Learn From the Fall of Active Management
- Created on Sunday, 07 September 2014 19:00
Proponents of evidence-based investing, myself included, doubted whether this day would ever come. Investors are now actually paying attention to the overwhelming data supporting evidence-based investing and are fleeing active management. Some of the recent developments reinforcing this growing trend are:
Index funds are mainstream
John Rekenthaler is the vice president of research for Morningstar. Here's the conclusion he reaches in an article titled "Do Active Funds Have a Future?": "Passive investing is now the mainstream approach."
Rekenthaler tallied net sales over the past 12 months for all exchange-traded funds, passive mutual funds and active funds. The results weren't even close. Of the total sales, 68 percent were passive and only 32 percent were active. Rekenthaler believes active managers have "become the periphery."
Read the rest of the article at The Huffington Post.
Resist Changing Direction Because of a Single Event
- Created on Sunday, 31 August 2014 19:00
I recently went backpacking in the Uinta Mountains. It’s a range of gorgeous peaks close to my home in Park City, Utah. A group of friends planned to spend a few days in the backcountry, so we got together to discuss everything we’d need for the trip. We had a lot of experience hiking and camping in this area, and we talked about a lot of things. But one subject never came up: bears.
Bears do exist in the Uintas, and we know it, but they’re rare. I’ve taken other trips, to the Teton Range and to Yellowstone, and plans always included the possibility of bears because they’re more common there. On this particular trip, however, we didn’t think about it.
We started the 11-mile hike into our campsite, and about four miles in, we came upon a park ranger riding a horse and towing a pack mule called Erma (the ranger called her Erm). We stopped to chat about the weather, and our friendly ranger mentioned offhandedly that someone had seen a bear a few days earlier. She didn’t mention the exact location, where the bear was headed or give us any kind of warning. She was just a ranger who happened to mention a bear during a conversation.
Read the rest of the article on The New York Times.
The Algorithm Scam
- Created on Sunday, 31 August 2014 19:00
An algorithm is defined as a set of detailed instructions that result in a predictable end-state from a known beginning.
The discovery of an algorithm that would consistently generate outsized returns would be the holy grail of investing. The individual who came up with such an algorithm and published the methodology in a peer-reviewed journal would be a serious candidate for the Nobel Memorial Prize in Economic Sciences. To date, no one has done so.
This is not surprising. As my colleague Larry Swedroe noted, the market is "forward looking" and incorporates all publicly available information into current prices. The issue is not (as many investors believe) whether news is good or bad. It's whether the news is "better or worse than already expected."
Read the rest of the article at The Huffington Post.