market vs. limit orders

Yes, perhaps "mechanical" was not a good choice. My thoughts haven't been completely formulated, but I think I like Tad's differentiation.

I agree that the next person to employ your strategy will not invariably fail. That wasn't my intention and I apologize. I also agree that barriers to entry COULD be lower than other approaches (including mine), but it would be dependent on the specifics of each situation. Short and long term capital gains, expense ratios of investments, and brokerage fees would all factor into which strategy would be most efficient (ignoring actual returns).

Again, agreed that my method could not be followed by all (especially uninformed) investors. .

I think this is the most important part. Marginally, success is definitely possible. No strategy (not mine, nor yours, nor the dogs of the dow, nor the january effect, etc...) will work if EVERYBODY engages in it. If everyone did, it would be highly impossible that the massive demand could be satisfied by any supply controls (an extension of economic scarcity). Given that, everybody fighting for the same "piece of pie" would drive up price and the value would be consumed. Thankfully this will never happen. If everyone were fighting for low p/ e stocks the lack of demand for all other investments would drop their prices down and someone would recognize the opportunity for profit and switch their investing strategy. Its the differing opinions on accurate valuation, investing strategy, and future expectation that drive the entire market.

What about VBISX, Vanguard's Short-term Bond Index Fund? Turnover: 106%, Category average: 93%. Is that not a passive fund, despite having above-average and >100% turnover...?

I don't think turnover is dispositive to categorizing a strategy as active or passive. "Does the firm employ securities analysts?" tells a lot. As an example, all of DFA's funds are passively managed, and they don't have any securities analysts (at least, none doing typical securities analysis). But few of the funds track any index. Arguably they're nothing more than quant funds based on a specific set of academic research...quant = mechanical.

Investopedia's definition of "active management" just plain stinks: "An investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions." Any small-cap value fund constantly monitors every one of its holdings and spits it out when it's no longer small-cap or value, per the criteria set by the fund (which might be membership in a small-cap value index, or just a criteria based on market cap and book-to-market value). And it watches the rest of the universe of stocks and adds in stocks when they meet the criteria.

-Tad

"Beliavsky" wrote

I agree the "barrier to entry" for application of a systematic strategy is now lower, but this is not because the traditional approach has been fallen by the wayside. It's simply that the traditional company information that brokers of, say, the 1970s and earlier sought is more readily available via the internet and other, near instant tele-yada-communications. (The internet not being flawless of course. Then again, greater information access applies to regulatory yada agencies as well, so with greater transparency in general, maybe the info we have about companies is more legitimate these days than in decades past.) Also, I would not call the traditional approach "qualitative." A good broker decades ago did sift through a company's financial numbers, weighing what the numbers said about the company's health. That's exactly what folks (at least those who make stock decisions based on fundamentals) do today when they read those numbers on the net.

Maybe the one wrench in the system that recent decades have introduced is legitimizing the application of numerology to stock picking--the use of so-called "technical analysis."

Then again, those employing TA probably are in part responsible for some of my good fortune. Their losses can often be my gains.

Just a clarification, at least from where I am sitting.

"Tad Borek" wrote

You quoted Investopedia's definition for "active investing." Look instead at its definition for "active management." It's similar to your definition of "active management."

Still more grist for the semantics mill: Chris Lott's interesting, investing FAQ site has a good, applied discussion of active vs. passive at

Tad I think investopedia's definition of "active management" is pretty accurate. Most non-index funds are actively managed. Standard & Poors thinks so too. The SPIVA report is created to show how those "actively managed" funds do in comparison to the benchmark index.

For most funds there are managers that buy and sell within a given set of guidelines in an attempt to outperform the benchmark index against which the fund is judged. If I hold ADCDX fund for 40 years, I would say that I have been passive, but the fund may have bought and sold thousands of investments in that time. How is that not "active"?

I don't get your point...what is ADCDX?

-Tad