Investment

Part 1 It is important to note, from the onset, that a lot has been said about efficient markets, behavioral finance, and investment strategy in the past. The approach Kevin Daly uses could be used to build a case against efficient markets whereby all there is to know about a firm’s value can be derived from the available information about the prevailing stock prices.

This is more so the case given that he has been successful relying on a wide range of metrics, apart from current stock price, to identify opportunities. Like Daly, Kenneth French does not believe in efficient markets theory. He is convinced that the markets can be incredibly noisy and driven by emotion such as overconfidence. As a matter of fact, French, like Eugene Fama, is skeptical of the skill most active money managers proclaim to have.

He is convinced that in some instances, performance is misinterpreted, largely because of the noisy nature of the market. Eugene Fama is also skeptical about modern investment and money managers. Fama is convinced that most investment managers are poor performers in the market, yet they still charge high fees to manage investments. There is a skill deficiency in the fund management industry. It is for this reason that Fama believes that very few investors or money manager can lay claim to beating market in the long-term.

He believes that most money managers rely on luck – not skill. This is a point of view supported by French who is of the opinion that in reality, only around 2 or 3 percent of money managers have the skill. On active investing, French is of the opinion that there is no way persons can make a lot of money via active trading.

He, like John Bogle, believes that there is an ongoing revolution from active investing to passive investing, with passive investing, in essence, being ‘buy and hold.’ Jimmy Bolodimas is an active trader French would frown about – with his firm often making an upwards of 500 trades in a day! Bogle is skeptical of active investment or fund management, with his hunch being that the high portfolio turn-over rate of active funds is very costly.

He also believes that although they cannot be regarded perfectly efficient, the markets tend to be highly efficient. Part 2 I do not think there is a revolution towards the rational way to invest. This is more so the case given that high frequency algorithmic trading is increasingly being embraced as an acceptable approach to trading and investing in stocks. In basic terms, algorithmic trading has got to do with the utilization of computers to make trading decisions, with little or no human intervention.

Companies making use of algorithms typically make hundreds of trades in a day and could therefore be classified as active investors/traders. Proponents of algorithmic trading are of the opinion that it “promises to cut costs, eliminate human error, and boost trading efficiency and productivity” (Essvale Corporation Limited, 2008, p. 72). The fact that algorithmic pioneer firms like Renaissance Technologies have been raking in impressive returns means that we are likely to see more investors and money managers embracing high frequency algorithmic trading.

Part 3 Active investment managers have been condemned in some quarters. This condemnation is not entirely deserved. As a matter of fact, active investors such as Kevin Daly and Jimmy Bolodimas play an important role in the marketplace. I will explain: To begin with, active investors are, to a large extent, the reason as to why markets are highly liquid – permitting all those who want play to enter trades and make exits at any time (Hachmeister, 2007).

In a market comprising of entirely passive traders it would be difficult to, for instance, find a willing seller for a specific asset. However, with active investors, one can be sure to find a willing seller (or buyer) for a specific stock at any point in time. Next, there is a small class of active traders that beat the market and have a demonstrable track record. These include, but they are not limited to, Gill Blake and Tom Basso (Schwager, 2012).

The fact that these individuals rake in impressive returns for those they manage funds for means that they actually add value to both the market and the economy at large. It is, however, important to note that active trading is not for everyone. Those who actually return impressive returns as active traders are experienced persons who have the skill for such an engagement.

In addition to being patient, these traders have perfect control of their emotions and can be able to wait for the right trading setups without being tempted to enter suboptimal trades. Lastly, active money and investment managers could help restore sanity in market downturns where all passive investors are selling (Hachmeister, 2007). To illustrate this, I will give a hypothetical example. Panic sets-in in the stock market, and panic stricken.