Truly active investing is…
…dealing productively with risk and opportunities:
- What stock opportunities to select that offer high upside potential for the risk taken (see section 3: Find Opportunities)
- How to diversify a portfolio to try and avoid large synchronised losses (see section 4: Minimise Risk)
- When to reduce exposure to a holding or to the market altogether (see section 5: Keep Aware)
Trying not to speculate
By favouring “bottom-up” investment thesis, that is, based on some fundamental knowledge of the stock (e.g. a company’s improving cost advantage or a technology disruption affecting a specific industry), rather than “top-down” bets (e.g. direction of some macro-economic variables) which are both a lot more complex to understand and more likely to have a systemic portfolio impact if wrongly forecast
Giving oneself a chance to benefit when proven right and survive when proven wrong
By keeping number of holdings low, carefully selecting stocks with high upside/downside risk ratio, and minimising the risk that several holdings fail at the same time for related reasons.
Focusing on absolute returns more than performance relative to an index
Over the long run, managing to deliver 10% return above cash deposit rate in good years and no worse than -5% in bad ones yields far better long-term outcomes than roughly matching the index each year. The objective is therefore not to try and beat the index every quarter so much as ensuring satisfactory absolute returns, which in turn will beat the index in the long run if not necessarily each quarter or even year.