Active vs. Passive Investors

Oct 2018

If long-term corporate performance ultimately drives stock prices […], yet much of share ownership is in the hands of [index] funds that don’t even attempt to think about revenues, earnings, etc., what is there to ensure that the stocks purchased by passive investors are reasonably priced? Some passive/indexing proponents claim that the buying and selling done by non-indexers is sufficient to move stock prices to reasonable levels. Put differ­ently, non-indexers (“active” investors) ensure fair stock prices through their research and investing, and then indexers essentially free-ride on their efforts. If you appreciate irony, the following should be delicious: In short, passive investors say they depend of the “efficiency” of markets—driven and created by active investors—to establish fair and appropriate stock prices for passive investors to accept. Yet these active investors are the very ones that passive investors often characterize as inept!