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Confessions of a Pool Player: Humility and Active Management
Dec 1, 1988
The ingredients needed for successful active management are luck, skill, and humility. Luck and skill are obviously valuable. Humility, as in knowing what you don't know, is required when luck fails. This article shows how humility can work to your advantage. Humility places the burden of proof on the active decision. It forces the manager first to decide what portfolio to hold when he or she has no insights, and then to justify deviations from that original portfolio due to his or her particular insights. Deviations need to be justified with expectations of compensating return, and a method of portfolio construction should be used to make sure that the highest level of expected return is attained per unit of risk.