There is an interesting post by prem sagar on passive v/s active interesting. In response to the post deepak has posted a response on his blog
If I have understand it correctly, prem’s position is that one should calculate the delta returns one would get by investing actively and compare it with other sources of income such as a job and decide if it is worth the effort. For ex: an extra 3-4 % return on a portfolio of 10 lacs could mean 30-40 K extra money. Not enough to make active investing worth your while.
In contrast deepak’s position is that if the returns are around 50% then the delta would be 3-4 lacs (for a 10 lac portfolio). With these kind of returns, active investing can be looked at seriously.
I have thought long and hard on this above issue. My take is as follows
I think prem’s position is perfectly valid for a new investor. I really doubt if it is possible to earn 50% annual returns for a long period of time (atleast 5 years or more) by spending 1-2 hours per day on the side. However if you are one of those guys (I am definitely not) who has earned 50% per annum (from 2001-2006, which covers a bear and bull market) then you are an exceptional investor. If I were you, I would seriously look at investing as a career. I would get my returns audited (no one is going to believe unaudited claims) and then look at the publicizing the returns. For a person capable of earnings such returns, attracting capital would not be diffcult. One can start an investment partnership and become really rich.
However I am definitely not such a guy. My final objective is to reach that level referred to by deepak. So what I do in the interimn?
This is my thought process (which mirrors prem’s approach partly)
a. save money and increase the amount of investible capital
b. learn and improve my skills to improve my returns
c. When the investible capital becomes high and my returns (for atleast 5 years rolling) cross a threshold, it maybe time to look at investing as profession (assuming you love to do this, I do)
For ex: passive investing returns are 15% (long term index returns). Active investing returns are say 30%.Investible capital is say 100 lacs. Then a net extra return of 15 lacs may be worth the effort.
BTW, to give you an idea of what 30% long term returns mean, consider the following – superinvestor ‘warren buffett’ has made 26% per annum for last 50 years, george soros has made 30-35% per annum (may be a bit more) for around 30 years and rakesh jhunjunwala around 70% (assuming he started with 5000 rs and has 4000 crs or 1 bn dollars now). So if you can make 30%+ for more than 10 years, you are an exceptional investor and can really do well.
For lesser mortals (it is easy to think that you are exceptional based on 1-2 years returns, I did that myself in 1999-2000), I think prem sagar’s approach is a valid one to start with, learn as you go along and deepak’s is the one to aspire for.
As an aside, I completely agree with deepak’s concept of leverage which is also referred to by several other authors.