Apr 05
Passive Investing
Photograph: Crater Lake Lodge
The reason for take the passive investing route to portfolio management is none other than playing the probability game. Let me quote again from David Swensen’s “Unconventional Success” book. “Security selection may provide substantial excess returns for skilled investors, but those excess returns come directly from the pockets of other players who suffer poor relative returns. When aggregating the returns for all actively managed portfolios, the combined results inevitably mimic the market, less a discount equal to the amount paid to play the game. For the investment community as a whole, security selection plays a return-reducing role in investment performance.” Swensen is simply stating what William Sharpe proved in “The Arithmetic of Active Management” paper.
If you are one of those individuals who know you can outperform the broad market by active management over the next 20-years, then by all means, keep selecting those stocks. However, the laws of probability are working against you. For this reason, we are taking the passive investing route.
Here is a short piece on Swensen and more of his advice. I too prefer to listen to David Swensen rather than Jim Cramer.
http://www.informationarbitrage.com/2007/06/why_i_love_dale.html
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