The Fix the Investor Series

Since our founding, America has been a nation of activists. The belligerent spark that ignited the explosion of liberty and freedom, The Revolutionary War, was the exemplar of activism, and our collective finger to the Crown.

Extreme. Passionate. Revolutionary!

For most of our first 250 years, we Americans have come to embrace activism in its many forms. We speak out when we feel the need to advocate for positive change. We may not always agree with each other, but it is in our collective DNA to defend our precious right to speak freely and disagree. 

On the other hand, as an investment philosophy, activism proves itself to be a very costly approach for most investors, so consider passivisism. Not pacifism. Passivism.

What is Passive Investing? provides the following definition: Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading. Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.

Ok, go get those last six words tattooed somewhere on your body so you can read them every day  “building slow, steady wealth over time.” You can add a graphic or a butterfly if you wish, but make sure you read these words every day.

As we write this, March 2018 ended with losses in most of the major indices. March is always tough, and currently tech stocks are taking it on the chin, Facebook is in hot, federal water and interest rates are on the rise. During the month, and so far this year, we’ve lived through wild, algorithmic fueled swings of 500, 600, 700 points. Both directions. What a ride!

What does this mean for us little folks who no longer drive the markets? It means that there are too many indications for us to continue to ignore a simple fact: Passive investing has become the new solution to a very old problem.

Exchange Traded Funds (ETFs) and index mutual funds are considered passive investments because they are not actively managed. They represent an index and deliver the market rate of return. They cannot beat the market. They ARE the market.

Isn’t it shocking that the vast majority of actively managed mutual fund managers do not beat the markets? So why have them? If they can’t do their job of delivering excess alpha (delivering returns above the market benchmark they manage against due to their own skill), why have them, indeed. Moreover, the funds are expensive to run, and you know who pays the freight. Right. We the little folk.

As a group, actively managed funds have not been beating the market since the late 1990s. They suck.

The market, and passive investments that simply track the market, beat the majority of actively managed funds, yet their managers are securely among the highest paid people in the world. 

The ten year period ending June 2015 saw fully 80% of active managers not able to beat the S&P 500, with similar underperformance in small cap and international stock funds. Look at the last fifteen years, and the number jumps to 92%. Kind of embarrassing, don’t you think, given the size of Wall Street bonuses?

While there are more people employed by Wall Street than ever before, we little folk are typically investing and trading without the benefit of the Street’s access to artificial intelligence and the computer algorithms that now drive the markets. And your plan to “beat the market” is…what?

Industry titan Charles D. Ellis, author of The Index Revolution, laid it out beautifully in a 2017 article in The Financial Times: “…institutional investors have collectively created a global expert information network that produces the world’s largest, most effective prediction market. The only way for active investors to outperform is to discover and exploit pricing errors by other expert professionals, all having the same information at the same time with the same computers… ” 

So, back to us little folk. We are going to outperform the markets by discovering and exploiting pricing errors? Right, when pigs fly.

It is time to become a Passivist. It is time to Be The Market. Rarely in life do we get deals that are better, cheaper, faster. 

This is one.


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