The harpoon and the net

A simple image for picturing active and passive investment — and why we think one is more deserving than the other

The abstract language of investment strategy can obscure as much as clarify the overriding objective: to hold as many profitable shares as possible for as long as possible.

This brief post presents a simple metaphor that might help illuminate what we are trying to do. It’s imprecise and certainly not wholly original. But it occurred to me soon after I grasped the essentials of the passive versus active debate, and I’ve borne it in mind ever since.

So think of listed securities as fish in the sea, most moving in dense shoals, others with various degrees of independence. Our objective is to catch as many high-value and as few low-value fish as possible. We want haddock, herring, cod and bass, and we don’t want — a quick Google search informs me — inedible or indeed poisonous fare such as King Mackerel, lionfish, certain species of venemous catfish, and sawfish.

Precision and imprecision

Consider two ways of catching them: the harpoon and the net. Yes, the harpoon is archaic: fishing websites tell me that in reality there are many ways of catching fishes directly — grabbing them by the mouth, lifting them by their backs, even by lasso. But the image of the harpoon effectively conveys the idea of precision, of targeting what we want. The net is imprecise and indiscriminate, wasteful even: we simply trawl the good and the bad.

The harpoon is the most elegant and skilful technique. But for the unskilled the net is by far the more effective method, guaranteeing a decent haul, even if the bad is mixed with the good. The unskilled user of the harpoon will catch very little — probably nothing — and the skilled only some, and even then some fish they weren’t aiming for. Perhaps a very skilled harpoonist will catch more high-value fish than those using the net. But only the most skilled, those who have invested much time in their craft, and, perhaps, enjoyed a degree of luck.

The metaphor is rather obvious, and that is the point. The passive investor wields the net, the stock picker the harpoon. The passive investor must exercise some discretion in designing their net. But that requires considerably less effort than targeting stocks.

The most successful investor is not the most skilful investor

The image illuminates a particularly counter-intuitive aspect of investing. The strategy that requires least effort and skill is — for the great majority — the most effective. This indicates one reason why even the unskilled are compelled to at least try to pick stocks. Focusing on a target and succeeding gives us more satisfaction than simply casting a net. And it seems more honourable — fairer. The harpoonist exercises skill and judgement. The rest of us simply cast our net and let it do its haphazard work.

Perhaps we might say that the successful passive investor’s skill has to do with the cultivation of attitude rather than craft: the ability to disregard the temptation to stray from what they know and to remain focused on the ultimate objective of maximising returns. In the capacity to rest content with a decent rather than spectacular haul. In realising that investment is not about fairness, but effectiveness. And, maybe, in recognising that by relieving us from the burden of developing stock-picking skills, a quietly effective passive investment strategy opens up time for the many other activities in life that offer opportunities for the exercise of skill and craft. I’m sure there’s satisfaction in wielding a harpoon skilfully. But that is not the only skill worth cultivating.

Collage by Justin Reynolds. Vintage whale illustration by rawpixel.com on Freepik.