Monday, August 12, 2013

How much active investing do we need?

Interesting article here on passive vs. active investing:
But the data misses one important aspect, something that is bigger than any statistical fact or researched conclusion:
We are human beings.
The Taliban's efforts to talk people into doing the perfectly rational thing is admirable, except where it becomes disdainful of the fact that for roughly 3 million investors, this is a hobby.
I think there is truth to that observation. The data on this is pretty clear, but the data on Vegas slot machines is equally clear and people still play them. Clearly, making money is not the driving force.

But then this:
You may want to consider that there is a major paradox at work here - the more successful passive investing is in converting the masses, the less successful it will be going forward. The last thing a passive indexer should want is for everyone to stop guessing and trading in the markets. Massive amounts of speculation is what fuels the winship of the passive approach over other strategies. If there were only a handful of institutions left picking stocks and the whole world was sitting in a Vanguard fund, the returns of the pros would probably become incredible thanks to all the unexploited inefficiencies. And so, counterintuitively, the Taliban should be celebrating the Seekers of Alpha, not looking to discourage them or insulting them at every turn.
It is certainly true that if 100% of all investors were passive, then there would be no signal in the marketplace and it would not work. But how much active investing really needs to happen for passive to be the right strategy for everyone else? What % of our current active trading volume would we really need to get the informational benefit for a passive portfolio?


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