The debate surrounding the use of active versus passive investing will probably never end. Congratulations to Mr. Buffet. He looks very likely to win his $1,000,000 bet on the subject. Each side can cite ad nauseum a compendium of stats as proof of the advantage they hold. Both have their warts. Passive investors are notoriously bad timers and highly subject to emotional biases. They buy high and sell low and they’re probably buying now. Active management comes at a cost that is at least a significant drag on performance. The DOL has made its stance on the issue very clear. Active managers are better at timing than the passive investor but the cost of this genius is constant.
Is there an alternative to this contrast of style? Perhaps. A combination, or taking the best of both, would be a good beginning. In a Seeking Alpha post today, Ron Surz, who for years has challenged the conventional thinking of our industry, mentions “active-passive optimization”. This approach would keep investors from shooting themselves in the foot and reward those managers who truly add value for their clients. Changing the mindset of the investing public and those who serve as their advisors will take time. It may never happen, but in a world where robo advice and high management fees erode confidence in our industry’s ability to provide value on a cost adjusted basis, the call for new thinking is needed. New thinking doesn’t have to be radical. It only needs to be rational and designed with the client in mind. After all we serve at the client’s leisure.