Passive vs. Active
Passive management is based on the simple observation that markets work. Capital markets are the mechanisms for pricing securities, quickly incorporating new information as it comes to light. As such, capital markets are the best determinants of a security's value. Grasping that there is no better measure of a security's value than its ever-changing market price and that the future is unpredictable, the basic strategy of passive management - owning the market as a whole so as to gain market returns - is a very sensible strategy. This basic strategy is my beginning point in developing investment strategies for my clients.
The alternative to passive management is active management. Active management is nothing other than buying and selling securities in light of predictions about the future - future stock prices, future broad market prices, future interest rates, future economic growth, and so on. The great goal of active management is to beat the market consistently and predictably. The evidence demonstrates overwhelmingly that it fails in its goal. And so I recommend passive management.
|
|