Good reads from around the Web.
I haven’t agreed with everything written by Cullen Roche of Pragmatic Capitalism [1] over the years – for me he doth protest too much when it comes to dissing passive investors [2] who dare to call themselves that – but I have linked to him plenty of times.
The man undoubtedly knows his investing onions. And even when he sees onions and I see – um – fennel, I usually find his writing a tasty broth worth consuming.
(Mental note: Don’t blog on an empty stomach.)
Cullen has now written a research paper, and it’s basically an investing mini book that you can download for free as a PDF from the SSRN website [3].
It’s got a serious title – Understanding Modern Portfolio Construction – and it’s a serious read. But not a difficult one.
You say potato, I say passive investor
I think Cullen’s hostility towards the concept of passive investing (as opposed to using index funds and ETFs, which he fully endorses) is made more articulate within the context of this greater work.
He writes:
One of the dominant themes in asset allocation these days is the distinction between “active” and “passive” investing.
While this distinction was once quite clear it has become increasingly muddled in a world in which most asset allocators have become asset pickers using low fee index fund products instead of picking stocks.
After all, a stock picker can be quite “passive” (for example, Warren Buffet has a very low fee and inactive management style), however, the stock picker is not merely trying to capture broad market returns. They are trying to beat the market.
This means that the most useful distinction between “active” and “passive” is as follows:
- Active Investing – an asset allocation strategy with high relative frictions that attempts to “beat the market” return on a risk adjusted basis.
- Passive Investing – an asset allocation strategy with low relative frictions that attempts to take the market return on a risk adjusted basis.
This macro thinking highlights the fact that most asset allocators deviate from global cap weighting and are therefore indirectly engaging in an effort to “beat the market” in an active manner.
As Cliff Asness of AQR has noted, one cannot deviate from global market cap weighting and call themselves a “passive” investor.
I’m still not entirely on the same page, but as (some) active fund fees come down and cheaper dealing fees and robo advisers bring down the cost of owning stocks, too, I guess the argument is moving in his direction.
Anyway, download the PDF [3], have a read and see what you think. (It’s U.S. but relevant – just remember the tax comments don’t tally exactly with the UK).
Have a great weekend, whether you’re active, passive, or just curious… 😉
From the blogs
Making good use of the things that we find…
Passive investing
- One reason it’s hard to time your way into new bull markets – AWOCS [4]
- Low volatility will probably deliver lower returns – The Value Perspective [5]
- Cute tool shows how investing $1 a day did in the US – StockChoker [6]
Active investing
- Is the value ‘pain trade’ finally over? – Alpha Architect [7]
- Quartix: Love at first sight (but expensive) – Richard Beddard [8]
- Unilever: Attractive firm, unattractive price – UK Value Investor [9]
- Why income matters more than yield – The Value Perspective [10]
- Some data (may) support tactical bond allocation – Dorsey Wright [11]
- Fund managers from poor backgrounds do better [Research] – SSRN [12]
Other articles
- Do 5-10 years at Goldman Sachs, then leg it – Stumbling & Mumbling [13]
- Less is more – The Psy-Fi blog [14]
- How Sequoia Capital stays motivated [Short podcast] – (the macro) [15]
- Debating UK pension intricacies [Nerdy!] – Toby Nangle [16]
Product of the week: The Telegraph [17] notes Santander’s [18] new Help To Buy ISA puts it at the top of the table with Halifax [19]. Both pay a tax-free 4%.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [20]
Passive investing
- Swedroe: Momentum delivers, and adds diversification – ETF.com [21]
- Smart/Strategic Beta is here to stay… – Morningstar [22]
- …not least because fund managers want to make money – ETF.com [23]
- Is passive investment actively hurting the US economy? [Who knows, but not persuaded by an article that’s just the latest to misrepresent how market cap weighted indices work] – New Yorker [24]
Active investing
- The latest Investment Trust Dividend Heroes list – This Is Money [25]
- Is Iran really one of the world’s best investments? [Search result] – FT [26]
- Buffett’s bet Vs hedge funds [Podcast, via Abnormal Returns [27]] – NPR [28]
A word from a broker
- SIPP or ISA, or the best of both worlds? – TD Direct [29]
- Aviva is becoming an attractive share to own – Hargreaves Lansdown [30]
Other stuff worth reading
- How ETFs work [Fancy interactive graphics!] – Bloomberg [31]
- Dividend tax changes: Winners and losers [Search result] – FT [32]
- Single, dating, and paying a high price for it [Search result] – FT [33]
- Don’t touch pensions; tax property instead – Guardian [34]
- Thousands earning less than £35,000 to be deported – Guardian [35]
- Latest disability benefits cuts seem mean-spirited to me – Guardian [36]
- Middle class? Your lifetime tax bill could be £3.6m – Telegraph [37]
- Housel: Read more books, fewer forecasts – Motley Fool (US) [38]
- Facebook is eating the world – Columbia Journalism Review [39]
Book of the week: Howard Marks’ The Most Important Thing [40]
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [45]]