# Higher return (with higher risk) investing



## sprdave (Oct 1, 2011)

Are there really viable investing options that generate greater return (compared to say an index ETF), but obviously would have higher risk associated? 
That is, in a smart sense, where the probability is that you'll come out ahead on average, not in the lottery sense.

Or does it essentially come down to gambling?

How does one find and decide on such options? Where are the unknown stocks that will be the next Amazon? (lol)

I know this is likely an opinionated subject, but I'm looking for people's thoughts (and we can have constructive discussion here right?)


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## MrBlackhill (Jun 10, 2020)

Yes, there are. Whether it's gambling, speculating, trading or investing depends on your strategy, your skills and your personality.

I'm not sure what's the goal of the thread, though. Are you looking for active ETFs suggestions, passive custom ETFs, stock picking ideas?

That's only my opinion, but I believe that most Canadian investors feel safe in stocks such as CNR, FTS, BAM-A, NA, RY, TD, MRU, TIH, T, TFII, ENGH, GIB-A, ATD-B, IFC, CP, etc. And such stocks have historically beaten the TSX index. But that doesn't mean they'll continue to beat the index. They are a big part of the index though, so a bad performance from these stocks also affects negatively the performance of the index.

There's already debates in these threads.









Stock-picking, let's test it


Hi all, Let's test this and make bets. It may look similar to this thread or this thread but here the goal is to follow a specific portfolio fully documented and make bets on what will be its faith. If you want, as @Karlhungus suggested below, if you believe you are good at stock-picking, you...




www.canadianmoneyforum.com













All equity, high returns, low drawdowns


This evening I was playing around with a few stocks taken from my US watchlist. I was playing around with only 25 US stocks that have been there for at least 30 years. And then I was wondering "ok, some people are risk-averse and it's ok, but what if a combination of stocks would provide high...




www.canadianmoneyforum.com


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## MrBlackhill (Jun 10, 2020)

sprdave said:


> How does one find and decide on such options? Where are the unknown stocks that will be the next Amazon? (lol)


If you are looking for the next Amazon, then I guess you are looking for stock-picking strategies. On the Canadian side, you could've said "how to find the next SHOP" which currently has +100% CAGR over 5 years. $10,000 in SHOP in 2016 is now worth $400,000.

How you find such stocks... that's a big debate. The debate being that some believe you'll end up with more fails than wins.


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## cainvest (May 1, 2013)

Pick a sector of interest and start researching smaller companies. If they are growing and you like their financial situation and business model going forward do further research. Look into the management teams history and who is funding them. Helps if you have knowledge about the companies business field.


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## MrMatt (Dec 21, 2011)

sprdave said:


> Are there really viable investing options that generate greater return (compared to say an index ETF), but obviously would have higher risk associated?
> That is, in a smart sense, where the probability is that you'll come out ahead on average, not in the lottery sense.
> 
> Or does it essentially come down to gambling?
> ...


If the outcome is uncertain,it's gambling.

I think by carefully reviewing and considering the information it may shift from being more chance based to information based.

I don't think it's a "gamble" to bet on a good company with a solid history and business plan.
I think it IS a gamble to bet that a stock price will continue to appreciate because it has in the past.

Efficient market theory suggests that consistent outperformance is unlikely.
I personally think that the market is only moderately efficient.


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## Jimmy (May 19, 2017)

You need to be able to do some basic valuation of companies to try and find stocks w good value. Many sites have screeners so you can sort and export the best returners or maybe the most undervalued by P/B as a starting point.

Look for low P/S / Sales growth ratios to compare companies . High GP x sales growth / P/s = GP yield is also good. These and other ratios can give you some ideas on companies that are the best values. Most of this information is on Yahoo.ca or other financial sites.

Here is a general article on valuation The 4 Basic Elements of Stock Value

I know generally the Brookfield companies are all designed to return 15+% which will easily beat the market which is another good starting pt . They all are good, but BAM and BIP are likely the best IMO


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## Tostig (Nov 18, 2020)

When they used to publish their quarterly magazine Canadian ShareOwner used to repeat over and over again, that great stocks have a steady 5 year revenue growth of 20% and EPS of 15% straight lines plotted on a log graph.

But if you're looking for the next Amazon, which started the first few years with zero earnings, then the Canadian ShareOwner method is not for you.

If you're looking for the next big thing, then you'll just have to sniff around and look at what new names keep popping up that everybody is using. Who knew that in January 2020, Zoom would be a big winner of the year all because of Covid?

Stock picking any method you choose is just like that falling marble game at the fair. You can't predict the exact path any individual marble will take but as a population, all the marbles will form a normal distribution curve.


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## Rusty O'Toole (Feb 1, 2012)

Last year I made 49.04% on my account and never risked more than 2%. I like making money and I don't like risk. I don't try to outguess the market or pick the next hot stock. I found an ETF that makes large, steady moves and buy when it goes up, and sell when it goes down. I laid out my methods on this board several times starting 2 or 3 years ago. Nobody seemed interested.


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## Karlhungus (Oct 4, 2013)

Sure, just follow what this guy did. A different approach to asset allocation - Bogleheads.org


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## james4beach (Nov 15, 2012)

sprdave said:


> Are there really viable investing options that generate greater return (compared to say an index ETF), but obviously would have higher risk associated?
> That is, in a smart sense, where the probability is that you'll come out ahead on average, not in the lottery sense.
> 
> Or does it essentially come down to gambling?
> ...


The classic way is to do leveraged indexing. You can take on some kind of debt, using margin or HELOC or something, and buy the regular index.

Another way is a leveraged ETF. For this purpose I think SSO may be one of the best candidates, since it's a reasonable 2x (daily) leverage and tracks the S&P 500 index, which is well diversified. There are unique risks with this. The leveraged structure will see performance loss in volatile markets, so it may not necessarily perform great in the long term even if the S&P 500 goes up. But it will do great if the market is as smooth and steady as it has been lately.

The 10 year return of SSO is 22.6% CAGR, which is about 1.7x times the S&P 500 index return. Beware though, this only worked out well because the market has been extremely smooth over the last decade. Every dip has been aggressively bought, so far.

A situation we haven't had for many years now (and certainly something no younger investor ever thinks about) is a prolonged sideways market, where the index makes no progress over a handful of years. SSO would do very badly in a prolonged sideways or bear market.


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## jargey3000 (Jan 25, 2011)

Rusty O'Toole said:


> Last year I made 49.04% on my account and never risked more than 2%. I like making money and I don't like risk. I don't try to outguess the market or pick the next hot stock. I found an ETF that makes large, steady moves and buy when it goes up, and sell when it goes down. I laid out my methods on this board several times starting 2 or 3 years ago. Nobody seemed interested.


 I must've missed your posts Rusty. I am interested. Which ETF?


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## james4beach (Nov 15, 2012)

jargey3000 said:


> I must've missed your posts Rusty. I am interested. Which ETF?


TQQQ but I'll leave it to Rusty to explain the method

This is a concentrated bet in the tech sector. Performance has been 49% per year, over the last 10 years.


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## cm2u (Feb 6, 2019)

You might find bull leveraged ETF's interesting. This is only for bull, never bear which tend to do much worse over time. Do you have a good charting system? I use TD's ThinkorSwim which seems to be quite good. Try as many as you can. See how intuitive they feel. ToS is decidely not very intuitive and takes a while to be comfortable doing much. If you're trading with them then it will be real time otherwise 15 minute delay which isn't a problem since you're comparing charting systems. 

The most important thing I've found in the market is to never put in what you may need in the next year or two. Because you never want to sell because you need the money for anything. Most younger investors make this mistake and after they've sold, being impatient, buy something that depreciates hugely, like a car, they see their equity sharply rise and feel sick. 

One technique that can have surprisingly good results is to vow, as long as the company looks healthy, the P/E is reasonable and the industry looks good (like the opposite of cruise lines during COVID!), just not to sell no matter what. It is hard to buy something on the dip because its got great valuation, then see it sink lower and lower. Obviously we cannot time the market and this often happens when you're seeking good valuation and buying on a decline. Most of your holding period can be in a declined position and this can get depressing, especially for new investors who read about some hotshot daytrader who makes "$1000 a day" passively and how has a course/subscription that YOU NEED NOW to profit. (Nothing is really passive except a fixed interest investment and even those you need to compare diligently so nothing is passive.) But if you can ignore that and patiently wait and be ready to sell and always, always have alerts going to your phone if it moves suddenly in the direction you need (and basically ignore anything else - basically a "wake me when it does something" attitude, at least you won't lose any money unless the market collapses which never happens without a recovery. 

So back to leveraged funds. First pick a sector that looks good. Many people are looking at what has gone down the most during COVID because they are optimistic about the vaccine and the potential recovery of these industries when things get back to normal. I am following SOXL and JNUG, both highly leveraged ETF's that track the semiconductor index (SOX) and gold. When comparing look at short term and graduating to long term, at least 2 years. Its insightful looking at how they fared around March 23, 2020 when the COVID dip was at its worst for most of us. But on the other hand if you held them it doesn't matter how low they go, just how fast they recover. Nobody makes money on a dip! That's when you buy. 

Another thing to watch is how an equity behaves after a sudden spike or dip. Most tend to revert back to where they were. Because the market tends to overreact to news. Its probably profitable to just buy on bad news if it really declines a lot as long as the company otherwise looks quite healthy. So if it spikes it can be good to sell in hopes of buying shortly thereafter. This way you gradually accumulate more and more shares. 

How to know when to sell? Impossible to even roughly predict that. Maybe the best indication is if you're happy with that amount of return. That is why you originally invested after all. Once we do the depressing "What if I had...." thing through our mind it will so sickening to see what could have happened. Many people just put in a sell order and let it sit there for months in hopes it will spike up and hit it. Sometimes that happens. Curing COVID I got really lucky and sold right at the peak of a triple leveraged ETF's spike. I was up about 20% within a few days. As soon as that happened I realized I'll never see that happen again for as long as I live! Then I lost way more than I had gained. NEVER , EVER invest in bear leveraged ETF's. Just look at long term results when you compare them with their bull equivalents. Its called decay and it hits them very hard. UVXY is about the riskiest of them all right now. Before it got delisted a few months ago the king was TVIX. Check that one out in late March of last year! Some people made a fortune. Very few actually. 

Its really a war against losses. 
Remember J Paul Getty: I'm more concerned with the return OF my money than the return ON my money. 
Say you have $100,000 and lose 20% = $80,000.
Say you then gain 20%. Most people would think you're right back where you started at $100,000. No. $80,000 + 20% = $96,000. 
$100,000 - 50% = $50,000
$50,000 + 50% = $75,000.
So if you lose just half you have to double your money to just get back to where you started. Most people take a long time to double their money. Quite a few years for experienced investors. 
Compare 3x SOXL and SOXS over several months or a year or more. And 2x SSO and SDS. And JNUG and NUGT. And 3x TQQQ and SQQQ. The bear fund does terrible over time. Draw a line for 0% to keep track of the decay of both over time. When one goes up 5% the other theoretically should go down the equivalent amount. But this often does not happen, especially with larger movements! Constantly be comparing short term and long term focusing mainly on long term. But if you're in a good industry, like semiconductors has been for a long time and even the Nasdaq (TQQQ), they do very well over time. If you read about leveraged funds they always say to be careful but rarely do they point out the vast difference between bull and bear funds. The charts speak for themselves. 

Daytrading: You'll hear a lot about this from younger, less experienced, dumber investors. Most people get into daytrading because really....they have very little money. The amounts they are investing are laughable and just make the whole scenario all the more absurd. If you have very little money, like not even $10,000 which so many younger investors are using, your temptation to go on margin will be higher because its so hard to make any money with just $10,000. They are looking at the market as a source of income which is ludicrous. You are trading with a ticking clock with interest accruing at an alarming rate. Its hard enough making a profit without paying to trade with interest! To avoid interest daytraders sell by the end of the day which means often they sell because they have to, often in a loss position because they don't have the ability to wait out the market. This is unbelievably stupid. This is the reason the vast majority lose everything. And the ones that profit are probably just trading on a rising market. A monkey can profit on a rising market. I'm surprised anybody even admits they daytrade. Its like admitting you're a total idiot. Swing trading is similar on principle but in reality totally different. Here you trade for smaller gains. It is hard though it sounds easy. In swing trading you pick stocks that look quite stable and just buy when they are a little lower and sell when they are a little higher. Looking at a typical chart it looks so easy to do. So you buy and it promptly sinks and stays below where you bought for weeks or months! The irony is incredible. In principle swing trading sounds like it could work and I suppose we all swing trade, just in different time periods. So always use time as an advantage by being able to patiently wait out the market's temper tantrums. Its really like an impetuous, spoiled child most of the time. 

Indicators like RSI, PMC, MACD can be useful but only as part of your strategy. Experiment to see how accurate they have been over time by changing their time settings. But its probably wise to use these and others to help you decide when to buy as they are pretty good most of the time. The most important though is the health of the sector and the health of the company.

I wanted to finish this little novel by reminding you that human nature bodes very badly in the market. When something goes down we feel we must sell to "limit our losses". When something goes up we feel we must buy for fear of missing out on potential profits. After watching charts closely you will see that usually an equity spikes or dips sharply then reverts back so doing anything after that happens is usually a huge mistake. It will probably go back to where it was after a little while, often in the same day. This is why its important to look at a chart and look at the company's figures and determine where you feel its a good deal. Same with selling. Then you do not change your mind unless new info comes available. This helps keep the emotions out of the picture. Emotions are the #1 reason people lose in the market.


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## james4beach (Nov 15, 2012)

I think it's worth making a distinction between leveraged sector bets (like TQQQ) and leveraging the whole market. I'd say that sector bets like TQQQ and ARKG are much more of a casino gamble.

In comparison, using margin (borrowing money) to invest in a diversified fund like XAW is not as much of a gamble. I think it has a very good likelihood of long term outperformance.

The Rational Reminder podcast (from PWL Capital) talked a bit about this. They observed that in theory, borrowing to invest in diversified index funds should be a long term winning strategy. It usually doesn't work out in reality due to other factors, including human psychology and the mechanics of leverage.

I'm pretty sure it's this podcast episode (link), in case you want to hear PWL talking about leveraged index investing is a great idea in theory.


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## sprdave (Oct 1, 2011)

MrBlackhill said:


> If you are looking for the next Amazon, then I guess you are looking for stock-picking strategies. On the Canadian side, you could've said "how to find the next SHOP" which currently has +100% CAGR over 5 years. $10,000 in SHOP in 2016 is now worth $400,000.
> 
> How you find such stocks... that's a big debate. The debate being that some believe you'll end up with more fails than wins.


Ya maybe I'm vague... One part is looking for thoughts on if it's a lost cause to go for higher returns, as I'm not a casino/lottery type. The next part would then be, how? 
But I'm also unable to spend "all day" by any means researching everything, so limited there.


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## sprdave (Oct 1, 2011)

MrMatt said:


> If the outcome is uncertain,it's gambling.
> 
> I think by carefully reviewing and considering the information it may shift from being more chance based to information based.
> 
> ...


I would agree that the market doesn't feel particularly efficient, which makes it tricky


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## MrBlackhill (Jun 10, 2020)

sprdave said:


> Ya maybe I'm vague... One part is looking for thoughts on if it's a lost cause to go for higher returns, as I'm not a casino/lottery type. The next part would then be, how?
> But I'm also unable to spend "all day" by any means researching everything, so limited there.


I don't think it's a lost cause to go for higher returns. Then, the "how" depends on how much work you are willing to put, how skilled you are, what's your personality and how much higher returns you are aiming.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> I don't think it's a lost cause to go for higher returns. Then, the "how" depends on how much work you are willing to put, how skilled you are, what's your personality and how much higher returns you are aiming.


Not a lost cause, but I think it's much more difficult than people tend to think.

MrBlackHill left out one very important word in his list. The outcome does not purely depend on skill and work. LUCK is a huge factor in the outcome and it's beyond your control. You can be a smart guy and try the best strategy ever, but you might be unlucky and still do badly. There's a big element of luck and randomness in markets.

The outcome of aiming for higher returns can be *lower* returns than average. So one has to think about what they might be signing up for and the range of potential outcomes.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> Not a lost cause, but I think it's much more difficult than people tend to think.
> 
> MrBlackHill left out one very important word in his list. The outcome does not purely depend on skill and work. LUCK is a huge factor in the outcome and it's beyond your control. You can be a smart guy and try the best strategy ever, but you might be unlucky and still do badly. There's a big element of luck and randomness in markets.
> 
> The outcome of aiming for higher returns can be *lower* returns than average. So one has to think about what they might be signing up for and the range of potential outcomes.


Luck will be part of it if you are aiming for very high returns. But if your goal is just to slightly beat the index, then there's less luck needed. If the index is averaging 9% CAGR over 20 years and you are aiming for 11% CAGR, there's no need of huge luck. But if you are aiming for 30% CAGR over 20 years, it's another game.

Indices like S&P500, NASDAQ and TSX are just blindly weighted by market cap and hold a huge amount of stocks. There's no intelligence behind it, no strategy, no analysis. If you are skilled and you just concentrate a little bit more, you pick only the stocks with the best fundamentals, solid history, great management team, great financials, etc., you'll certainly beat the index without the need of luck. You won't crush the index, but at the very least you should slightly beat it.


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## MrBlackhill (Jun 10, 2020)

Interesting.


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## Rusty O'Toole (Feb 1, 2012)

jargey3000 said:


> I must've missed your posts Rusty. I am interested. Which ETF?


I usually trade TQQQ because it has big up moves without wild swings which makes it easy to trade. I am a technical trader, that means I go by the charts not by the news. You can trade anything with my method but the TQQQ is easy and very profitable. I never risk more than 1% of my account, or at most 2% on any trade.
I use a trading platform called Think or Swim from TD Waterhouse. You can download it for free, and paper trade it for free. Suggest you download it if you do not already have it, I can show you my method in 10 minutes on the chart, without the chart you may never get it.
The main indicator I use is called the TTM Squeeze. I also use an RSI indicator as backup, and look at volume and two moving averages, a 200 period and 50 period EMA.
You don't need to know what these things mean at this time. Download the ToS platform and get back to me, I will help you set up the charts and you will see what I mean very easily.


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## fireseeker (Jul 24, 2017)

MrBlackhill said:


> If you are skilled and you just concentrate a little bit more, you pick only the stocks with the best fundamentals, solid history, great management team, great financials, etc., you'll certainly beat the index without the need of luck.


For every winner in the marketplace there must be an equivalent loser. If everyone focuses on fundamentals and picks skillfully, who will be the losers?


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> Interesting.


Highly misleading diagram. They aren't including all the investors who performed much worse than the index.

There are studies on this which have looked at large numbers of active managers. They don't do very well.


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## james4beach (Nov 15, 2012)

fireseeker said:


> For every winner in the marketplace there must be an equivalent loser. If everyone focuses on fundamentals and picks skillfully, who will be the losers?


But you're forgetting, the stock picker is smarter than everyone else. They gonna be smart when everyone else stooopid. Hedge fund managers are stupid. Mutual fund managers are stupid. Index decision committees are stupid.

They are no match for an amateur, retail stock picker who just got into stocks, whose enthusiasm is off-the-charts with a CAPE at 34


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## Rusty O'Toole (Feb 1, 2012)

fireseeker said:


> For every winner in the marketplace there must be an equivalent loser. If everyone focuses on fundamentals and picks skillfully, who will be the losers?


How do you figure that? A glance at a chart of the Dow or S&P shows the market as a whole goes up most years. Then there are stocks that don't go up much but pay dividends. It's not like a poker game where someone must lose for another to win. It's supposed to reflect the businesses that make up the stock market and hopefully produce profits. There's no reason everyone couldn't invest and make money without hurting anyone else.


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## fireseeker (Jul 24, 2017)

Rusty O'Toole said:


> How do you figure that? A glance at a chart of the Dow or S&P shows the market as a whole goes up most years. Then there are stocks that don't go up much but pay dividends. It's not like a poker game where someone must lose for another to win. It's supposed to reflect the businesses that make up the stock market and hopefully produce profits. There's no reason everyone couldn't invest and make money without hurting anyone else.


Quite true.
But if you re-read the citation from Mr. Blackhill, you'll see the objective being discussed is "beating the market," not simply making a profit.


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## MrBlackhill (Jun 10, 2020)

fireseeker said:


> For every winner in the marketplace there must be an equivalent loser. If everyone focuses on fundamentals and picks skillfully, who will be the losers?


You can't win a game if you don't play it. Whether you should try your skills/luck at the game depends on how much you know yourself.

We are all above average in something and below average in something else. I won't try to become a successful painter, for instance.

But if I never tried something new in which I believed I was skilled, I wouldn't have done much of my life. Who will be the losers? Those who fear trying something new.

What most people are missing when using the above-average cognitive bias argument is that even though it's true that you can't be above average in everything, you also can't be just-average in everything. You are an outperformer in something and an underperformer in something else. Know your strengths and weaknesses. To know them, test them.



james4beach said:


> Highly misleading diagram. They aren't including all the investors who performed much worse than the index.
> 
> There are studies on this which have looked at large numbers of active managers. They don't do very well.


It's a diagram of the super investors. It's basically showing how the best fund managers performed in excess return to S&P 500. And that also means you should not expect a fund manager to do better than that unless it's a new super investor. Also, obviously, it's just the top performers and it doesn't show the hundreds of fund managers that performed up to a 5% excess return over 20 years. It's notable only if the excess return is very high on a short time (10-20 years) or if the excess return is decent on a very long time span (30+ years).

Most studies about active managers didn't take into account *how much active* they are, as many funds are considered "active" even if they have a few holdings outside the index, but the *truly active* managers have many holdings outside the index and those ones are outperforming.

See below.




__





Sizing up active management


So-called industry experts, index ETF providers and pundits tout that the market can’t be beat. But past studies on active fund managers have been misleading at best and we have the proof.



www.edgepointwealth.com






https://www.fpamn.org/wordpress/wp-content/uploads/Invesco-Active-Outperformance-WhitePaper.pdf





> *Invesco* conducted an extensive study of *approximately 3,000 equity mutual funds over the past 20 years* _[1994-2014]_ - covering five distinct market cycles - to investigate the true value of active management. Our study focused on *active share*, which measures the difference between a fund's holdings and the holdings of its benchmark index.
> 
> Our results show that during these five market cycles, in aggregate, *more than 60% of high active share fund assets outperformed their benchmarks, after fees, in a variety of measures - excess returns, downside capture and risk-adjusted returns*
> 
> ...


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