July 2025
IN THIS ISSUE
Stocks look pricey
Don’t hire a hedge fund billionaire
Buffett and Belfort agree
Scratch the itch
As market volatility returned this year, data from the first half of the year shows that Hedge funds lure record inflows in first half of 2025 (Reuters):
“Global hedge funds had their strongest inflows in the first half of the year since 2015, gaining popularity in turbulent markets amid President Trump's new trade policies, data from provider HFR showed.
Hedge funds lured $37.3 billion in inflows in the first half of 2025, while they attracted $7.2 billion in the same period a year earlier, according to HFR.”
Readers of this newsletter know the convincing evidence that doing nothing adds value and traditional active management is not performing relative to passive indexing.
Short periods of time sometimes produce attention-grabbing headlines in support of active management, like when 57% of actively managed U.S. equity funds beat their average passive peer over a single 12-month period through June 2023 (Morningstar). But as I noted last July, upsets happen, and short-term upsets should not be relied upon for drawing long term conclusions.
Indeed, over long time horizons the performance gap is enduring. Here are the numbers from the SPIVA Report through December 30, 2024 showing the percentage of all Large-Cap funds that outperformed the S&P 500 Index over the past 1, 5, 10 and 15 years:
Source: S&P Global SPIVA Report
Most active managers know these data and are willing to admit their underperformance during bull markets, but assert that in exchange they will outperform during bear markets. Their service to investors is swapping upside potential for downside protection.
Look, there’s clearly demand for this service, even if that demand has been shifting away from active management to passive indexing. (For the first time in history, as of December 31, 2023, total Passive fund assets surpassed Active fund assets). If that’s what someone wants, there are plenty of active fund managers who will fill that demand.
My point is that if an investor has enough capital to be investing in individual stocks and still be able to pay their electric bill if their portfolio loses a substantial amount of value, then they probably do not need to be buying insurance for their portfolios - or their vacuums.
Anyway, this month I came across an interesting “investing hack” for those who want to outperform benchmark indices but still like the challenge (and entertainment?) of trying to pick winning stocks:
Invest 90% of your portfolio passively and 10% actively.
This hybrid strategy was recently discussed in a Reddit thread by investors seeking the best of both worlds:
Many investors in the thread advocated for a middle-ground approach. One described their approach as 90% passive investing, 5% allocated to unconventional assets such as gold, GameStop (NYSE:GME), and bitcoin, and the remaining 5% in actively managed stocks. “I find having a small basket of stocks allows me to learn quite a bit about the companies.”
Another added, “The passive allocation does the heavy lifting, and the other 10% scratches the itch to be active.”
There’s also a psychological angle. One investor admitted, “If you’re stressed holding stocks at all-time highs, I wouldn’t be in the market.”
Some described stock picking as a rewarding hobby. “I like knowing and believing in the names I hold. Even in periods of underperformance, I don’t sweat it.”
This “scratch the itch” approach mitigates the catastrophic underperformance risk associated with managing 100% of capital actively. Hey, having only 10% of your portfolio underperform is significantly better than 100%.
(Past performance is not necessarily indicative of future results of course)
ONE MORE THING…
Stocks look pricey. This Is, Officially, the 3rd Priciest Stock Market in Over 150 Years -- and There's No Mistaking What Comes Next for Stocks, Based on History | The Motley Fool
Don’t hire a hedge fund billionaire. Jordan Belfort has a better answer of course. Wolf of Wall Street Explains How to Become a Hedge Fund Billionaire
Buffett and Belfort agree. Here’s Buffett: "Some people should not own stocks at all because they just get too upset with price fluctuations. If you're gonna do dumb things because your stock goes down, you shouldn't own a stock at all". Warren Buffett's Timeless Advice: 'If You're Gonna Do Dumb Things Because Your Stock Goes Down, You Shouldn't Own A Stock At All'
The information and opinions contained in this newsletter are for background and informational/educational purposes only. The information herein is not personalized investment advice nor an investment recommendation on the part of Likely Capital Management, LLC (“Likely Capital”). No portion of the commentary included herein is to be construed as an offer or a solicitation to effect any transaction in securities. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.
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