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The issue is that in the long run, index funds or passive investors do outperform hedge funds or active investment management as shown by Warren Buffett: https

The issue is that in the long run, index funds or passive investors do outperform hedge funds or active investment management as shown by Warren Buffett: https://www.cnbc.com/2018/02/16/warren-buffett-won-2-point-2-million-on-a-bet-and-gave-it-to-girls-inc.html https://www.cnbc.com/2018/02/16/warren-buffett-won-2-point-2... There are a lot of factors at play but simply for your non-analyst mom-and-pop investors, they don't have time and the know-how to investigate stocks and index funds are just much more accessible and as they say, in the long run we are all dead.

CryptoPunk 8y ago
This is true right now, but it's situational, not a constant that is guaranteed to remain unchanged. If passive investments continue growing as a percentage of all investment capital, they will eventually underperform actively managed investments because market prices will cease to be reflective of value.
- C1sc0cat 8y ago
  This is happening all ready for example one of my active investments saw the bank crash coming and mostly sold out of banks before the crash. Then again this IT was started in 1888 and has increased its dividend every year for the last 51 years.
throwawaymath 8y ago
Nitpick: it would be more correct and precise to say that index funds tracking the total market beat the average aggregate performance of hedge funds on a long enough timeline. In practice that timeline tends to be quite short in the current market climate. I mention this because (regardless of your intention in particular) Warren Buffett's famous bet is extremely overused and cited as evidence for many claims it doesn't really support. Someone's takeaway from your comment could be that all hedge funds fail to beat the market - but that's not even what Warren Buffett believes (Buffett doesn't believe in the efficient market hypothesis). This is to say that index funds are generally a superior investment vehicle for modal investors. But that shouldn't be used to extrapolate broader truths about active versus passive management, except that active management is a lot harder. An (imperfect) analogy I like to use is that of a kid whose dream is to get drafted into the NBA. You'd probably tell them to have a solid backup plan for a more realistic way to make a living, because approximately no one is drafted into the NBA. Vastly more people try and fail than are actually drafted. But that doesn't tell us the NBA is itself a fiction. Similar parallels exist in venture capital investment, startup success, acting and making music.

CryptoPunk 8y ago

This is true right now, but it's situational, not a constant that is guaranteed to remain unchanged. If passive investments continue growing as a percentage of all investment capital, they will eventually underperform actively managed investments because market prices will cease to be reflective of value.

C1sc0cat 8y ago
This is happening all ready for example one of my active investments saw the bank crash coming and mostly sold out of banks before the crash. Then again this IT was started in 1888 and has increased its dividend every year for the last 51 years.

throwawaymath 8y ago

Nitpick: it would be more correct and precise to say that index funds tracking the total market beat the average aggregate performance of hedge funds on a long enough timeline. In practice that timeline tends to be quite short in the current market climate. I mention this because (regardless of your intention in particular) Warren Buffett's famous bet is extremely overused and cited as evidence for many claims it doesn't really support. Someone's takeaway from your comment could be that all hedge funds fail to beat the market - but that's not even what Warren Buffett believes (Buffett doesn't believe in the efficient market hypothesis). This is to say that index funds are generally a superior investment vehicle for modal investors. But that shouldn't be used to extrapolate broader truths about active versus passive management, except that active management is a lot harder. An (imperfect) analogy I like to use is that of a kid whose dream is to get drafted into the NBA. You'd probably tell them to have a solid backup plan for a more realistic way to make a living, because approximately no one is drafted into the NBA. Vastly more people try and fail than are actually drafted. But that doesn't tell us the NBA is itself a fiction. Similar parallels exist in venture capital investment, startup success, acting and making music.