10/11/19
As first a professional and then an amateur investor, I have
for years banged my head against the proverbial wall trying to beat the
indices. Then, years ago, it came to me, slowly, but
not as slowly as it has come to most market participants, that I don’t have to
bang my head against the wall anymore; I simply had to, as indexing’s
detractors like to say, surrender and accept mediocrity. By doing so, I was virtually guaranteed to
improve my investment performance. Oh,
sure, I own a few individual stocks, on which I have done quite well, and I
still put on an option position now and then.
Vertical put spreads, which, despite their provocative sounding name, have
nothing to do with the recreational habits of those of questionable propriety,
are my current fascination in the options world. However, these few stock positions and even
fewer, and more paltry, option positions are put on to amuse, rather than
enrich, myself. The bulk of whatever financial
assets we have is in index funds and there it will remain.
So it is heartening, especially to this graduate of a couple
of Midwest cow colleges, to know that the great minds at Harvard (aka, the U of
I of the East), the notables on CNBC and other bastions of the financial media,
and the rocket scientists of Wall Street continue their futile pursuits of the holy
grail of active management that consistently, reliably, and durably beats its passive
counterpart. The efforts of these great
minds (and I’m not being sarcastically ironic here…really, these people are
indeed, for the most part, great minds) only serve to make the markets more
efficient and, hence, passive investing even more compelling.
So thanks, guys, for making my life easier and more
profitable.
I wrote the below letter to the Wall Street Journal
expressing these very sentiments. It
went unpublished, perhaps owing to the academic pedigrees of much of the staff
of that estimable Journal:
9/28/19
The Wall Street Journal reported on 9/28 (“Harvard
Fund Logs Return of 6.5%,” 9/28-9/29/19, B13, Dawn Lim and Juliet Chung) that
the Harvard endowment achieved a 6.5% return in fiscal 2019, far behind the
S&P 500’s 10.4%.
While one year does not constitute a performance record,
such underperformance is not an anomaly and is virtually certain to repeat
itself and be sustained over time.
Surely, the powers-to-be at Harvard are smart enough to realize
this. So why don’t Harvard and its
fellow enormously endowed institutions of higher learning pursue a purely
passive investing strategy and reap the seemingly inevitable rewards? One suspects the reason for sticking with
active management is that a change to indexing would result a lot of people,
many of whom doubtless are Harvard alums, losing their highly paid gigs managing
the endowment’s investments.
That Harvard and its similarly situated institutions whistle
past the ever-growing evidence and continue to pursue the quixotic mission of
beating the indices will have a dyspeptic effect on the endowment. However, the bad news for Harvard and for
those who love it is good news for the rest of us. The continuing fruitless pursuit of mediocrity
by very smart people that constitutes most of active management serves to keep
the markets efficient and hence profitable for those of us who have accepted
the facts and become proud indexers.
Thanks, Harvard.
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