In today’s Skinny, we borrow a classical technique from capital budgeting to use for our own purposes. Specifically, we take a look at Net Present Value (NPV), a method that is traditionally used for project evaluation. NPV effectively measures the incremental value that some course of action might yield, given the risk that is assumed with that action. Rather than trying to determine which building to buy or what machinery to acquire, we apply this concept to the investing landscape.
What we learn is that passive investing will always produce an expected NPV of zero over the long-term. In other words, by simply holding “the market”, we will earn a fair return on that investment, but we can never hope to outperform. However, by actively trading theand that exists in the market, our expectation over time is for . Put another way, as tastytraders, we fully expect that over time, we will outperform.