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Weekend reading: Passive investors should bring Larry Swedroe to a knife fight

Weekend reading

Good reads from around the Web.

Perhaps it’s because it was the first film I saw at the cinema with my own money – and without my parents – but I often recall the life lessons taught by Crocodile Dundee, not least when I first encountered a bidet in Paris 20-odd years ago.

Alas, when I was mugged (with an axe!) in the late 1990s I was insufficiently armed to create this famous moment from the movie:

I thought again of this scene when I read Larry Swedroe demolishing an argument in favour of active investing over at ETF.com.

After gently cutting the argument to shreds, Swedroe concludes:

The bottom line is that there’s no real cyclicality in the percentage of active managers who outperform, at least not when you measure things properly.

And there’s nothing presented in the article that should convince you that using actively managed funds is the winning strategy at any time.

Sorry, active fund management industry.

To mix my movie memes…

…you’re going to need a bigger boat.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Free brain training of the week: Blogger Ermine spotted that the Open University has just started a free online course entitled Managing My Investments. It runs for six weeks.

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 subscriber of that site.1

Passive investing

  • Want diversification? Buy bonds – Morningstar
  • Smarter fund managers are still not worth paying for – Telegraph
  • New research gives Smart Beta the thumbs down – MarketWatch
  • Big ETF firms bolster credit lines over liquidity fears – Reuters
  • Big interview with Vanguard’s CEO Bill McNabb [Audio]Bloomberg

Active investing

Other stuff worth reading

  • Do a State pension top-up instead of saving cash – Telegraph
  • Household wealth rises by record £50k in 2014 – ThisIsMoney
  • Young Britons needs their own Ros Altmann – Guardian
  • ‘Triple tax lock’ makes CGT a target [Search result]FT
  • UK investing fraudsters up game, make billions [Video]Bloomberg
  • Deep dive into the 4% withdrawal rule [Note: US data]NY Times
  • Algorithmic trading and comedy don’t mix – Bloomberg
  • From $95,000 a year to selling ice cream in paradise – Sunny Skyz
  • The revolution will be wearable – Washington Post
  • The global land grab for farmland – Vox

Book of the week: I read an interesting article this week on innovation and the rise of medieval knights, which riffed heavily on sections from Warlords, Inc – a new book about what entrepreneurs can learn from despots. Really!

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  1. Note some FT 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”. []

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{ 27 comments… add one }
  • 1 Mathmo May 16, 2015, 10:56 am

    He draws a knife, you draw a gun.
    He puts one of yours in the hospital, you put one of his in the morgue.
    That’s the Chicago way.

  • 2 dearieme May 16, 2015, 11:00 am

    I find myself becoming more sceptical of standard investment advice. Diversify globally, people say. So suppose a British investor in 1913 decided to spread a good chunk of his money into shares from N America (USA), S America (Argentina), Europe (Russia, Austria-Hungary, Germany, France, Italy), and Rest of the World (Japan). Over the next 40 years would this really have improved her returns? How about for a US investor doing the equivalent?

    Next 50 years? 60 years? ….

    How much of the standard advice we hear is essentially based on just US and UK experience, mainly after the Second World War? Or even after the 1970s?

    Would the Barclays study that you mentioned in your previous post throw any light on this issue?

  • 3 dearieme May 16, 2015, 11:02 am

    @mathmo, that’s needlessly violent. When a mugger tried to stick his knife in my heart I simply disarmed him. British exceptionalism.

  • 4 Neverland May 16, 2015, 11:43 am

    @ Dearieme

    Diversifying globally would have been excellent advice for a Chinese, Russian or Argentenian investor in 1900 however

  • 5 Neverland May 16, 2015, 11:54 am

    It’s good that some people want to waste their money on active management

    If everyone invested passively the agency problem with company executives running companies just in their own interests would be even worse

    The piece I object to is paying a fund manager or a CEO 5 or 10x a government ministers salary for basically the same administrative type job

  • 6 Mathmo May 16, 2015, 12:00 pm

    @dearieme — another film quote, I’m afraid. From the year following TIs maiden movietrip so I’m sure he’ll recognise it (and very close my own to Beverley Hills Cop II: we must be of a similar vintage).

    “I’ll be back” – once I’ve read all these links. Particularly the bond ones… 😉

  • 7 The Investor May 16, 2015, 12:34 pm

    @Mathmo — There was another — very deep — bond article by Vanguard last night, making the case for the ‘don’t dismiss bonds’ camp and explaining the virtues and downsides of both short- and long-term duration bonds.

    However rather bizarrely the link I’d saved had stopped working by this morning, and it was redirecting to Vanguard’s home page. (Perhaps the Anonymous hacking group has a thing against bonds? 😉 )

    Anyway, in case it starts working again this was the link:

    https://personal.vanguard.com/us/insights/article/duration-diversification-052015?SYND=RSS&Channel=AN

    It’s still showing up in Search results, as below. (I wonder if it’s redirecting because we’re in the UK? It is US focused, of course…)

    https://goo.gl/MF1A8H

  • 8 The Investor May 16, 2015, 12:34 pm

    p.s. Hasty la vista, baby!

  • 9 Just Passing Through May 16, 2015, 12:50 pm

    @The Investor

    I think Vanguard pulled the article, but you can still get Google’s cached version of it. There’s then a little drop down arrow at the end of the URL in the results which links to Google’s cached version:

    http://webcache.googleusercontent.com/search?q=cache:qdBIjfJf04gJ:https://personal.vanguard.com/us/insights/article/duration-diversification-052015%3FSYND%3DRSS%26Channel%3DAN+&cd=1&hl=en&ct=clnk&gl=uk

    Ta-da!

  • 10 Mathmo May 16, 2015, 1:51 pm

    Do you expect me to read that, Goldfinger?
    No, Mr Bond, I expect your prices to fall!

    (etc)

  • 11 Mathmo May 16, 2015, 2:45 pm

    Both those bond articles fascinating — thanks for finding (and the link @JPT).

    My reading of them is that if you look at bonds as uncorrelated diversifications of the equity engine, then you need mid-term (ie 10yr, not 30-yr) Government bonds (and not corporates as they aren’t properly uncorrelated).

    Also, if you are going to take flight into short-term govt bonds to dodge the interest-rate-risk train then you’d better get your timing right as it costs a lot if you miss out on final few years of bull run. (That chart was the best bit of the Vanguard article: I can see why they pulled it — it does ramble a bit after that). I like this argument as I often make it to people who hark back to Mar 2000 as a reason equities are risky: you’d have to be spectacularly lucky to have bought in that month. 6 months earlier or later and you’d be taking massive chunks of return.

    The morningstar article does rather base itself in fantasy land by looking at the last 10 years only, so a pinch of salt to be taken. Any rational analysis of that time period wouldn’t place equities as the core engine.

    Interested to see gold get another mention as a diversification asset. I have very few of the qualms about gold prices that I do about bond prices. I can only assume that I, too, am a barbarous relic.

  • 12 UK Value Investor May 16, 2015, 2:45 pm

    Thanks for the link TI. To keep the first movie theme running, I’m pretty sure mine was:

    Rocky III (1982)

    Was so inspired I joined a boxing gym the next week (and quit the week after that).

  • 13 Minikins May 16, 2015, 3:25 pm

    There is much financial wisdom through the condensation covered windows of 80’s films: “the kind of windows faces look in at”.

    Whether passive or active, “we are indeed drifting into the arena of the unwell, making enemies of our own futures.”
    For, “those with the money are eccentric. Those without, insane.”
    Investing is “free to those that can afford it, very expensive to those that can’t.”

    I only wish this post had been mailed earlier and brightened my day sooner. Above quotes courtesy of Bruce Robinson director of the legendary Withnail and I.

  • 14 Mathmo May 16, 2015, 4:43 pm

    @minikins and of course the best pricing policy ever: “free to those who can afford it, very expensive to those who can’t”

    Two fascinating articles on valuation of asset classes in today’s Telegraph (borrowed copy, I can assure you). The Barings one worthy of a whole post, TI, and the FTSE one coveringuch of the ground in other links / passim.

  • 15 Mathmo May 16, 2015, 4:45 pm

    @minikins apologies my phone truncated the bit of your post with that in. I feel unusual. The sky is beginning to bruise…

  • 16 david May 16, 2015, 5:55 pm

    Is this how it went down:

    Investor: “That’s not an axe! My lumberjack father cut his toenails with that. What a light-weight mugger you are LOL.” (mugger laughs it off and takes Investor to the pub for a complimentary pint)

  • 17 david May 16, 2015, 6:18 pm

    Re: the global land grab, I just saw this Dundee quote in IMDB:

    Michael J. “Crocodile” Dundee: Well, you see, Aborigines don’t own the land. They belong to it. It’s like their mother. See those rocks? Been standing there for 600 million years. Still be there when you and I are gone. So arguing over who owns them is like two fleas arguing over who owns the dog they live on.
    http://www.imdb.com/title/tt0090555/quotes

  • 18 dearieme May 16, 2015, 6:55 pm

    “Diversifying globally would have been excellent advice for a Chinese, Russian or Argentenian investor in 1900”: that is a good point. All we have to do now is work out which case applies to us. How?

  • 19 david May 16, 2015, 7:07 pm

    @dearime – i see getting a global index as not about increasing returns but rather about reducing the risk of potentially living in a nation with bad stock returns (greeks could have done with a LifeStrategy 60/40 for example). the global index can have less volatility than single nations i imagine – portugul and spain seemed to suffer incredible collapses in the mid-70s along with the UK (over 80%!?), while the global index was less extreme.

    the credit suisse yearbook shows a theoretical global index slightly underperformed a theoretical UK index since 1900, growing 325 times in real terms (page 59) versus 367 for the UK (page 57):

    https://publications.credit-suisse.com/tasks/render/file/?fileID=AE924F44-E396-A4E5-11E63B09CFE37CCB

  • 20 The Investor May 16, 2015, 8:47 pm

    @Just Passing Through — Thanks for that!

    @All — Love the quotes — more fun than I expected on a Saturday afternoon. 😉

  • 21 dearieme May 17, 2015, 12:24 am

    @david: ta. I’m getting persuaded here.

  • 22 smiling vulture May 17, 2015, 12:30 pm

    love the film clip

  • 23 The Investor May 17, 2015, 9:10 pm

    @david @dearieme — Some world market data collected here:

    http://monevator.com/world-stock-markets-data/

  • 24 dearieme May 18, 2015, 1:00 am

    “a theoretical global index slightly underperformed a theoretical UK index since 1900, growing 325 times in real terms (page 59) versus 367 for the UK (page 57)”. “… each of the 23 countries is weighted by its starting-year equity market capitalisation.”

    I see (I think) that what mattered is that the putative global investor of 1900 put lots of her dosh into the USA. But that country had a unique combination of circumstances. It was a nature-blessed primary producer – oil, gas, coal, ore and agriculture. It had a template of English property law, and (after the Civil War) a single dominant culture, with a politically submissive population. Its central government was small and cheap. Its industry was proving hugely successful at mass manufacturing, and, as TI said at his link, it had the advantage of “being out of the range of jackboots and bombers”.

    No country offers such a combination today. Still, short of investing in Mars or Venus, a youngish Briton today probably ought to invest almost entirely in foreign equities (which means 52% US, if she wishes to use equity market capitalisation as her guide), to diversify from her human capital being invested in Britain. Is that a logical conclusion?

  • 25 dearieme May 18, 2015, 1:03 am

    But what is a codger – with his shorter investment horizon – to invest in, particularly if he feels that US equities look substantially overvalued today?

  • 26 Thruxie May 18, 2015, 9:40 am

    @Dearieme, personally as I like receiving dividends, for all world exposure I use the Vanguard high yield ETF VHYL it tends to naturally avoid over priced stocks/markets like the US hence North America =38.2% UK 13.6% Euro 24.1% Emerging 11.7% Pacific 12.6%

  • 27 dearieme May 20, 2015, 2:16 pm

    A question for TI: the advantage of passive vs active – this is usually discussed in terms of equities. Is the evidence equally compelling for bonds? (I can see that the logic is much the same, but how about the evidence?)

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