Comments on: Active vs. Passive Investing: The Results Are In.

By: Robert Wasilewski

Robert Wasilewski — Sat, 27 Mar 2010 12:34:17 +0000

Great post and discussion. Here’s a couple of side points for those trying to pick the winners:
-the largest pension funds in the country with their full-time staffs put almost one-third of their investable assets in low cost indexed funds
-think about Long-Term Capital Management, Bear Stearns, Lehman Brothers, Bill Miller
All have/had contacts and information you and I could only dream about.

By: DFA Funds Advisor

DFA Funds Advisor — Fri, 26 Feb 2010 15:57:44 +0000

Congratulate the Biz of Life. You certainly has beaten the odds.

It is simple arithmetic that active investing on aggregate can not beat passive investment. Passive investors hold the market portfolio, active investors jump around, but on aggregate they must also hold the market portfolio. So before costs, they must have the same return. After costs, you know the answer.

There is a way for an active investor to beat the market, however. He must pick a skillful manager BEFORE the manager has established a track record of skill. Once he has established the track record, he will extract all the excess returns of his skill. And why shouldn’t he, his skill is the scarce resource, not the investor’s money.

By: The Biz of Life

The Biz of Life — Wed, 23 Dec 2009 20:13:28 +0000

Guess I must be one of the lucky monkeys on coin-flip island. My active funds easily beat the averages after taxes for the past 10 years….. all of them. I do own indexes in my portfolio (about 50/50 between indexes and active), but in this tin decade they haven’t beaten my actively managed funds.

By: Dan Cuprill

Dan Cuprill — Thu, 22 Oct 2009 00:32:08 +0000

Aside from costs, active management fails because it relies on receiving information before anyone else Assuming we all act legally, this is simply not possible. Past success at defeating market averages fall under the law of large numbers: if enough people try to do something, someone will succeed, even if it was only by luck. Have 100 people flip coins. I guarantee that someone will flip heads ten times in a row. In coin flipping, we call it luck. But in the world of finance, we call it genius. It’s not.

By: Susan Tiner

Susan Tiner — Wed, 21 Oct 2009 16:55:37 +0000

I basically agree with the point that most actively managed funds perform poorly because they cost too much, but as Dan Wiener likes to say, low-cost funds with great managers can and do outperform their indexing benchmarks.

For example,
madsinger’s latest monthly report at
http://www.bogleheads.org/forum/viewtopic.php?t=43790&highlight=

shows results for a selection of portfolios over different periods of time, up to 10 years. The actively managed Newsletter Growth (Dan Wiener) portfolio has done well over a 10 yr period.

By: Michael Harr @ TodayForward

Michael Harr @ TodayForward — Thu, 15 Oct 2009 21:40:16 +0000

@Mike – last comment. You are exactly right. I commented on another post you have about what a financial advisor should be doing. In part, the remainder of my life will be spent eliminating salespeople who profess to be ‘advisors’. Also, as your Motley Fool post so effectively points out, there is far too much peddling to the quick buck. It simply doesn’t exist…well, not the way they would have you believe anyway.

You run a terrific blog and I’m glad to see that you can articulate your points so effectively. By the way, I haven’t collected a paycheck in more than a year and a half, so the non-monetary benefits are worth it.

By: Mike

Mike — Thu, 15 Oct 2009 20:55:50 +0000

Regarding your self-employment analogy: Presumably running your business has some emotional/psychological benefits as well, yes? Mine sure does. If it didn't, and if the financial expected return were lower than that of having a job, I'd say you and I made poor choices by becoming self-employed. As I've mentioned before (in, for example, this post, this post, and the comments to this post) I have no problems with other people pursuing other investment strategies. My complaint is with the entire industry built around convincing people that their odds with such strategies are better than they really are.

By: Michael Harr @ TodayForward

Michael Harr @ TodayForward — Thu, 15 Oct 2009 20:35:30 +0000

@Mike – I’m glad you pointed this out. As an entrepreneur, the odds of my business being successful and being passed on to my grandchildren are…well…not good. Even in the face of odds that are far worse than investing successfully in the stock market AND the considerably more unpredictable returns on a small business, it doesn’t mean I or anyone else shouldn’t pursue it. What would happen if there were no people starting new businesses or taking risks with unpredictable outcomes?

Certainly I’m taking measures that are believed to increase the odds of success (just as active managers do), but I also recognize there is no guarantee waiting on the other side (just as active managers do). I’m just sayin’ be open about these things. It’s great to steer people down the road with relatively good odds, but don’t shut down if there are other paths to the same destination.

By the way, we haven’t covered the risk or psychological aspects of the asset allocation discussion. Perhaps sometime down the road?

Seriously…love the blog and great discussion.

By: Mike

Mike — Thu, 15 Oct 2009 20:08:10 +0000

“Just because we can’t predict it, it doesn’t mean that this investment strategy should be taken off the table.”

It seems to me that’s precisely what it means. If it’s impossible to predict which fund managers will outperform, should we really attempt to do so?

By: Michael Harr @ TodayForward

Michael Harr @ TodayForward — Thu, 15 Oct 2009 19:43:54 +0000

@Mike – I dropped you an email, but wanted to point out something that you are already aware of – there is no way to predict future performance. While passive investing can predict relative performance (it’s kind of rigged to be that way), this doesn’t do anything for absolute performance. The FRC study didn’t add any new value to what was already well known – fund flows are negatively correlated to improved performance, investors chase returns, fund expenses always reduce performance, and there is no way to see the future.

That said, the study is important in bringing these elements together and reiterating these facts.

As to predicting future performance of actively managed mutual funds, of course there is no guarantee of being able to guess right, but even though the study didn’t find statistically significant relationships between tenure, M* ratings and the like, you can’t fight the fact that many active managers have, do, and will continue to outperform the indices. Just because we can’t predict it, it doesn’t mean that this investment strategy should be taken off the table.