Active Management: Not a Silver Bullet,
but Better than ‘Buy-and-Hope’
Brian Schreiner
March 3, 2009


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Asset Preservation

The ten-month moving average system has worked well over the last ten years, and it has also outperformed the market over the last thirty and fifty-year periods.  Why?  Two words: asset preservation

The most successful investors know that preserving capital in poor markets is just as important as growing capital in strong markets.  The famous investor Warren Buffett often reminds us of his two golden rules of investing.

Rule #1: Don’t lose money.
Rule #2: Don’t forget rule #1.

It’s striking how Buffett’s rules stand in stark contrast to traditional investment advice, which tells us to buy and hold, no matter what.  Clearly, Buffett believes in limiting losses.  He understands the value in asset preservation.  He is not a passive investor.

The benefits of asset preservation are profound.  Preserving assets during a bear market, empowers you to take less risk down the road — you won’t be pressed to make up for the big losses you’re likely to suffer in a buy-and-hold strategy.

Some will criticize this approach as being too simple to be effective. Moving averages lag the market and sometimes provide false signals. While we don’t use this particular approach in our active management, we show it here to demonstrate that even a simple indicator can prevent a catastrophic loss. There are certainly more sophisticated indicators and tools that can improve effectiveness.

Even the simplest of indicators could have helped you outperform buy-and-hold over the last ten years, last 30 years and last 50 years.  This isn’t rocket science or black magic, but it does require an industrial amount of discipline.  Active management is no silver bullet, but there are some basic technical indicators that can help you grow and protect your clients’ assets.

If you’re tired of ‘buy-and-hope,’ consider using some simple technical analysis to limit risk and offer the opportunity for better return.  Understand that the payoff will come when bear market losses are avoided.  The benefit of avoiding the worst of bear markets is far more valuable than participating in every gain in bull markets.

If you’re not convinced that an active approach to investing is safer and potentially more profitable than a passive one, let me leave you with a final question to ponder.  If you come up with an answer, please let me know.  I’ve asked thousands of people this same question, and so far no one has been able to give me an answer:

Can you think of any goal-oriented activity where taking a passive approach improves your chances of success?

Raising children?  Advancing a career?  Prevailing on the athletic field?  In life, taking a passive approach to what’s important to you is usually harmful.  That’s why you take a proactive approach to the things you care about.  You’ve made thousands of important decisions in raising your children.  You’ve worked hard to make advancements and achievements in your career.  And on the athletic field you’ve been competitive, aggressive and relentless.  In pursuing your goals, you know that a proactive approach is best because it is the best way to manage risks and achieve the outcomes you want.  Investing should be no different.

 

* Brian Schreiner is Vice President of Schreiner Capital Management, Inc. (“SCM”), a federally registered investment advisor located in Exton, Pennsylvania.  SCM is a third party investment manager and sponsors the Select Advisors Wrap Program, an investment platform that provides active investment solutions for Advisors and their clients. 

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