isn't asset allocation an active investment strategy?

-Will

Elle wrote:
- quote -

I think by "work" B meant beat the indices. In which case, many
stock-picking strategies do not "work" - witness actively managed mutual
fund performance vs. indices.

-Will

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

Sorry you don't get it. The paper obviously completely
ignores the conventional wisdom of investing in stocks only
for the long term. It's very much about short-term trading.
More grist for the academic mill, with its only practical
salient point being (for all buyers, limit or market): Keep
an eye on the companies you plan to buy/sell.

I explained my misreading of your example earlier. The
misreading is easy because your example is so extreme.
Preliminary announcements and chatter about possible buyouts
are the rule. The sudden price adjustment you propose is
unlikely, unless its related to a panic of sorts (which are
common). Or only someone completely oblivious would fall
into the trap you propose.

Fact is anyone buying or selling stocks should be informed,
and the same caution should be applied whether they use a
limit order or a market order. You may not like GTC orders,
but they are absolutely no big deal for long-term investors
who exercise reasonable caution. Arguably they represent the
advantage individual investors may have over mutual funds,
since the fund managers are not necessarily shopping for a
good price on a stock.