![]() Nobody uses monkeys to make investment decisions. The journal then concluded that after the cost of researching, trading and paying taxes, any added value created by investment professionals was lost. Investment professionals won 61 times per 100 contests. Then in 2001, 13 years later, they released their results. In 1988, they pitted investment professionals against their own staff (who simulated the monkey throwing darts). The Wall Street Journal even decided to test his theory. I think he meant it as a joke, but ever since then as ridiculous as it seems, this idea has been added to the conventional wisdom behind passive investing. ![]() To prove his point, he said that “a blindfolded monkey throwing darts at a newspaper’s stock listings should do as well as any investment professional”. The idea came from Princeton University economist Burton Malkiel who believed that asset prices follow a random walk. It begins with a blindfolded monkey who throws darts and beats humans at stock picking. There is a popular story on passive investing, which needs to be debunked. The Conventional Wisdom on Passive Investing is Wrong Picking the right manager is no different. Anyone who wants to generate alpha knows that picking the right stock is crucial. What should be clear is that active investing significantly outperforms passive investing. The chart below looks at the median performance. So, it is quite unfair to take an average of all funds in the “active” category when they are playing against each other.Īs you can see below, looking back over the past three and a half years, there is a wide divergence between the top and bottom decile performing hedge funds in the US. They are effectively betting against each other. Now, almost 80% of investing is done by institutions. ![]() In the 1980s and 1990s, investment flows were mostly institutional versus retail. Not all investors can be right and therefore investment selection is very important. What you need to remember is that if you are buying a stock then someone has to be on the other side of that trade. Source: Bureau of Labor Statistics, Business Employment Dynamics If you want to turn your dreams into reality, it is not going to be done as a passive observer. You can’t do this from the side-lines and you can’t do this passively. That’s why investing matters, whether it’s with an entrepreneur or an established blue-chip company. There are benefits from these risks that can reward you financially and have a positive impact on society. In short, there are risks that are worth taking. Of course not! If you are an entrepreneur, you’re incredibly important to the future health of the economy. Should entrepreneurs quit while the going is good? This rises to 45% within five years, which is depressing. Bureau of Labor Statistics, 25% of new businesses go bankrupt within two years. Sorry to put a dampener on things but this is true. Yet, after all that, there is a good chance that you will fail. ![]() It’s a constant learning experience and you will most likely end up working unbelievable hours. If you start a new business, you will need determination, tenacity, and the mental stamina to withstand the pressure. The reasoning is that if it is so hard to beat the benchmark, then why try? This is what underpins the case for passive investing. It questions whether it makes sense to invest in an approach where it is becoming harder to generate returns over a benchmark. The case against active investing is that fewer and fewer active managers over time have been able to generate alpha.
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