[COMMENT: I don’t normally reproduce this much text from a news article; but this is compelling reading because it will challenge the beliefs of some investors. I urge you to click-through and read the entire article.]
(6 May 2017, AFR, p25, by Christopher Joye)
‘Buying a “passive” or “indexed” fund is lobotomised investing, predicated on the beliefs that the market is smarter than you are, investors are systematically rational, assets are always properly valued as prices move in an unpredictable “random walk” and, finally, one has no ability to identify those “active” managers that do consistently beat benchmarks. (Yes, they exist.)
‘The problem is that every single one of these assumptions has at various times and across different sectors proven to be wildly incorrect, save for the question on your relative intellectual quotient and/or financial markets expertise.
‘For those who never want to engage in analysis and/or are convinced they possess fundamentally inferior faculties, passive strategies may certainly be preferable to an “active” approach. And let’s be frank, many folks fall into this category.
‘Yet let’s also bust the utterly misguided myth that passive investing is universally superior to active. By active we mean…’ <snipped…>
‘Second, the foundation assumptions upon which Eugene Fama’s heroically simplistic “efficient markets hypothesis” rests have been comprehensively invalidated in even the most “semi-strong-form” or price-accurate asset-classes. Time and again, collective investor behaviour has been subject to bouts of persistent irrationality precipitated by innumerable behavioural biases that make a sham of Fama’s idealised “homo economicus” (AKA the always accurate and objective human calculator).’ <snipped…>
‘One pervasive argument in favour of indexing is that it’s uber cheap. Yet this idea that choosing the cheapest possible product always yields the best results is incredibly stupid. Would you apply this lowest common denominator logic when engaging a doctor, lawyer, accountant or new employee? No way.’