Active vs Passive; links to facts, no opinions wanted.

[OldShooter]

... I [would] like to see another thread based on "data and professional articles" only on the subject of passive investing versus active investing and NO PERSONAL OPINIONS. ...

Here you go. Too easy, really.

http://www.mkwinc.com/wp-content/uploads/2017/12/15-Years-of-SPIVA.pdf
https://thebamalliance.com/blog/2018s-active-vs-index-scorecard/
https://www.ifa.com/articles/despit...active_funds_fail_dent_indexing_lead_-_works/
https://www.indexologyblog.com/2019/03/27/can-you-beat-the-market-consistently/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153
https://www.wsj.com/articles/the-dying-business-of-picking-stocks-1476714749 (behind WSJ paywall)
https://www.economist.com/finance-and-economics/2016/10/08/active-defence
https://www.early-retirement.org/forums/members/38349-albums210-picture1603.jpg

https://web.stanford.edu/~wfsharpe/art/active/active.htm

https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx
https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

https://www.spglobal.com/en/researc...-performance-matter-the-persistence-scorecard
https://www.aaii.com/journal/article/most-mutual-funds-do-not-outperform
https://www.early-retirement.org/forums/members/38349-albums210-picture1602.jpg

 

[flintnational]

I may be posting info already included by Oldshooter.

For a single page snapshot of US markets active vs. passive see page 9 of the attached report. (PDF attached and site linked below)*

The attached report, published by S&P Dow Jones, and located here compares active funds to their appropriate index benchmark for the 1 year, 3 year, 5 year, 10 year and 15 year periods ended 12/2018. At 15 years, the best performing active category was large cap value. The index beat 79% of the active managers in this category. The worst performing active category was small cap growth. 98% of active managers failed to beat the index. They slice and dice the US market into it's broad subcategories and all fall between these two values.

Additionally, the doc covers international and bond funds. Also included is data on survivorship among the active funds. The attrition rate is fairly high and increases over time.

*If someone with better skills than I possess can post the chart on page 9, it would be helpful.

 

[OldShooter]

No problem. Here is your page 9 chart:

​

For those unfamiliar, S&P has been publishing semiannual SPIVA (S&P Index Versus Active) reports for about 18 years. Over that period they have expanded to cover markets outside the US. You can search for them and read to your heart's content. All of them reach basically the same conclusion +/- a few percent.

There is also a companion "Manager Persistence" report that is very worthwhile reading.

 

[2177V]

Here you go. Too easy, really.

http://www.mkwinc.com/wp-content/uploads/2017/12/15-Years-of-SPIVA.pdf
https://thebamalliance.com/blog/2018s-active-vs-index-scorecard/
https://www.ifa.com/articles/despit...active_funds_fail_dent_indexing_lead_-_works/
https://www.indexologyblog.com/2019/03/27/can-you-beat-the-market-consistently/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153
https://www.wsj.com/articles/the-dying-business-of-picking-stocks-1476714749 (behind WSJ paywall)
https://www.economist.com/finance-and-economics/2016/10/08/active-defence
https://www.early-retirement.org/forums/members/38349-albums210-picture1603.jpg

https://web.stanford.edu/~wfsharpe/art/active/active.htm

https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx
https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

https://www.spglobal.com/en/researc...-performance-matter-the-persistence-scorecard
https://www.aaii.com/journal/article/most-mutual-funds-do-not-outperform
https://www.early-retirement.org/forums/members/38349-albums210-picture1602.jpg

My original comment was to provide only 3 articles supporting passive investing and 3 articles identifying problems with active investing.

You really can't expect people to read all 14 articles. People's time is valuable. You need to downsize the 14 articles to the 3 best articles for and 3 against.

 

[flintnational]

My original comment was to provide only 3 articles supporting passive investing and 3 articles identifying problems with active investing.

You really can't expect people to read all 14 articles. People's time is valuable. You need to downsize the 14 articles to the 3 best articles for and 3 against.

You have a single chart on the 3rd post if you want a summary. This discussion involves people's finances. Yes, they can be expected to read a few articles. In fact we often recommend reading several books. The issue is way too important to not allocate appropriate time. In many cases, a mistake can cost the investor $100k's or more.

 

[corn18]

My original comment was to provide only 3 articles supporting passive investing and 3 articles identifying problems with active investing.

You really can't expect people to read all 14 articles. People's time is valuable. You need to downsize the 14 articles to the 3 best articles for and 3 against.

This reminds me of that Home Advisor commercial. Wish I could embed a video.

https://youtu.be/eMsdejYM-08

 

[imp4]

My original comment was to provide only 3 articles supporting passive investing and 3 articles identifying problems with active investing.

You really can't expect people to read all 14 articles. People's time is valuable. You need to downsize the 14 articles to the 3 best articles for and 3 against.

No he doesn't necessarily need to downsize the 14 articles.
I propose the responsibility falls to you to do some reading here and to identify the three that in your opinion make the most compelling argument.

Happy reading!

 

[easysurfer]

This reminds me of that Home Advisor commercial. Wish I could embed a video.

Or this ...

While were are taking about rules, what about all these naked links?

 

[travelover]

what about all these naked links?

Now this is a naked lynx. Check out those hind quarters.

 

[easysurfer]

No he doesn't necessarily need to downsize the 14 articles.
I propose the responsibility falls to you to do some reading here and to identify the three that in your opinion make the most compelling argument.

Happy reading!

I second the nomination.

 

[OldShooter]

Hmm ... no good deed goes unpunished, I guess.

@vchan2177, beauty is in the eye of the beholder. I suggest that readers click each link and take a 30 second look to see if it is one that is of interest. The two dimensional.com videos are about the only ones where a little extra time may be needed. But ... in total maybe 10 minutes tops to get an impression of everything.

Re factual information arguing against passive investing, I am not aware of anything. The only criticisms I have seen are speculative and without any significant data, like the factually garbled investopedia article you linked in the other thread. I am not your person for this. You'll have to find someone else.

@easysurfer, re naked links, guilty I suppose. I thought the title of the thread was adequate to explain the links, but here is a little more:

The first group of articles is primarily presentations and discussion of S&P SPIVA data. These comprise 18 years of analysis consistently showing that active management fails. The ssrn.com link is to the oldest data that I am aware of, Michael Jensen's PhD thesis of approximately 50 years ago.

The single line is Nobel winner William Sharpe's paper showing why the average of active managers will always underperform vs passive simply due to their costs. The actual results, ref the first group of links, actually shows that Sharpe's analysis produces an upper bound to average performance that is not achieved in the real world.

The two dimensional.com links are videos where Kenneth French talks about active management's underperformance and about why managers' past performance is not predictive. These are from a treasure trove of links (https://famafrench.dimensional.com/videos.aspx) that includes a great discussion between Richard Thaler and Eugene Fama, both Nobel laureates. There is also a great Eugene Fama interview recorded at a fiduciary investors forum.

The last group of three is more oriented to the question of manager persistence, which is critical to the discussion. The fact that most active managers underperform would not be an issue if it were possible to predict the winners ahead of time. This is the question of manager persistence.

 

[2177V]

You forget I am a non-believer in passive investing.

Therefore i will not read all 14 articles because it is like reading every single word of the Koran.

In any case, I decided to submit only two articles on the passive investing versus active investing issue.

The reason for the article below is to describe how i personally made a bunch of money in the stock market.

https://www.fool.com/investing/2019/06/05/how-often-is-buying-into-a-stock-market-correction.aspx

The reason of the article below is to describe why some people do not believe in passive investing and that "active asset allocation" is the way to go.

https://seekingalpha.com/article/4171043-fan-passive-investing

Like I stated in a previous comment, you can't change a people's belief especially if that person made more money than a passive investor.

 

[imp4]

You forget I am a non-believer in passive investing.

Therefore i will not read all 14 articles because it is like reading every single word of the Koran.

In any case, I decided to submit only two articles on the passive investing versus active investing issue.

The reason for the article below is to describe how i personally made a bunch of money in the stock market.

https://www.fool.com/investing/2019/06/05/how-often-is-buying-into-a-stock-market-correction.aspx

The reason of the article below is to describe why some people do not believe in passive investing and that "active asset allocation" is the way to go.

https://seekingalpha.com/article/4171043-fan-passive-investing

Like I stated in a previous comment, you can't change a people's belief especially if that person made more money than a passive investor.

Congratulations on your investing prowess!
It is still not others' responsibility to distill evidence for you, the avowed non-believer in passive investing.

No one ever state that passive will always beat active. The preponderance of evidence shows, however, that passive index investing results in better returns over large sample sizes and long investment horizons.

If you choose to ignore or discount this, then great! Have a great day!!!

 

[corn18]

[youtube]_13EaDoiu4Q[/youtube]

 

[SecondCor521]

My original comment was to provide only 3 articles supporting passive investing and 3 articles identifying problems with active investing.

You really can't expect people to read all 14 articles. People's time is valuable. You need to downsize the 14 articles to the 3 best articles for and 3 against.

At some point you may learn that you're not the king of this board, and asking people here to follow your rules is a lot like herding cats.

Or not.

 

[OldShooter]

@vchan2177 I guess I'm a little puzzled. You asked for information and now you're telling me that you're not going to read it. If you can stretch your busy schedule to read one thing, read article from the first link.

Re your fool.com article, the word "passive" doesn't appear and I don't see any data. If your point is simply that someone can sometimes make money by stock picking I'll cheerfully concede that point. On the subject of retirement funds, however, William Bernstein points out: "Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine” That is not the game most of us want to play here. YMMV, of course.

Re your seekingalpha link, I see no actual facts there. If I understand his article, he observes that passive investors don't try to time the market, which is certainly true. Then he follows with the (non sequitur) observation that bear markets are bad, which is also true. Is he implying that successful market timing is achievable if you are an active investor?

Re your assertion that at one point you made more than a passive investor, I have done that too. Back in the bad old days when I didn't understand what I do now. The difficulty is not in doing it once in a while; the difficulty is in doing it consistently enough to beat a passive portfolio. Remember, too, Nassim Taleb's caution about getting lucky and from that concluding that you are a genius.

 

[easysurfer]

Hmm ... no good deed goes unpunished, I guess.

...

@easysurfer, re naked links, guilty I suppose. I thought the title of the thread was adequate to explain the links, but here is a little more:

OldShooter, I was just joshing you pretending to make a stink about the naked links since this thread seemed a bit sensitive about rules and regulations. No harm, no foul .

 

[2177V]

@vchan2177 I guess I'm a little puzzled. You asked for information and now you're telling me that you're not going to read it. If you can stretch your busy schedule to read one thing, read article from the first link.

Re your fool.com article, the word "passive" doesn't appear and I don't see any data. If your point is simply that someone can sometimes make money by stock picking I'll cheerfully concede that point. On the subject of retirement funds, however, William Bernstein points out: "Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine” That is not the game most of us want to play here. YMMV, of course.

Re your seekingalpha link, I see no actual facts there. If I understand his article, he observes that passive investors don't try to time the market, which is certainly true. Then he follows with the (non sequitur) observation that bear markets are bad, which is also true. Is he implying that successful market timing is achievable if you are an active investor?

Re your assertion that at one point you made more than a passive investor, I have done that too. Back in the bad old days when I didn't understand what I do now. The difficulty is not in doing it once in a while; the difficulty is in doing it consistently enough to beat a passive portfolio. Remember, too, Nassim Taleb's caution about getting lucky and from that concluding that you are a genius.

Please read my original suggestion for this new thread. I suggested 3 publications supporting passive investing and not 14.

You also miss the main point in the buying after a correction. This does not mean stock picking. It means for someone who have a three fund portfolio of (1) total stock market index, (2) total international stock market index and (3) total bond market index, then that investor can simply exchange $100K in his/her total bond market index fund for $100K total stock market index fund shares in his IRA. After the market has recovered from the 10% correction, he/she transfer the $100K back to the bond fund. The end result: he/she made a profit based on the three fund portfolio he/she already have. As the article suggest, this has ALWAYS worked and this has ALWAYS worked for me. Do you need really data on something based on common sense?

You also missed the point on Dynamic or Active Asset Allocation. As you know...AA is based on the investor's risk tolerance which is dependent on the investor's age, time horizon and financial and personal circumstances. What people fail to take into account is market condition. Should an AA during a bull market be the same as during a bear market? I will let you answer this question.

This is my whole point of the active investing versus passive investing debate. It is not either one....but Dynamic or Active Asset Allocation. I only risk 10% of my portfolio to buy during a correction or conduct Active Asset Allocation. I also have a specific plan during a crash or a bear market. because the 9 year bull market is not going to last forever.

Per your request, I will read the first article out of professional courtesy and later I may have a comment on it. I am not in the business on proving who is wrong and who is right. I am more interested in exchanging and sharing useful information. Finally, when you provided 14 articles instead of 3, I get the impression that you were on a mission to "prove someone is wrong and I am right".

 

[HI Bill]

I once was diving with a guy from the San Francisco Bay Area on a liveaboard boat in the Maldives. He had been a day trader, claiming to have routinely made multi-million dollar trades that 'moved the market'. He was highly successful, until he wasn't. He lost everything/nearly everything. He said he didn't know what to do. I kindly suggested he might consider getting a job. He said that didn't appeal to him. True story.

 

[easysurfer]

I once was diving with a guy from the San Francisco Bay Area on a liveaboard boat in the Maldives. He had been a day trader, claiming to have routinely made multi-million dollar trades that 'moved the market'. He was highly successful, until he wasn't. He lost everything/nearly everything. He said he didn't know what to do. I kindly suggested he might consider getting a job. He said that didn't appeal to him. True story.

Not to hijaak (I won't give the link this time), but that is the reason why I gave Qs Laptop on the other thread the opportunity to show us his (I assume him, apologize if mistaken) skills in the contest, since he was saying that he routine could outperform the market. The same with Boho months earlier.

If I said that I can high jump 15 feet, that I have a method and routinely do so. All the literature I provide isn't convincing enough. Instead we'd want to see for ourselves.

I think a majority of folks here are passive investors. So, those that are more active have their chance for two years to show us a "better method" for bragging rights at the contest.

As I said, no attempt to hijaak with this post.

 

[SecondCor521]

Please read my original suggestion for this new thread. I suggested 3 publications supporting passive investing and not 14.

Meow.

You also miss the main point in the buying after a correction. This does not mean stock picking. It means for someone who have a three fund portfolio of (1) total stock market index, (2) total international stock market index and (3) total bond market index, then that investor can simply exchange $100K in his/her total bond market index fund for $100K total stock market index fund shares in his IRA. After the market has recovered from the 10% correction, he/she transfer the $100K back to the bond fund. The end result: he/she made a profit based on the three fund portfolio he/she already have. As the article suggest, this has ALWAYS worked and this has ALWAYS worked for me. Do you need really data on something based on common sense?

I doubt OldShooter missed your point. I think he (?) was waiting for you to make it explicitly.

So to distill your method from above it is to buy low and sell high. Got it. Or maybe it's to move from stocks to bonds when stocks are going down and to move from bonds to stocks when stocks are going up. What are your decision rules for when to make these $100K shifts? Is it based on PE, price to book, who wins the Super Bowl, or something else?

You also missed the point on Dynamic or Active Asset Allocation. As you know...AA is based on the investor's risk tolerance which is dependent on the investor's age, time horizon and financial and personal circumstances. What people fail to take into account is market condition. Should an AA during a bull market be the same as during a bear market? I will let you answer this question.

My AA is the same in all market conditions. It is based on, and could change as a result of changes in, all the other things you list.

professional courtesy

If you're getting paid to participate here, you're doing it wrong.

 

[pb4uski]

This reminds me of that Home Advisor commercial. Wish I could embed a video.

You have to use the url at the top of the browser page... not the url from clicking on the video... don't ask me why.

 

[RetireBy90]

Originally Posted by vchan2177 View Post
You also miss the main point in the buying after a correction. This does not mean stock picking. It means for someone who have a three fund portfolio of (1) total stock market index, (2) total international stock market index and (3) total bond market index, then that investor can simply exchange $100K in his/her total bond market index fund for $100K total stock market index fund shares in his IRA. After the market has recovered from the 10% correction, he/she transfer the $100K back to the bond fund. The end result: he/she made a profit based on the three fund portfolio he/she already have. As the article suggest, this has ALWAYS worked and this has ALWAYS worked for me. Do you need really data on something based on common sense?

Heard an interesting story on CNBC yesterday, there was a study that found that with a sell at the top and buy at the bottom strategy if you missed the best day of the year each year, that is you didn't get back in at the bottom, your return would have gone from about 11% a year to about 4%. The numbers are wrong, but the point is reflective of the story.

 

[flintnational]

Two thoughts.

1) Active managers can implement strategies based on stock values or any other metric. That is the point of active management. Most have a strategy. Their results are reflected in the chart on post 3. Per the data, the vast majority of strategies employed by active managers fail to beat the benchmark.

2) If a particular strategy worked, active managers as a group could be expected to gravitate toward that strategy. IOW, most if not all active managers would be able to beat the benchmark using the proven strategy. The fact that they do not beat the benchmark should be evidence that no such strategy exists. Or you have to believe it exists but the sophisticated folks with super computers, MBA analysts, and their job on the line have simply not found it and that you have.

 

[ncbill]

When I see active investors saying they beat the market I wonder how much additional risk they've taken in their active portfolio vs. the market...after all, with increased risk you'd expect an increased return...at the price of deeper losses during downturns.