Which is a better - active management strategy or passive management startegy?

ACTIVE PORTFOLIO MANAGEMENT VS BUY AND HOLD STRATEGY

In the fascinating world of the investments, Warren Buffet is considered God. From high flying Hedge fund managers to Ivy league management students, every body will vouch that their idol is none other then oracle of Omaha. More reams of paper must have been dedicated to his abilities and his wisdom than probably all other successful investors put together. Even his random statement is lapped up investment professionals the world over and become financial folklore. Investors would blindly pick up the stock that he buys and the sole reason is that Buffet is buying it. Although questioning the investment acumen of the of the world most successful investor would be madness, there definitely seems to be case for scrutinizing some of his most glorified statement, particularly in times like these, where neither fundamental nor technical analysis can stand the tide of negative sentiments. In 1988, in a letter to Berkshire Hathaway shareholders, Mr. Buffet wrote “our favourite holding period is for ever”. Not even trying to analyze the context in which the statement was made, the cliché hungry financial media in general and investment advisor in particularly lapped up the statement with both hands. What they actually did was further strengthen two of the biggest misconception prevalent in the worlds of the equities:

Buy and hold strategy will give great return in the long run.

Trying to time the market is a futile exercise.

Firstly, there have been numerous decade long spells, where equities have given negative returns. For example, if you had bought NASDAQ stocks about a decade ago, you would be now sitting with very hefty losses, notwithstanding whether the stocks where blue chip companies line Yahoo or Microsoft. The NASDAQ bubble was not a one off thing, it happened during the great depression, with Japanese stock in 1990’s. And if you thought this happens only when an investor is caught in a bubble, think again, there are numerous examples when investors had entered the market at absolute low, stayed there and ended making loses. A recent example is the price of Gold, after the Lehman brother collapse, the gold prices stated to rally from $798 and went up to as high as $920 per ounce before again slipping to $860 level, the only way of making money in this volatile environment is to actively trade in. Another historical example is the DJIA started rallying after hitting a multi year low 530 in 1962. Over the next decade, it went on to hit multiple highs around 1000 in 1966, 1968and 1972 but it then crashed back to the 500’s in 1974. So an investor who had managed to get in even at the absolute bottom in 1962 would have actually lost money ion 1962. The story was the same during the great depression, when the DJIA rose six fold from just 64 in 1921 to about 380 in 1929, but the cracked appeared and by the time it found its bottom in 1932 at around 41 it had given up all the gains of the eight years bull run. In fact investing in the equity market is like growing fruits, you should know when the fruits are ripe to be plucked and not left them on the tree to rot.

We are not advocating against the long term investment strategy but we are against passive investment strategy. Market always goes through its cycle of ups and down, hence it becomes more important for the investors to actively mange their portfolio, skimming the profits at regular interval and most important not to panic in the falling markets. With the range of the financial products in the market now days, it is possible to make money in the rising as well as falling market.