I had the pleasure of listening to Larry Swedroe speak last night about the benefits of passive investing. Swedroe is the Director of Research for the Buckingham Family of Financial Services, is the author of several solid books on investing, and writes the Wise Investing blog.
Many arguments about the merits of passive and active investing boil down to ideology, but Swedroe doesn’t bother with ideology; he looks at data. He is driven by the science of investing and answers his critics with data. If someone comes along with data showing that some active strategy can beat the market, then he can be convinced. But he has seen precious little such evidence.
An interesting statistic Swedroe gave was that while passive investing among institutional investors has gone from 15% to 60% over the last 25 years, among individual investors the number using passive methods has only gone from 1% to 15% over those 25 years. Perhaps institutional investors know something that most of the rest of us don’t know, yet.
Another statistic was that 90% of all trades are made by big institutions. So when you buy a stock, odds are strong that a big institution sold it to you because they thought it was better not to own the stock. Do you really think you can know more about the business you’re buying than a large institution?
Apparently being smart doesn’t help. A Mensa investing club underperformed the market by almost 13% per year for 15 years! This is a brutal result. This means they were left with about one-eighth as much money as they would have had if they had invested in the index.
A closing remark from Swedroe was that active investing “is the triumph of hype, hope and marketing over wisdom and experience.”