Good reads from around the Web.
Dale Carnegie, writing in his famous book How To Win Friends and Influence People, stressed the pointlessness of criticizing people – because 99% of people will never believe they have done anything wrong, ever.
Among the evidence Carnegie cites is this quote from one self-delusional focus of the critics:
“I have spent the best years of my life giving people the lighter pleasures, helping them have a good time, and all I get is abuse, the existence of a hunted man.”
The downtrodden joy provider in question?
The gangster, Al Capone.
Wise guys
If mob bosses, arsonists, and serial killers can go to their grave believing themselves to have done nothing wrong, then nobody should expect the gilded scions of the fund management industry to be any different.
Of course, I’m not equating an active money manager on a high six-figure income that’s accrued by tithing 2.5% a year from pensioners with a crook, or anything like that.
The fund managers I’ve met have all been very likeable, intelligent people I could happily spend hours chatting with.
They’re invariably driven, and as far as I can tell conscientious about their clients.
However the fact is they operate in a racket that has over the decades extracted trillions from the world’s more socially useful wealth generators – and that now that their bluff has been called they’re not going down without a fight.
A reminder. Active investing is a zero sum game. It cannot be otherwise. Because of higher costs, active managers in aggregate must under-perform the market and also cheaper index tracking funds.
For most people, then, the rational choice is to use index funds.
For most fund managers, the best use of their time would be in another job.
Of course back in the days when returns were higher and knowledge about passive investing was lower – or even non-existent – the industry grew fat on fairy tales about its prowess.
You know the sort of thing:
- That a company had the winning managers (for a year or two maybe)
- That index trackers were okay in bull markets but bad in bear markets (only because active funds must hold some cash for redemptions which saves them a tiny bit from the falls; asset class wise it’s still a zero sum game)
- That fine, perhaps they couldn’t beat the market in aggregate but that skilled managers could nimbly get in and out of the market while everyday investors panicked and sold up (sounds good, but actually it’s active managers who clog the airwaves warning that bear markets will persist or bull markets will never end – so sell, sell, sell, or buy, buy, buy – and who under-perform due to their timing errors, whereas the evidence from the likes of Vanguard is its passive investors just keep on keeping on…)
As these justifications have been pervasively debunked – first from the fringes like the Bogleheads in the US and, well, Monevator in the UK, and latterly even in mainstream media – the industry is turning to more outlandish reasons why it deserves to continue in the future as it has in the past.
Such as, for instance, claiming that passive investing is effectively Marxism.
Reds in the head
Now this isn’t the first time that anti-capitalist charges against index funds have been raised – as one writer put it behind the FT paywall this week, as passive investing grows in popularity the tendency of it to be equated with communism seems to tend towards certainty – but this time it has made headlines.
Unfortunately, I can’t link to the original paper, snappily entitled: The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism.
Produced by New York research house and brokerage firm Sanford C. Bernstein, as far as I know it’s only available to Bernstein clients.
So I’ve only read the media reports and seen it debated on CNBC.
But according to Bloomberg, the money shot quote runs thus:
“A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management.”
Now this is of course a classic straw man argument. We’re nowhere near all money being run passively, so the argument is moot. You might as well put out a paper saying that it’d be terrible if all money was invested by Smaug the Dragon from The Hobbit.
I suspect the authors actually know that, as according to comments I’ve heard even from its detractors, the paper itself is very detailed and a decent piece of research.
Perhaps it’s like one of those Buzzfeed articles you can’t help yourself with, where the headline is irresistible bait that lurks above a more interesting but less sensational piece of content that most would otherwise ignore.
Either way, the irony of suggesting that passive investors should go active and accept lower returns for an alleged common good – or else be labelled as communists – is hilarious and contradictory.
Passively invest for yourself, not for the masses
I expect to hear more of these sorts of complaints in the future.
The incumbents will, naturally enough, do almost anything to justify their position – including talking nonsense to criticize index funds, as I have read and also heard several doing on live television in the past few days.
Besides the standard flimflam, one money manager even argued that passive investing was bad because lower fees meant fewer jobs in finance and a smaller fund management industry – which was bad because it meant fewer taxes would be liable on their inflated incomes.
Hey, at least it’s honest.
The more esoteric debates about whether a world of say 90% passive investing are worth having, but only in the sense that various other philosophical mind games are fun diversions.
i.e. Not in any urgent sense until we’re at least three-quarters of the way there.
Even that revered font of good thinking, the financial journalist Jason Zweig, admitted as much this week in his comprehensive overview of where this latest missive fitted into the Passive Investing Is The Road To Damnation thesis.
In an article for the Wall Street Journal, Zweig wrote:
Economists showed long ago that in a market in which everyone has equal information, it must pay off for someone to make the extra effort to obtain superior information.
So active management is unlikely ever to disappear.
Though there are no clear harms yet from index funds, the rhetoric against them will keep escalating. Don’t be passive about this topic. Pay attention.
I believe there will always be more than enough active managers willing to take money off those who’d like to try to beat the markets to keep said markets efficient.
I mean, as most of you know, unlike my co-blogger The Accumulator I myself invest actively, despite fully understanding the theory behind why I shouldn’t.
Previously I’ve presumed I was just egotistical, addicted, or maybe in a hurry.
But now I have learned mine is a noble quest that serves to keep Marxism from the door, I’ll pay my trading fees with a glad heart.
