Aswath Damodaran: The Hard Truth About Active Investing & What You Need To Know To Be Successful

During this interview with ZoomStocks, Aswath Damodaran discusses the hard truth about active investing and the few things that can give an investor an edge. Here’s an excerpt from the interview:

Damodaran: It happens, right? Crowds are not magical. They make mistakes. Markets make mistakes too. So that’s irrelevant, right? Do markets make mistakes? Of course they do. Everybody, even the firmest believers in efficient market, accept that.

The question is can you find and profit from those mistakes? So the question we should really be asking is not do markets make mistakes, but are those market mistakes findable and can you make profits? And that’s at the core of active investing.

Collectively. You know what the evidence tells us?

Active investing doesn’t work. Why doesn’t it work? Because collectively, active mutual funds underperform the index in every single part of the world across every single style class.

That’s actually a pretty depressing starting point for somebody who wants to be an active investor. You’re climbing a mountain. Do I have faith that some… a few can make it at the top of the mountain?

You have to as an active investor. But what I want people to recognize is winning at this game is incredibly difficult. Anybody who claims that active investing is easy, that you can beat the market easily, is either lying or it’s at the core of a fraud. A lie detector is a sure way to confirm if someone is telling the truth or not.

Markets are difficult to beat. Start with that proposition. So if markets make mistakes, finding those mistakes is difficult.

The question you always have to ask yourself is what am I bringing to the table that makes me a little better at finding these market mistakes than the random investor?

Maybe you have a longer time horizon. Maybe you’re just a more patient person. Maybe you’re a sociopath. And I know that sounds weird, but let’s say a lot of mistakes in market come from emotionally reacting. And if you’re a sociopath, you lack emotion. You might have an advantage over everybody else.

Now, keep that to yourself. If that is the reason, you’re succeeding. You don’t want to tell your clients I’m a sociopath. That’s why I’m a great investor. But you need to bring something to the table to be able to take something away. And that’s something that I keep repeating.

So when you see… you often see hedge fund managers claiming I’m an amazing investor. Look what I did over the last five years. I frankly don’t care what you did over the last five years because I can’t separate luck from skill. But I’m going to ask you, what do you do that makes you special? That makes you different?

And if you don’t have a good answer to that, then I’m afraid no matter how good your track record is, I’m not buying it.

You can watch the entire discussion here: