Connect with us

Investing

Outsmarting The Market

What’s best: Active or passive investment? It’s not as simple as that. For some, smart beta might be the ‘Holy Grail’ of investment.

James Twidale

Published

on

active-investment

The active versus passive debate in the investment world is as old as time. For as long as people have been investing money, there have been those that think they can do it better than others, and want to charge a premium for doing it.

However, before we get into the debate from a different angle, let us classify the two approaches:

Active Investing

Active investing is where a manager or investor uses a methodology for his security selection in order to generate investment returns that are better than the market average.

An active investor believes he has some insight that will lead to excessive returns.

We-recommend-tickWe recommend: Understanding Total Return of Investment

Passive Investing

Passive investing is where an investor does not believe or have any superior insight and therefore simply chooses to invest in the market as a whole, often via low-cost exchange-traded products. The Top40 tracker is a great example of a passive investment for South African investors.

Here investors get exposure to the top 40 shares on the JSE via a low-cost exchange-traded product. The benefit of this is that the investor is not trying to work out which of the shares are the ones worth buying and is simply happy to hold a basket of local-listed equities.

Active investors are in search of alpha, which is the return generated over and above that given by the market in a period. The market, on the other hand, gives investors what is known as beta.

Beta is simply the return of the market that is made up of every listed share. Active managers try to outsmart the market, while passive investors simply try to capture what the market offers in the form of returns.

It all seems fairly logical. You may also be thinking at this point that active managers with all their education, insight and analyst teams have the ability to identify good investment opportunities and avoid the poor ones.

The truth is that active managers, on average, give you the market return, because for every winner there must be a loser.

Moreover, the reality is that you do not get the average (or the market return) because you often pay excessive fees for the active manager to give you the average market return.

In almost any decade, the number of active-management strategies that outperform traditional passive investments is around 15% to 25% after costs.

To frame it another way, between 75% and 85% of the time, traditional passive strategies outperform active managers. If you want a high probability of achieving a better return, I would suggest passive investing over active.

I will avoid going further into the active versus passive debate, since another opinion from either side of the fence is not going to get us anywhere. So instead, let’s discuss the best solution for both parties: Smart beta.

What is Smart beta?

The term ‘smart beta’ (or ‘alternative indexation’) means very little to most, so let’s unpack it a little. If you were to invest in all the shares on the market in the same ratio, then your return will be that of the market, and you would have achieved a beta return.

The next question is: How is the market made up? Essentially, shares are weighted by market capitalisation. This means that the company with the highest value has the highest ranking.

It therefore means that, in a passive investment, the highly-valued company has the highest weighting, as these normal passive instruments have market capitalisation (market cap) weighting.

Market-cap weighted indexes have outperformed active managers consistently over time in all investment markets, after taxes and costs.

As I mentioned earlier, this is not enough to win the debate. The reason may be that the market-cap weighting methodology has some pretty clear downsides as far as economic theory goes. Most notably, it gives you the most exposure to stocks that are already highly valued.

We-recommend-tickWe recommend: What’s The Best Way To Make Your Money Grow?

The best of both worlds

Modern finance tells us that there are a few clear and persistent risk premiums available to investors. Value and growth stocks are two examples of sub-sectors of the investment universe.

If one were to invest in either of these groups, you would tend to outperform the market as a whole. You therefore have beaten the market.

This, however, is not alpha, and is therefore not active management but rather smart beta. So, smart beta gives you a tested and systematic way to outperform your traditional passive investment options over the course of an investment cycle.

Logically, this also implies that you are outperforming at least 75% to 85% of active managers. It would appear as if you now have the ability to beat the market in an efficient and low cost manner without much effort.

This may be the ‘Holy Grail of investment’, as it blends the beauty of passive management (which is ease of use and low cost) with the screening process of many active managers.

Research Affiliates in the United States were early adopters of non-traditional passive strategies, creating a fundamentally weighted basket of stocks.

They would take the US stock market and screen it by five fundamental factors. The stocks that met the criteria and fulfilled all five factors were included in an index, which was weighted by these factors.

This methodology was trademarked and is available worldwide. Other alternative weighting strategies have come out of the woodwork.

We have simple strategies such as equal-weighted indices, which simply randomises the odds of which stocks will generate your return.

We also have value-weighted indices that weight stocks that satisfy value criteria, growth-weighted indices, momentum-weighted indices, volatility-weighted indices and even dividend-yield-weighted indices. The list grows longer almost daily.

The Holy Grail of investment

What has smart beta achieved? In my opinion, it combines all of the benefits of low-cost passive investing with the benefits of sound financial theory and screening. One could look at it as the perfect blend between active and passive investing.

Smart beta is available to all investors, both locally and globally. The depth of options in offshore markets is far more impressive than locally, but the move to ‘smart beta’ products is very noticeable among local product providers, either creating an offering locally, or partnering with an international partner to assist.

We-recommend-tickWe recommend: Are You Preserving Wealth or Creating It?

Any readers who want access to smart beta products can chat to their financial advisors or stockbrokers.

Etfsa.co.za is a good place to look for all listed exchange-traded products in South Africa, however, one would probably want to get advice as to what exposure you are getting into, before investing.

James Twidale is a portfolio manager and fund expert at 1st Fusion Asset Management, a specialist multi-asset portfolio manager which is part of the Genesis Capital group of companies.

Continue Reading
Advertisement
Click to comment

You must be logged in to post a comment Login

Leave a Reply

Investing

11 Things You Need To Know About Bitcoin

The cryptocurrency has had a tumultuous existence so far.

Published

on

Gold Bitcoin Coin

11 Bits about Bitcoin

Even the most tech savvy among us have a hard time wrapping their heads around Bitcoin. It’s a hot topic and a frequent point of discussion among investors, entrepreneurs and stock traders, so you should want to know all about it.

For starters, here’s an overly simplified explanation of Bitcoin: It’s a digital currency (there are more than 800 now) that isn’t controlled by a central authority such as a government or bank. It’s created by “miners,” who use computers and specialised hardware to process transactions, secure the currency’s network and collect bitcoins in exchange.

Supporters say it allows for more secure transactions over the internet. That’s in part due to blockchain, a technology that records cryptocurrency transactions chronologically in a public digital ledger.

Bitcoin is only eight and a half years old, but it’s the oldest and most highly valued cryptocurrency out there. In such a short time, it’s had a rocky and controversial history, but it’s also attracted a fair share of high-profile supporters.

Related: 6 Rookie Investor Mistakes You Must Avoid For Profitable Investing

Click through to read 11 bits about Bitcoin that will make you at least sound like you know what you’re talking about next time it inevitably comes up.

The birth of Bitcoin

birth-of-bitcoin

Starting point at 2008

The origins of bitcoin trace back to 2008, when its creator, who went by the pseudonym Satoshi Nakamoto, published a proof of concept for Bitcoin.

The proof was then published to a cryptocurrency mailing list in 2009. Nakamoto left the project in 2010 and disappeared, but other developers picked up the work.

Bitcoin’s birthday is Jan. 3, when Nakamoto mined the first 50 units of the currency.

An elusive creator

elusive

No one really knows

The true identity of Bitcoin’s creator has never been confirmed. Newsweek claimed to have found Bitcoin’s creator in 2014, identifying Temple City, Calif, resident Dorian Satoshi Nakamoto. He has vigorously denied it.

In 2015, an Australian entrepreneur named Craig Wright said he was Bitcoin’s creator, but he couldn’t produce the evidence to support his claim.

Whoever Nakamoto is, that person is very rich, as the creator is estimated to have mined a million bitcoins in the currency’s early days.

Very expensive pizza

pizza

We wonder what was on the pizza?

The first transaction involving bitcoin was reported on May 22, 2010, when a programmer identified as Laszlo Hanyecz said he “successfully traded 10,000 bitcoins for pizza.”

As of June 14, 2018, 10,000 bitcoins are worth about $64.8 million.


Fintech: Fusing Finance And Technology

Fintech has become a disruptive force in the financial sector that is threatening the current status quo of banking and finance. The main beneficiary of that is the consumer.


You can spend bitcoins

spend-bitcoins

How to spend your bitcoins

While it may not seem like it, people continue to use bitcoins to buy stuff.

Related: Make The Most Of SA’s Law And Initial Coin Offering

The largest businesses to accept the cryptocurrency include Overstock.comExpediaNewegg and Dish.

Federal Bureau of Bitcoin

Federal Bureau of Bitcoin

The banning of Bitcoins

At one point, the U.S. government was one of the largest holders of bitcoin.

In 2013, after the FBI shut down Silk Road, a darknet site where people could buy drugs and other illicit goods and services, it took over bitcoin wallets controlled by the site, one of which held 144,000 bitcoins.

Investors have been making a killing by bidding on government-seized bitcoins.

A mountain-sized setback

Mt. Gox

Mt. Gox

In early 2014, Bitcoin suffered a devastating loss after the alleged hacking of Mt. Gox, a Japanese exchange.

About $460 million of the currency (in 2014 value) was stolen. It was the largest loss of bitcoins ever and raised concerns about how secure the currency was.

The billionaires’ takes

warren-buffett

Warren Buffett

Warren Buffett, perhaps the most famous investor in the world, was not so keen on Bitcoin one of the only times he addressed the currency.

“Stay away from it. It’s a mirage, basically,” he told CNBC. “The idea that it has some huge intrinsic value is a joke in my view.”

Fellow billionaire investor Jamie Dimon, chief executive of JPMorgan Chase, had even stronger words about Bitcoin:

“You can’t have a business where people are going to invent a currency out of thin air. It won’t end well … someone is going to get killed and then the government is going to come down on it.”

But not all billionaires are against Bitcoin. Mark Cuban has said its value is inflated, but he recently invested in a venture capital fund that backs cryptocurrency. Richard Branson, however, has spoken more optimistically about it.


The Currency Revolution

The rise and rise of digital currencies – and how they’re affecting your business.


Wealthy twins and a smart teen

Cameron and Tyler Winklevoss

Cameron and Tyler Winklevoss

Other notable investors in Bitcoin include Cameron and Tyler Winklevoss (the Harvard-educated twins who sued Mark Zuckerberg claiming that Facebook was based on an idea they’d had).

They invested $11 million into Bitcoin in 2013, an amount said to be about 1 percent of all bitcoins in circulation at that time. The Winklevoss twins have been petitioning the SEC to create a bitcoin exchange traded fund.

The agency rejected the idea earlier this year.

Another is investor and entrepreneur Erik Finman, who invested $1,000 into Bitcoin when he was 14 years old and is now a millionaire.

Celebrities want in

ashton-kutcher-2017

Ashton Kutcher

Celebrities have also expressed enthusiasm for the cryptocurrency.

Actor and Goop founder Gwyneth Paltrow advises Abra, a Bitcoin wallet, and Ashton Kutcher, Nas and Floyd Mayweather have all invested in Bitcoin start-ups.

Support from a big financial institution

Fidelity Investments

Fidelity Investments

In August 2017, Fidelity Investments became a rare standout among financial institutions in embracing Bitcoin and other cryptocurrencies.

The company allows its clients to use the Fidelity website to view their bitcoin holdings held through digital wallet provider Coinbase.

“This is an experiment in the spirit of learning what these crypto assets are like and how our customers may want to interact with them,” Hadley Stern, senior vice president and managing director at Fidelity Labs, told Reuters.

A hard fork

Bitcoin Cash

Bitcoin Cash

On Aug. 1 2017, Bitcoin experienced what’s being called a “hard fork” as a result of a few issues, including the limited number of transactions that can be processed per second. Essentially, the cryptocurrency split into two, with Bitcoin Cash debuting.

Here’s how Rob Marvin of PCMag explains the situation:

“The Bitcoin fork speaks to a fundamental ideological rift over what’s more important: Preserving the decentralised nature and independent control of the Bitcoin network, or accelerating transaction speeds to make the cryptocurrency more viable for mainstream ecommerce and payments.”

Bitcoin Cash allows larger blocks of currency and more transactions per second.

This article was originally posted here on Entrepreneur.com.


Related: 10 Ways To Make Money While You Sleep

Continue Reading

Investing

9 Warren Buffett Quotes That Will Teach You More Than Just Investing

While he is one of the most famous investors in the world, his expertise goes beyond money.

Published

on

USA

Check out these nine quotes on time, success, mindset and more

There’s more to learn than finance from one of today’s most famous investors, Warren Buffett. In fact, the businessman, financial guru and philanthropist can teach you a thing or two about life. From taking risks to coping with change, Buffett’s expertise that expands far beyond stocks and dollar signs.

From a young age, the billionaire investor was destined for success – selling garbage bags to neighbors and delivering newspapers. By age 15, Buffett was already worth thousands of dollars and investing in real estate.

However, fast forward nearly 70 years and the “Oracle of Omaha” is now worth a whopping $77 billion, according to Forbes, making him currently the second richest person in the world (behind only Bill Gates).

Related: 5 Worthwhile Investment Lessons I Learned From Warren Buffett

There’s much to learn from Buffett too.

On time

warren-buffett

Warren Buffett

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” – Warren Buffett

On risk

Warren Buffett

Warren Buffett on risk management

“I don’t look to jump over seven-foot bars: I look around for one-foot bars that I can step over.” – Warren Buffett

On change

warren-buffett

Be the change you want to see in the world

“The most important thing to do if you find yourself in a hole is to stop digging.” – Warren Buffett

Related: 5 Things Warren Buffett Does After Work

On success

Warren-Buffett

What you need to know about success

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – Warren Buffett

On empowerment

Warren-Buffett-billionaire-successful-entrepreneur

Image Credit: Art Streiber

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” – Warren Buffett

On opportunity

Warren-Buffett-problem-solving

When looking for an opportunity…

“You do things when the opportunities come along.” – Warren Buffett

On mindset

Warren-Buffett-billionaire-close-up

Mindset management

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett

On leadership

Warren Buffett

Warren Buffett

“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett

On motivation

Warren Buffett

Look for motivation

“Predicting rain doesn’t count. Building arks does.” – Warren Buffett

This article was originally posted here on Entrepreneur.com.

Related: 21 Inspiring Quotes About Success, Persistence And What It Means To Be An Entrepreneur

Continue Reading

Investing

Decrypting Cryptocurrencies

Your guide to understanding cryptocurrencies, why they are so popular and how you can use them.

Brenton Naicker

Published

on

brenton-naicker-cryptocurrency

Cryptocurrencies, like other forms of currency, provide a means of transacting goods and services. While other forms of exchange, such as fiat currencies (paper money) are issued, circulated and centrally controlled by governments and regulated by banks, cryptocurrencies are electronic and decentralised.

This means that transactions are peer-to-peer, negating the need, or additional expenses, of third party involvement such as banks or governments. The cryptocurrency market penetration will be facilitated by universal Wi-Fi and global mobile phone dispersion, enabling anyone to move money and assets, peer-to-peer, seamlessly and at almost no cost.

This clearly shows that it’s important that businesses and entrepreneurs understand this market in order to plan for the inevitable shift in the way the world transacts finances.

Related: Make The Most Of SA’s Law And Initial Coin Offering

How does a cryptocurrency transaction work?

The infrastructure supporting the cryptocurrency system is called the Blockchain, a digital ledger that stores all transaction information, and addresses three of the most obvious problems of the current money transmittance system:

  • It is decentralised, so transaction data is dispersed and not centrally controlled – this also means that the data is a lot more secure than with more traditional systems because there is not one point of entry for hackers.
  • There is no third-party involvement (ie, banks), which makes transaction fees significantly lower.
  • Transactions are in real-time and not encumbered by trading hours or bureaucracy.

Who controls cryptocurrency?

bitcoin-and-internet-accessLike conventional banking, cryptocurrency has a complex underlying structure issuing currency, recording transactions and allowing people to transact. The main difference is that an algorithm issues the currency and ledgers (not banks or governments), storing the information in blocks. Transactions match up public codes relating to user-held private passwords from their cryptocurrency Wallets.

The transaction amounts are public, but who sent the transaction is encrypted. Whoever owns the password to the Wallet owns the denoted cryptocurrency amount shown on the ledger. Even though transactions are added sequentially, many may be added to the ledger at the same time. These chains of transactions grouped in blocks make up the Blockchain.

Related: 11 Things You Need To Know About Bitcoin

Are Cryptocurrencies Here to Stay?

Cryptocurrencies, and with it the Blockchain, have unlocked value and opportunities for commerce that would’ve been hard to imagine even a few decades ago. Here are 5 reasons why Cryptocurrency is here to stay:

  1. A transaction, once confirmed, cannot be reversed or tampered with. So, they are secure and indelible.
  2. Cryptocurrency is transferred between Blockchain addresses. So, no real-world entities are associated with the accounts.
  3. Transactions are processed instantly and globally. Therefore, there is no delay in transfers.
  4. Cryptocurrency uses cryptographical processes. So, funds are locked and only available to private key owners.
  5. Generally, cryptocurrency does not require permissions from an authority.

Investing in cryptocurrencies

When looking to invest in cryptocurrencies, keep in mind that they are just like other stocks and subject to change in value based on supply and demand. In fact, since cryptocurrencies are not insured, and exposed to market fluctuations, they bear the same risks as stock markets.

Some exciting work has however been done to address these potential fluctuations while also continually optimising cryptocurrency value by companies such as Krypteum, who offer an advanced A.I enabled investment crypto coin.

Read next: 6 Rookie Investor Mistakes You Must Avoid For Profitable Investing

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending