3 ms·

Active management is an overpriced, tough to beat affair, but if enough people invest passively, active management will regain the upper hand. Indexers herd, t

Active management is an overpriced, tough to beat affair, but if enough people invest passively, active management will regain the upper hand. Indexers herd, they reduce liquidity, they push up prices of stocks in the index, they increase volatility, initially smaller/less liquid stocks have prices pushed around irrationally, then bigger stocks. It starts to pay to do private equity, buy out cheap stocks, IPO them, get them back into the index universe, and sell them back to the indexers. Indexing is not a silver bullet, it's one strategy in a Nash-like equilibrium. Too much active investing, passive can match them at a lower cost and win...too much passive investing, mispricing arises and active investors can exploit passive investors. https://blogs.cfainstitute.org/investor/2016/02/02/active-investing-really-the-losers-game/ https://blogs.cfainstitute.org/investor/2016/02/02/active-in...

deleted 11y ago
[deleted]
inthewoods 11y ago
First question - "they reduce liquidity" - how? Second, I don't think anyone is arguing that active investing can beat potentially beat passive investing. The problems with active management vs. passive are: - Most active manager will continue to underperform (this year I believe it was north of 90%) - That it is just about impossible to predict which funds will be leaders - That the fees active managers require are too high relative to the lack of any real value The point of the article isn't that active management can't ever beat passive - it's that the fees on investing are coming down because most active management provides little value. So if active management is going to win, the fees may be compressed and that may change the industry.