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 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.
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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.
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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.
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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.
(Infographic) The 10 Things You Should Cover In Every Investment Pitch
If you want to wow potential investors, you need to cover your bases.
If you’ve ever watched Entrepreneur’s original series, Elevator Pitch, then you’ve probably seen smart founders make dumb mistakes while pitching their ideas to potential investors. They might flub an answer or get tongue-tied, or they might just be a little boring. Other times, you might notice that something seemed off about a pitch, but you can’t quite put your finger on why.
Investors are gambling every time they put money into a new project or idea. Your job when pitching is to prove to them that you’re worth the risk. That means you’ll need to not only show them the possible upside of what they have to gain, but also be clear about what they could possibly expect to lose and their odds. In other words, you need to give them a holistic view of what you do, not just the one good idea.
You might have pitched an investor yourself and thought you crushed it, only to hear that the investor isn’t interested. If that’s the case, there’s a chance the pitch was missing one of 10 essential elements.
This infographic by Buffalo 7 breaks down 10 slides you should have in your next investment pitch deck. If you’re not presenting formally, though, you can still keep track of these aspects in your head and make sure you cover each one. They include:
- The vision, where you concisely explain your idea.
- The problem. Why is your vision necessary or helpful?
- The opportunity. What is the market size, and how can you position yourself to earn a share of it?
This is just the start, though. Check out the infographic below to see the rest of the slides you need when pitching investors.
This article was originally posted here on Entrepreneur.com.
‘Shark Tank’ Investors Reveal Top 5 Tips To Make Your Business Famous
Is your business worthy of fame? If so, pay attention to what the Sharks have to say …
Shark Tank enters its tenth season as popular as ever. Over the past decade, millions of people have watched fascinated as entrepreneurs pitched their business ideas and startups in the hopes of winning an investment and support from self-made millionaires and billionaires.
The multi-Emmy® Award-winning reality-based show has had a tremendous impact on the business world and has been a major influence on the increased popularity of becoming an entrepreneur. Over the years, the show has evolved into one of the world’s top platforms to launch a business and recently reached an astonishing $100 million in deals offered in the Tank.
I was recently invited to attend a private event hosted on the set of Shark Tank to celebrate their 10th season and met with all the Sharks and most of the guest Sharks for the current season. This year’s guest list includes luminaries:
- Charles Barkley, Hall of Fame NBA star and TV analyst
- Alex Rodriguez, legendary baseball player and businessman
- Rohan Oza, an iconic brand builder and marketing expert
- Sara Blakely, founder and owner of SPANX brand
- Matt Higgins, the co-founder and CEO of RSE Ventures and vice chairman of the Miami Dolphins
- Bethenny Frankel, TV celebrity, author, and founder of Skinnygirl brand
- Jamie Siminoff, the CEO of RING, who rejected an investment offer in season 5, but went on to sell his company to Amazon for a whopping $1 billion.
My better half was also invited, and we arrived promptly on time at Studio 24 inside of Sony Pictures Studios in Culver City, CA. We were greeted by the cordial staff who informed us that the Sharks were still filming the last takes of the day. After several minutes, we were invited to chat with the Sharks on the main floor where nervous entrepreneurs excitedly pitch their companies to the investors under the bright lights of the studio set.
I was curious to know what excited the Sharks the most about their tenth season and what they believed to be the best advice for an entrepreneur to help make their business famous.
1. Create an ingenious product
When asked, Lori Greiner said, “It’s a mix, right? Of smart marketing and ingenious product. For example, Scrub Daddy was a technology. So, taking that one sponge, which was revolutionary, changed the whole sponge arena. We now have, to date, 20 different SKUs, and we have 30,000 new retail locations and 170 million in sales. That’s what takes it from one idea to a global brand.”
Of course, skillfully promoting your product on a platform like QVC is another excellent way to make your business famous. The day after the Scrub Daddy episode aired, Greiner helped CEO Aaron Krause sell their entire inventory of 42,000 sponges in less than seven minutes on QVC.
2. Leverage social media marketing
During my chat with Bethenny Frankel, she stressed, “Social networking is so important. Also being a little bit disruptive now … and you have to be creative. You have to be creative. The President was the most disruptive candidate that there’s probably ever been in history. He got people’s attention, and young entrepreneurs need to get people’s attention in some way. So be a little disruptive.”
Matt Higgins responded, “I’d say that you have to understand social and digital marketing. You can’t survive unless you understand Instagram, Snapchat or all the tools out there. You have to be contemporary.”
Barbara Corcoran claimed, “Every one of us successful entrepreneurs, for the last two years, were phenomenal at social media. It’s true. No exceptions.”
No smart entrepreneur will deny the power of social media when it comes to making your company famous. With more than 2 billion people worldwide using some form of social media, any business can put their business in front of a large audience, especially if they can create content that goes viral.
3. Build a community
Daymond John stressed the value of building a community. “You’ve got to build a community,” stated John. “Nobody needs to buy anything new in this world. They only buy it because there’s some form of community and/or need that you are supplying for them.”
John speaks from experience. He built a successful clothing empire by creating a vast community of his own via his clothing brand FUBU. John wisely invested in celebrity endorsements, making him an early pioneer of modern influencer marketing.
If you lack the resources to build your own community from scratch, you can leverage the power of others. Partnering with influencers who have cultivated their own communities allows you to introduce your product or service to larger audiences. In fact, some consider Shark Tank to be the world’s largest business influencer platform.
4. Devise a publicity hook to win earned media coverage
Barbara Corcoran also said, “I’d say you need a publicity hook. Some hook, angle or gimmick that grabs the attention unfairly from your competitors.”
Remember, Shark Tank is a unique combination of reality television, business acumen, and entertainment. Doing something unique, different, or disruptive can get you significant media attention and abundant free publicity… especially if you’re able to leverage that publicity and captivate the show’s producers, who decide your fate as to whether you’ll appear on the show.
Regardless if you want to appear on Shark Tank or not, being featured in the media is a way to differentiate your business from the competition and reach a broader audience. Be creative and willing to take educated risks when it comes to getting noticed by the media. You should always be actively building relationships with media representatives and ask for their insights when formulating your plan.
5. Know your strengths and stay focused
When I asked for billionaire Mark Cuban’s insights, he thoughtfully replied, “Knowing your unique advantages, play to that, and your strengths. And focus. You know, what happens is very often people start with an idea, get a little bit of traction, then it gets hard. And when it gets hard, they start looking for other things to do as opposed to playing to their strengths. Because businesses aren’t supposed to be easy. You know, if they were easy everybody would already be rich, and we’d all be sitting on a beach somewhere. And so, when it gets tough, you gotta dig in and work hard. I’d say the final thing I’d add is that sales cures all. There’s never been a business that succeeded without sales. So, if you focus on selling … if you’re able to sell … and that’s something that is one of your core competencies, then you’ll be okay.”
These are wise words from one of the world’s few billionaires.
This article was originally posted here on Entrepreneur.com.
The Best Way To Get Your Teenager To Start Investing Right Now
Jeff Rose advises a young fan on where to start his investment journey.
In this video, Entrepreneur Network partner Jeff Rose talks about receiving a letter from a young investor, who is looking for advice on how to begin investing.
Rose talks about the act of actually doing the investing versus worrying about reading books or asking others about the process. Taking action gets the most results, since you are able to make mistakes and start the learning process. Taking action also leads to more experience, which is to say if you begin investing as a teen, you will be much more savvy about investing as a twenty-something.
In answering this young investor’s concern about investment direction – the fan hopes to balance short-term gain and long-term gain, as well as to establish some padding for a future business – Rose turns him in one specific direction: A Roth IRA. When he was younger, Rose didn’t even know what a stock was until far into his college years; during this time, he discovered the Roth IRA and learned of its compounding power, as well as the accessibility of an initial investment.
As another route, Rose also mentions starting a business. This path, Rose explains, will help you achieve the most return on investment.
Click on the video to hear more tips for a younger investor.
This article was originally posted here on Entrepreneur.com.