The value of ownership
Extract >>
It's been said that the fastest car in the world is a rental. That might not always be true — unless, of course, your local Avis has a Bugatti Veyron on its books — but the statement does reflect how people feel differently about the assets they rent compared to the ones they actually own. A rental driver returns the keys and doesn't have to worry about the amount of tread left on the tires or how much wear remains in the brake pads. But the car owner is much more likely to care about such things.
The significance of ownership
It's peculiar how many investors don't consider the long-term condition of the assets they own. Perhaps it's because most owners are not owners at all, but are just renting a share certificate for a short period of time. “High-frequency trading” strategies are probably the most extreme example of this and have invited a lot of controversy. Opinion is divided as to whether two million quotes a second on U.S. stock exchanges represent an improvement in price discovery and market efficiency, or whether they simply exacerbate market volatility.
Passive investment strategies are arguably similar. These attract investors wanting exposure to an index or “asset class,” not to individual businesses. Aggressive focus on a short-term trade is replaced by an apathetic, hands-off approach. Indeed, once the basket of shares has been bought, a passive investor will intervene as little as possible in order to reduce trading costs. Such strategies have grown quickly, accounting for 18.4% of the total net assets of U.S. mutual funds in 2013, up from 11.4% 10 years earlier 1.
Whether it is high-frequency trading or passive investment strategies, it's clear that neither option does anything for improving the quality of the underlying asset — the business.
