Value Investing

‘Actively Passive’ Investment Value Strategy

Via Jason Gilbert Jason Gilbert and Elliot Turner present actively passive investment value strategy.

“The stock market is a giant distraction from the business of investing.” – Jack Bogle

In our last commentary, we highlighted the relationship between the market’s earnings yield and its long-­?term average return of approximately 6.67% since 1925. In response, several clients have asked us whether this should be viewed as an endorsement of passive, rather than active investing. This is a popular question in financial literature today, with many suggesting the recent financial crisis provides unequivocal proof that a passive approach is better than active. However, in order to offer a proper answer, we need to first define the essence of the question. What people mean today when discussing passive versus active investing is really whether one should “index” or “pick stocks?” As is often the case, we think this is the wrong question to ask. As we explain why this is wrong, we hope to answer both the right and wrong questions at the same time.

What is Active Management?

The most basic problem with the above question is how “Active Management” is simply painted with one brush. Active management has come to mean something very different over time. John Bogle, considered by many to be the “Father of Indexing” recently published a book about (and aptly titled) “The Clash of Cultures” and borrowed Keynes’ distinction of investing as “forecasting the prospective yield of the asset over its whole life” and speculation as “forecasting the psychology of the markets.” What most people think of as active management today is actually more akin to speculation and momentum trading than true investing. In practice, active management has become what we popularly call “trading” and this is evidenced by the explosion in portfolio turnover at the average investment fund. Bogel laments how “in 1950, the average holding [period] for a stock in a mutual fund portfolio was 5.9 years; in 2011, it was barely one year.” As of 2011, annual turnover of U.S. stocks was over 250% per year!

Actively Passive Investment Value Strategy