Weekend reading

Good reads from around the Web.

With flows into index funds and ETFs soaring and articles about passive investing venturing beyond enclaves like Monevator and into the mainstream media, it’s not surprising active fund managers are getting more hostile.

Their latest wheeze has been to label indexers as ‘parasites’ who prey on the hard work of fund managers.

This is a handy line-of-attack, because it’s emotional. The data (that passive funds beat most active funds) and the logic (by definition the average active fund must offer average returns, before costs) offers them nowhere to go, but emotional appeals don’t need to be rational.

But rationality remains the best way to fight them, as Jack Bogle did this week in the Financial Times (that link is a Google search result – click through to the article. If on a tablet, switch to desktop view first).

Bogle writes:

[Index fund critic] Mr Smith describes the index mutual fund as a “passive parasite”, rejecting the value of the innovation I created in 1974. He suggests that the index fund simply takes advantage of the market efficiencies created by active manager/traders. His article assumes that my confidence in the index fund is based on the “efficient market hypothesis”.

This is not so. Whether markets are efficient or inefficient is beside the point. The cost matters hypothesis is all that is needed to explain why indexing works: gross return in the market as a whole, minus the costs of obtaining that return, equals the net return investors actually receive.

Paradoxically, it is the active manager who is the real parasite. For stock market returns are simply a derivative of the returns earned by publicly-held corporations as a group, the total of their dividend yields and their earnings growth over the long term.

Active money management, with costs averaging some 2.27 per cent a year, is the greedy parasite that eats away at the host.

At the grand age of 84, Jack Bogle is still one step ahead of the financial services industry as it throws confusion, fear, and flak in the face of his big insight.

I admire his energy and tenacity, almost as much as his achievements.

Investing ages well

If indexing was guaranteed to give me a mind as sharp as Bogle’s in my 80s, I’d go without food to buy more index trackers. But plenty of top-performing active investors are still razor sharp in their old age, too.

Sure, reaching old age in a fit state is largely down to genes, luck, and lifestyle.

Survivorship bias obviously favours the long-term compounder, too!

But as I’ve written before, perhaps there’s also something positive in the long time horizon of the true investor, however they happen to invest.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: On Monday HSBC will launch competitive new 90% loan-to-value mortgages, according The Guardian. The range will include a two-year fix at 3.59% and a five-year fix at 4.39%. Fees seem in line with current norms, so it could be a good option for first-time buyers.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Invest with Buffett’s five-year plan – MarketWatch
  • Swedroe: Emerging markets have investors panicking – Moneywatch
  • The safety-first credentials of a 50/50 portfolio – Telegraph

Active investing

  • The hidden risk of investing in stable companies – Morningstar
  • Exploring buy-to-let hotspots – This Is Money
  • Some ideas for safe dividend payers in the UK – Telegraph
  • Wealthy club together to buy commercial property [Search result]FT

Other stuff worth reading

  • How can the BOE’s Carney prick the house price bubble? – Guardian
  • Annuities: A dying breed? – Telegraph
  • Technology and games changing financial services [Search result]FT

Book of the week: If all authors treated economics the way Tim Hartford does, Harry Potter might have starred a central banker. His brand new book, The Undercover Economist Strikes Back, tackles nothing less than the entire global economy!

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  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.”

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