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Source Basis

Investment Foundations

Mission 8 · Count the Friction

Aswath Damodaran, Investment Philosophies (Session 6 of 38)

How this lesson uses themShow

Source-authentic claims follow the official Session 6 slide deck (22 pages), the complete trading-costs narration, and the test/solutions. The official Session 5 and Session 6 uploads are swapped: OPS audited the trading-costs narration in video bUJUGsDQ16w. OPS repairs two test-versus-solution mismatches — item 1's option (f) reads "lots of analysts" in the test but "few" in the solution, and item 4's options (c) and (d) differ between the two. Damodaran publishes a 12.22% hurdle approximation; OPS independently recalculates the exact bid/ask treatment as about 12.24% and labels the difference. Friction Budget percentages are illustrative OPS scenario assumptions, not measured account costs or forecasts; current US tax rules are handled in mission 13. No live market data.

Mission 8Investment Foundations · Count the friction

Count the Friction

The average active manager finishes about one percent behind the market. Find out where that percent goes, and what it means for the return your own plan has to earn.

Your mission

Break the cost of acting into spread, price impact, waiting, and tax; work out the hurdle a 4% spread really creates; then write the annual drag your own plan carries.

Start counting ↓

35 minutesSeven guided decisionsOne saved friction budget

Guided cost lab

0 of 7 stages complete

OPS Guide

Active managers trade because they expect trading to pay. Split their return into its parts and the cost of trading stops being a footnote.

Read the three parts of an active return, then work out what trading costs must be.

Stage 1 of 7 · Drag

The missing one percent has to go somewhere.

The three parts of an active return

The return you would earn anyway for taking this much risk

plus whatever active trading actually adds

minus the cost of doing the trading

Try itReasoning from evidence

The average active manager finishes about 1% behind the market. If active trading adds nothing at all across those managers, what does that 1% have to be?