Quote:
Originally Posted by pelagius
Of course, its written by academics. If you think the studies are flawed then bring up problems with the studies. Just stating that they are written by academics is not a criticism. Point out flaws in the empirics.
Second, I have no problem with active management. Its fine ... its not going to make a huge difference on average. On average passive will beat active by a little not a lot and active has more chance for upside (someone may get very lucky and choose fund that happens to do fantastic). Of course, it also has a greater chance of a worse downside (relative to the benchmarks since passive by definition is basically the benchmark). In fact in aggregate we can prove passive beats active under the following two assumptions:
(1) Passive in aggregate holds approximately the market portfolio
(2) Active is higher costs then passive
If passive holds the market then by definition active also must be holding the market in aggregate because by definition passive plus active adds up to the market. If active is higher costs then by definition they must do worse because in aggregate the holding are the same: the market.
Of course, in any given period some active managers do way better than passive even controlling for risk. I have always agreed wit that. However, that really good performance in a given period is not usually a good predictor of future performance.
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Basically there are some active managers who kick passive managing butt and have done so over long periods of time. Note, I said "some". Not all, not even most. Most managers actually underperform the average, which is true in about anything. I am sure you have heard about the 80-20 rule.
I will give you the high ground on theoretical arguments. I don't deal in that world and have no interest in it. That is the world of economists, who quite frankly also fall into the 80-20 rule.
If I find a manager who has consistently outperformed over the past 10 years, as for me, I will take my chances with that person over some theory. Like I have said over and over in this thread, it doesn't bother me if someone chooses to do otherwise.