Trouble With Active Investing

Amongst most young "traders," there consistently this notion that rapidly buying and selling stocks is the best way to beat the market. While there is no absolute truth to what methodology will most likely provide you with the best returns, Warren Buffett - who I personally tend to listen to just based upon his modest credentials - provides us with the following insight:

Everyone expects to be above average. And those helpers - bless their hearts - will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group - the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group - the "know-nothings" - must win.

Pretty simple yet interesting point. And while he definitely doesn't go forth and say active investors cannot be successful, he definitely brings to light what I consider to be reality - unless you are a profoundly experienced investor, the odds of beating the market as an active trader are distinctly against you.

The quote comes from the following blog, and I'd certainly recommend reading Felix Salmon's blogs as I personally feel that they frequently shed light onto extremely complicated matters in a very clear and understandable fashion.

Active Investing Datapoint of the Day