I’m a firm believer in the value of active investment management.
I also believe that 95 per cent of institutions should invest passively.
No, I’m not confused or delusional. My apparently contradictory viewpoint is the result of a deliberate effort to synthesise both sides of the active vs passive debate.
Most of the active versus passive debate focuses on the analysis supporting either the active or the passive side. In reality, the correct decision depends on the circumstances (see my earlier post).
This is why synthesising the arguments from both sides of the debate is vital. One of the best examples of the power of synthesis is the legendary Charlie Munger. Here’s a thought-provoking quote from Charlie courtesy of an interesting piece written by the Farnham Street Blog entitled The Work Required to Have an Opinion.
The ability to destroy your ideas rapidly instead of slowly when the occasion is right is one of the most valuable things. You have to work hard on it. Ask yourself what are the arguments on the other side. It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.
I’m going to take up Charlie’s challenge: an active investor presenting the case for indexing better than a passive investor. There’s a lot to cover, so I’ll tackle the subject in three parts:
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