SUPPORT FOR PASSIVE INVESTING


So who are the voices that support passive (index) investing? Some of the most prominent investors and Nobel Prize Winners of our time.


“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

Warren Buffet, 1997


“No amount of hope and luck (if a market is efficient) or work and skill (if a market is inefficient) can change the mathematically certain fact that active investing in all financial markets–whether efficient or inefficient–is a zero sum game. This law of nature may seem unfair to active investors (tough, it was also unfair that the Giants lost the ’02 Series) but it cannot be otherwise.

Investors may disagree in their beliefs about this market being efficient or that stock being inefficiently priced. There can be no room for disagreement, though, about the fact that active investing in all financial markets is a zero sum game where most active investors are condemned to underperform after costs. Those who would disagree with this just can’t do simple arithmetic.”

W. Scott Simon, Morningstar Advisor, February 3, 2005


“Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.”

William F. Sharpe, Nobel Laureate in Economics, 1990


“If active and passive management styles are defined in sensible ways, it must be the case that:
1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
2) after costs, the return of the average actively managed dollar will be less than the return on the average passively managed dollar.”

William F. Sharpe, Nobel Laureate in Economics, 1990


“..But experience shows conclusively that index-fund buyers are likely to obtain results exceeding those of the typical manager, whose large advisory fees and substantial portfolio turnover tend to reduce investment yields.”

Burton Malkiel, author of “A Random Walk Down Wall Street


“Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry.  All three are trying to pull off elaborate hoaxes.  But while Santa and the bunny suffer the derision of eight-year olds everywhere, actively managed stock funds still have an ardent following among otherwise clear-thinking adults.  This continued loyalty amazes me.  Reams of statistics prove that most of the fund industry’s stock pickers fail to beat the market.  For instance, over 10 years through 2001, US stock funds returned 12.4% a year, vs. 12.9% for the S&P 500 stock index.”

Jonathan Clements,“Only Fools Fall in…Managed Funds?”, Wall Street Journal,  9/15/2002


“..the best way to own common stocks is through an index fund…”

Warren Buffett, Berkshire Hathaway, Inc. 1996 Shareholder Letter


” If there’s 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that’s all that’s going on. It’s a game, it’s a chance operation, and people think they are doing something purposeful… but they’re really not. ”

Merton Miller, Nobel Laureate and Professor of Economics 1990, Univ. of Chicago, Transcript of the PBS Nova Special,”The Trillion Dollar Bet”


“Question: I wonder if I might ask you, …how do you think people should invest for the future…? Should they buy index funds?”

“Answer: Absolutely. I have often said, and I know this will get some of your readers mad, that any pension fund manager who doesn’t have the vast majority—and I mean 70% or 80% of his or her portfolio—in passive investments is guilty of malfeasance, nonfeasance or some other kind of bad feasance! There’s just no sense for most of them to have anything but a passive investment policy.”

An Interview with Merton Miller, Investment Gurus, by Peter Tanous, February 1997


“The S&P 500 is up 343.8% for 10 years. That is a four-bagger. The general equity funds are up 283%. So it’s getting worse, the deterioration by professionals is getting worse. The public would be better off in an index fund.”

Peter Lynch, former manager of the Fidelity Magellan fund


“A miniscule 4% of funds produce market beating results…. The 96% of funds that fail to beat the Vanguard 500 Index fund lose by a wealth destroying 4.8% per annum.”

David Swenson, CIO Yale University Endowment Fund


“Suppose we observe a person who correctly calls a coin flip five times in a row. The probability of such success if the flipper relies only on luck is about 3%, so we might conclude that there is something about the coin known only to the flipper or that he is prescient about coin flips. In either case, it looks likely that our guy is a talented coin flipper (read active manager). This inference is appropriate–if this is the only sequence of five coin flips we examine (the only active manager we evaluate). But if we examine larger and larger samples of five coin flips we are more and more likely to find at least one lucky active manager who is right all five times. In fact, in a sample of 100 managers we expect to find 3, in a sample of 1000 we expect 30, and in 10,000 we expect 300 to succeed just by chance.”

Eugene Fama and Ken French, Fama/French Forum, October 18, 2010


“If the data do not prove that indexing wins, well, the data are wrong.”

John Bogle, The Little Book of Common Sense Investing


“..the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the ‘know-nothings’ – must win.”

Warren Buffet, 2007 Shareholder Letter Berkshire Hathaway

“What, then, is the intellectual foundation for active management? While I’ve seen some evidence that managers have provided returns that are superior to the returns of the stock market before costs, I’ve never seen it argued that managers as a group can outperform the market after the costs of their services are deducted, nor that any class of manager (e.g., mutual fund managers) can do so. What do the proponents of active management point to? . . . Themselves! “We can do it better.” “We have done it better.” “Just buy the (inevitably superior performing) funds we that we advertise.” It turns out, then, that the big idea that defines active management is that there is no big idea. Its proponents offer only a few good anecdotes of the past and promises for the future.

Alas, it turns out that there is in fact one big idea that can be generalized without contradiction. Cost is the single statistical construct that is highly correlated with future investment success. The higher the cost, the lower the return. Equity fund expense ratios have a negative correlation coefficient of –0.61 with equity fund returns. In the fund business, you get what you don’t pay for. You get what you don’t pay for!”

John C. Bogle, Remarks at Washington State University, April 13, 2004