Another prominent figure in the world of finance has declared passive investing a bubble. Josh Brown has a good take on this here, saying that active investing is the true bubble. I don’t think you can declare a decades-long phenomenon (as both active and passive investing have achieved) a bubble, but we can recognize that passive investing has changed the way people build wealth. Passive investing has clear advantages over active management. I won’t rehash it in this post, but if you’re curious I covered it here, here, and here. It seems to me that the advent of passive investing is like the rise of health consciousness. As we learned more about what we should (exercising) and shouldn’t (smoking) be doing, we have changed our habits. The same is true about investing.
Why Don’t More People Smoke?
I recently went to the doctor and she asked me if I smoke. My family history of heart disease and viewing hot dogs as a food group during the ’80s made her look deeper into how my heart is doing. She said something like 80% of heart-related issues can be traced to smoking. We know this now and the negative effects of smoking have been hard science for decades. Smoking in the US has decreased dramatically, but there are still smokers. I expect something similar to happen with passive investing. As more and more folks read the research, they will continue to migrate away from active management (or picking their own stocks).
Bourbon Before Bed
This won’t kill active management, though. In fact, some managers will thrive in this environment. People hate being told what to do. Everyone knows that they are above average, so why can’t they be part of the 20% that beats the index? That’s just human nature and some people (raising my hand here) cannot learn this lesson until they’ve screwed up on their own. I may or may not have lost money buying a stock I read about in a popular dinosaur book.
Let’s move on.
The hardest part of investing is hearing about someone who invested in something ludicrous and made a killing. It’s like when the local reporter asks the 100-year old lady her secret to a long life. The answer is invariably embracing some vice (drinking, smoking, whatever). They run that story on the news. You don’t hear about the smokers that didn’t make it. If that’s genetics or luck, the odds are not in your favor whether you’re actively trading or ruining your body.