Winning at Active Management

Chapter 8 Debates on Active Managers’ Styles and Methods

“[ The stock market] is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that it is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion (emphasis in the original).”¹ So wrote Benjamin Graham and David Dodd in 1940, in a discussion relating the inherent worth of companies with the prices of their shares.

Graham and Dodd went on to point out the value of systematic analysis to the investment process, and how careful research on companies—both quantitative studies on their financial health and qualitative reviews of their competitive context and strength of management—could aid investors in evaluating whether the prices investors set by their votes offer attractive investment prospects.

This chapter considers the variety of styles and techniques equity managers apply to their investing, and highlights what Epoch considers to be at the core of companies’ economic value: free cash flow.

Manager Style

Among investors, deliberating over whether to pursue active versus passive approaches may be a binary, yes-or-no question. Within the community of active managers of equities, however, there are second-, third-, and fourth-level debates over how to best earn superior risk-adjusted returns from selecting securities. The main divisions ...