The Reformed Broker- "Memo to the Passive Investing Taliban"

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matjen
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The Reformed Broker- "Memo to the Passive Investing Taliban"

Post by matjen » Mon Aug 12, 2013 6:32 am

http://www.thereformedbroker.com/2013/0 ... g-taliban/

Thought many would enjoy this since he calls out some of our more respected members. He makes the case pretty strongly for passive investing but then introduces a straw man by pretending that people like Ferri and Swedroe are calling for the outlawing of active management. As far as I am concerned, our thought leaders are doing great work and barely scratching the surface in battling the billion dollar marketing budgets and 100-year history of the active management/stockpicking culture. Some snippets below:


"Alongside Richards and Swedroe, Rick Ferri and the still feisty Jack Bogle (the movement's Supreme Leader), Solin cranks out the kind of blogsmanship that both educates the amateur investor and confirms the secret suspicions of many pros."

"This is happening because the data (and logic) is clearly on the side of the Passive Investing Taliban and they've become extremely proficient at disseminating it:

* Markets can not be timed consistently for entry and exit points by anyone, based on thirty years worth of tracking this data by the Hulbert Financial Digest.

* Persistence studies show the same thing every year - top stock pickers who appear in the top quartile during one year are statistically just as likely to be in the bottom quartile in the following year.

* Morningstar cannot prove that a single metric it tracks has any forward-looking consequences for active fund selection - the only predictive measure it can cite is that the lower the cost of the fund, the more of a chance it has to become an outperformer.

* Both Warren Buffett and Ben Graham, two of the most famous and successful investors (and stock-pickers) in American history, have advocated a passive index approach for the majority of investors, Graham having done so on his death bed in 1976, around the time Bogle was inventing the modern-day index fund."

"The Taliban's efforts to talk people into doing the perfectly rational thing is admirable, except where it becomes disdainful of the fact that for roughly 3 million investors, this is a hobby. There are seven million millionaires in the United States and not all of them want to take their chances with a passive portfolio - even if it's the best thing for them. Some of them want to try their best to do better. Some of them want to employ professional stock pickers and live vicariously through the ups and downs, the triumphs and defeats. Some of them have the majority of their portfolios conservatively and passively managed and then use a percentage for gambling or entertainment trading.

This is America - everyone should be allowed to do whatever they'd like. Even if it's not the most rational choice."

"It's a free country, and while you may not agree with the choices of others, they are entitled to make them regardless of whether or not they "should" or "shouldn't." If you believe that you possess the investing Holy Grail, then congratulations - no need to beat everyone else over the head with it."
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by nisiprius » Mon Aug 12, 2013 6:42 am

matjen wrote:...then introduces a straw man by pretending that people like Ferri and Swedroe are calling for the outlawing of active management.
Indeed.

Meanwhile, what are all the active-management writers saying when they talk about how passive investors are slackers, getting a free ride on the coat-tails of the people willing to pitch in and give an invisible hand to do the virtuous work of price discovery, and how they are making the market more volatile and less efficient for the good guys?

I haven't actually heard one of them propose that index funds be outlawed or taxed, but it's only a matter of time...

Taliban, my foot. The only reason he isn't comparing them to Hitler is that these days the Taliban is a bigger bogeyman. Personally, I see many resemblances between Joshua Brown and Darth Vader.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by matjen » Mon Aug 12, 2013 6:50 am

Amen Nisi. I actually thought about it a bit more and decided to leave a comment on Brown's site:

"no need to beat everyone else over the head with it"..there most certainly is a need. If the Bogle, Ferri, Swedroes, Bernsteins, etc. of the world didn't get the actual facts out and hard data, then folks like you would still be charging huge commissions and pretending you could pick stocks. Their information is what is killing the wire houses and forcing you into a better business model for everyone. 1% AUM is the next to go but it will be some time. Remember, they write blog posts and books. Wall Street spends billions advertising their absolute fake ability to predict the future in the markets. If I see one more ad of a guy with gray hair but the body of a 35-year-old racing a vintage sports car or navigating a sloop with voice overs about how some wire house made it happen for him.... In the meantime I have noticed you writing more about these topics the last couple of years and am appreciative.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by bottlecap » Mon Aug 12, 2013 6:51 am

Wow, that was a dumb piece. No one has argued for outlawing active management. His argument against indexing appears to be "It's human to make mistakes, so let us have our fun."

The "Taliban" reference is juvenile and is never explained. He is suggesting that Solin, Ferri, Bogle and Swedroe are the equivalent of a bunch of murdering thugs?

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by Matin » Mon Aug 12, 2013 7:58 am

I decided to look up taliban because I was suspicious that the word actually means something. The meaning of the word taliban is student. If he is saying that Swedroe et al are students of Jack Bogle or Ben Graham, I would say that is an accurate. However, the more likely explanation is that he is using Talaban to indicate that they are wrong about being right. I'm pretty sure he does not make this case convincing.

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by livesoft » Mon Aug 12, 2013 9:05 am

I think all he is saying is to "lighten up" on dissing the actively-managed folks. This forum is absolutely stuff full of actively-managed proponents: Just look at all the folks who have performance-chased into Wellesley and Wellington. We are pretty passive about those folks. Why can't we be passive about the likes of Jim Cramer?
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by Novine » Mon Aug 12, 2013 9:22 am

If the actively managed folks weren't fleecing billions from investors under the guise of "helping them out", I might agree with you. The Jim Cramer's of the world aren't the real problem. It's the Merrill Lynch's and their ilk that are profiting at the expense of millions of people, many with fairly modest investments, all the while telling these people that they are better off in ML's actively managed accounts when in most cases, the opposite is true.

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by Mitchell777 » Mon Aug 12, 2013 11:37 am

Although I occasionally invest in individual stocks, the vast majority of my equities are in index funds. As far as multi-millionaires who want to try to beat the market, fine. They will probably remain multi-millionaires and maybe it is like the race track or casino for them. My main concern is those trying to save for a decent retirement. Not just brokers or funds trying to beat the market. One of the worst things I've seen, firsthand, is the friendly financial advisor that has someone in a Class C balanced mutual fund with a 1.75% annual expense ratio

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by C8H18Engineer » Mon Aug 12, 2013 11:48 am

matjen wrote:...
"It's a free country, and while you may not agree with the choices of others, they are entitled to make them regardless of whether or not they "should" or "shouldn't." If you believe that you possess the investing Holy Grail, then congratulations - no need to beat everyone else over the head with it."
... except when the sum of these choices puts a disproportionate burden on everyone else. It is our duty to inform the public of the consequences, so at least an informed decision is made. If a large portion of the population were to end up very poor and too old to find gainful employment, there is social cost as well as monetary cost - since everyone else's taxes would need to go up to support this segment (we don't do 'Logan's Run' in our society).

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by G-Money » Mon Aug 12, 2013 11:53 am

Sensationalism. Why do I care what this guy thinks?
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by Beagler » Mon Aug 12, 2013 12:07 pm

"Graham having done so on his death bed in 1976..." A little dramatic, huh?
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by G-Money » Mon Aug 12, 2013 12:23 pm

Beagler wrote:"Graham having done so on his death bed in 1976..." A little dramatic, huh?
Yes, and the same can be said for many other parts of the blog post. I don't intend to waste any more time reading anything by this guy.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by telemark » Mon Aug 12, 2013 2:29 pm

So Wall Street has actually been in the entertainment business all along. Well, that does explain a few things...

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by scone » Mon Aug 12, 2013 2:36 pm

Personally, I see many resemblances between Joshua Brown and Darth Vader.

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by Ted Valentine » Mon Aug 12, 2013 2:44 pm

Matin wrote:I decided to look up taliban because I was suspicious that the word actually means something. The meaning of the word taliban is student. If he is saying that Swedroe et al are students of Jack Bogle or Ben Graham, I would say that is an accurate. However, the more likely explanation is that he is using Talaban to indicate that they are wrong about being right. I'm pretty sure he does not make this case convincing.
He means it as a pejorative in that adherents are strictly religious and intolerant of any other view to the point of being harmful.

Its childish name calling. Giving him the benefit of the doubt, I guess its supposed to be tongue in cheek (a joke), but its hard for this American laugh about the Taliban. I see it as modern way of calling someone a Nazi.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by matjen » Tue Aug 13, 2013 7:14 am

So the blog post has been removed and replaced with an apology. It didn't bother me all that much but, still, I think wise move.

Clarification

Joshua M Brown August 12th, 2013
Yesterday I talked about what I deemed to be some rather harsh and somewhat insulting comments coming from the passive investing camp and being directed toward those who have a different opinion of how to invest. While I agree with the idea of being more passive and using indexes (which we do in practice), I - like many others - have grown increasingly perturbed at the level of discourse between the disciplines, particularly online.

But in my plea to the passive indexing authorities, I used a very unfortunate metaphor in comparing their rigidity and fundamentalist ideology to that of the Taliban. After speaking with some friends, it had occurred to me that I was essentially doing the exact thing that I was asking others not to - inadvertently insulting others to get a point across.

The metaphor is not an apt description of the passive investing writers, whom I had mentioned I had a lot of respect for. I wish I had made my same points but without having used it.

Dan Solin does a lot of good and saves the people who read his views from making big mistakes with their retirement investing. The only negative I meant to convey is that sometimes his points are made at the expense of others - people who do their best but may disagree with the passive philosophy.

I wanted to clarify that and apologize specifically to Dan, whose message I agree with even if I don't always like the way he chooses to present it. I should have drawn a different comparison if my aim was to engender a more harmonious discussion. My clunky metaphor may have accomplished the exact opposite effect and for that I'm sorry.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by G-Money » Tue Aug 13, 2013 7:19 am

Glad he recanted. Thanks for the update.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by IPer » Tue Aug 13, 2013 7:25 am

Just tell the guy to take a pill and be thankful he got so much airtime over here at bogleheads!

Also, please remind him that John Bogle bought a single stock, it is right in the video!

Also, ask him (for me) if someone is trying to beat him over the head with this stuff where
is he standing? No one ever did that for me!

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by yeamon » Tue Aug 13, 2013 10:11 am

I follow Josh on "the twitter" and I read his blog posts... for entertainment value mostly, not for investing insight. I will admit, I was entertained by his portrayal of active investing in a total straw-man-victim-scenario, like his own personal "war on Christmas" cause. The premise itself was so ridiculous, I had a hard time getting worked up over any insensitive language.

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by swimirvine » Tue Aug 13, 2013 10:24 am

does anyone have access to the entire article? In you browser history or copied and pasted somewhere? Can you post it on this thread for those of us that didn't get a chance to read the entire thing before it was taken down?
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by matjen » Tue Aug 13, 2013 10:39 am

As luck would have it, one of my browser tabs still was open to it on my work computer. Not sure if this violates forum rules but it shouldn't since the post was taken down it seems to me. Here it is:

Memo to the Passive Investing Taliban

Joshua M Brown August 11th, 2013
"Uncompromising men are easy to admire."
- Robert Bruce Sr, 'Braveheart'

"The Fundamentalists have taken the fun out of the mental."
- Ken Kesey

Dan Solin is an investment writer whose work I respect and link to all the time. He is part of the triumvirate of content creators for Buckingham Asset Management, along with the great Larry Swedroe and my friend Carl Richards. Buckingham is a gigantic investment advisory firm with a predilection for passively managed investing (care of Dimensional Fund Advisors) and a highly successful message - between the firm and its "Alliance" network of affiliates, we're talking north of $15 billion in assets under management according to publicly available data.

Dan is also a Grand Mullah of the newly emerging Passive Investing Taliban.

His thought leadership on the topic can be found from the Huffington Post to the pages of US News & World Report. He is part of a wave of advocates for the kind of low-cost, index-focused portfolios that have become incredibly popular in recent years as markets have gone straight up without correcting or even pausing for breath. Alongside Richards and Swedroe, Rick Ferri and the still feisty Jack Bogle (the movement's Supreme Leader), Solin cranks out the kind of blogsmanship that both educates the amateur investor and confirms the secret suspicions of many pros.

Investors, having grown weary of the failed market-timers, tactical underachievers and Black Swan-obsessed crash-predictors who were so popular in the wake of 2008, have finally turned to the "do little" approach. Performance-chasing investors who had never even thought about going passive have seen the only evidence they need to - "it worked over the last three years!" - and the cash has been flooding in over the transom. Witness Vanguard's $2 trillion-plus in assets, lots of it from "new money" that's flowed in post-2011.

According to a recent Rick Ferri post on the momentum of the passive movement, "During 2012, Vanguard alone took in $126 billion in passively managed index funds. They also owned 5 of the top 10 mutual funds in the U.S. to gather assets last year. The fund that gathered the most assets was SPDR S&P 500, an index tracking ETF managed by State Street Global Advisers."

This is happening because the data (and logic) is clearly on the side of the Passive Investing Taliban and they've become extremely proficient at disseminating it:

* Markets can not be timed consistently for entry and exit points by anyone, based on thirty years worth of tracking this data by the Hulbert Financial Digest.

* Persistence studies show the same thing every year - top stock pickers who appear in the top quartile during one year are statistically just as likely to be in the bottom quartile in the following year.

* Morningstar cannot prove that a single metric it tracks has any forward-looking consequences for active fund selection - the only predictive measure it can cite is that the lower the cost of the fund, the more of a chance it has to become an outperformer.

* Both Warren Buffett and Ben Graham, two of the most famous and successful investors (and stock-pickers) in American history, have advocated a passive index approach for the majority of investors, Graham having done so on his death bed in 1976, around the time Bogle was inventing the modern-day index fund.

I could go on and on, the actual facts in this debate are almost completely one-sided and they are legion.

But the data misses one important aspect, something that is bigger than any statistical fact or researched conclusion:

We are human beings.

The Taliban's efforts to talk people into doing the perfectly rational thing is admirable, except where it becomes disdainful of the fact that for roughly 3 million investors, this is a hobby. There are seven million millionaires in the United States and not all of them want to take their chances with a passive portfolio - even if it's the best thing for them. Some of them want to try their best to do better. Some of them want to employ professional stock pickers and live vicariously through the ups and downs, the triumphs and defeats. Some of them have the majority of their portfolios conservatively and passively managed and then use a percentage for gambling or entertainment trading.

This is America - everyone should be allowed to do whatever they'd like. Even if it's not the most rational choice. The boomers, whose portfolios now make up the bulk of the $60 trillion in US investable assets, grew up respecting the logical Mr. Spock but idolizing the adventurous Captain James T. Kirk.

Last year, 40 million Americans visited Las Vegas to try their luck. Some of them smoked and drank and many of them were entertained by strippers or even call girls. None of this was in their best interests, none of it logical. But another 40 million will do the same thing next year.

When Dan Solin rips into James Cramer for the 300th time as he does here, it almost seems rote at this point...

From US News & World Report:

CNBC is a rich source of useless financial information. Typical is Cramer’s recent endorsement of Facebook. He now believes the stock is a buy because it has entered a "virtuous cycle" in advertising.

Respected journalist Allan Roth reviewed Cramer’s stock-picking skill in a scathing blog post. The results aren’t pretty. Roth calculated the odds of Cramer’s four erroneous sell recommendations for stocks that turned out to be the best performers out of 749 different stocks for the six-month period ending in May 2013. They were 1 in 13.1 billion.

Cramer's nightly "picks" have been audited for almost a decade now, ever since his show Mad Money first hit the airwaves and infuriated the stuffed shirts with its combination of loud noises, colorful costumes and stock market showmanship. Researchers have reconstructed the results of thousands of Cramer's buy and sell calls without stopping for a moment to think about the fact that a) it's just TV and b) the holding period for every stock is not the same and a hundred long ideas from the show were never meant to be equally-weighted in a portfolio in real life.

I saw one guy arbitrarily assign a precise one-year holding period to Cramer's buy recs and then study the results - clearly this researcher has never managed actual money before if he thinks it works like that.

Any sentient being understands that Jim Cramer is not exhorting investors to act on every single buy and sell call - give me a break. Is Dan Marino telling the tens of millions of viewers for his NFL Today show on CBS that all of his weekly football picks are worth betting on?

The Passive Investing Taliban needs to realize the following:

1. Blog posts at the Motley Fool or on StockTwits about discovering new growth stocks are entertainment to many investors and that's okay.

2, Cramer's doing a TV show, not acting as a financial advisor for every household that turns his show on. TEE-VEE SHOW. Lighten up. I watched color commentary about a high school lacrosse game on ESPN 2 the other day, I was entirely capable of doing so without getting the urge to start cradling balls with a Brine goalie stick.

3. Anyone's who's actually investing for retirement using stock picks from a magazine or a TV show is already fucked, no amount of logic is going to get through to them. Lost cause.

4. There are many smart people who can recognize the difference between retirement planning versus speculation but they want both in their lives. Would you seek to make this illegal?

5. You may want to consider that there is a major paradox at work here - the more successful passive investing is in converting the masses, the less successful it will be going forward. The last thing a passive indexer should want is for everyone to stop guessing and trading in the markets. Massive amounts of speculation is what fuels the winship of the passive approach over other strategies. If there were only a handful of institutions left picking stocks and the whole world was sitting in a Vanguard fund, the returns of the pros would probably become incredible thanks to all the unexploited inefficiencies. And so, counterintuitively, the Taliban should be celebrating the Seekers of Alpha, not looking to discourage them or insulting them at every turn.

Bottom line, obviously low-cost, low maintenance portfolios will always win over enough time - but not everyone needs to agree to that and just bury their guns in the ground. We're a cowboy culture and there are plenty of investors who can be successful actively - just not the majority.

It's a free country, and while you may not agree with the choices of others, they are entitled to make them regardless of whether or not they "should" or "shouldn't." If you believe that you possess the investing Holy Grail, then congratulations - no need to beat everyone else over the head with it.

Be nice.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by swimirvine » Tue Aug 13, 2013 11:13 am

I agree with one thing. We should stop treating index investing as a religion and stop trying to get everyone else to join. Passive investing only works if there are A LOT of active investors and stock pickers out there. We could end up shooting ourselves in the foot if too many people convert to passive investing. We should think of it as a secret club that anyone is welcome to join but you have to discover it on your own. If you take it upon yourself to find and read a book by Solin or Bogle and you're convinced ... welcome to the club. Just don't go telling all your friends about it. Let them figure it out for themselves.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by Houston_investor » Tue Aug 13, 2013 11:14 am

I'm not sure I understand the message of piece.

"Yes, passive investors are right but we still hate them."

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by G-Money » Tue Aug 13, 2013 11:20 am

Houston_investor wrote:I'm not sure I understand the message of piece.

"Yes, passive investors are right but we still hate them."
Sounds about right to me. Maybe: "Yes, passive investors are right, but they should stop sticking it in active managers' faces. It hurts their feelings."
Don't assume I know what I'm talking about.

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by scone » Tue Aug 13, 2013 11:48 am

It's August, people are on vacay, markets aren't doing much. And so, horror of horrors, pageviews and clicks are down! What to do? Post something outrageous and hope people get incensed enough to tell their friends to read it. If you're lucky, it might even go viral. Business Insider has been doing the same thing lately, along with recycling old stories with new headlines.

Internet "journalism" is like television-- the business is advertising and promotion, the content is just a hook. I read this stuff for entertainment, the way I used to watch cartoons. Although, come to think of it, Bugs Bunny is better. :wink:
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by nedsaid » Tue Aug 13, 2013 10:20 pm

Passive Investing Taliban? Oh brother!! That has got to be the dumbest thing I have ever heard.

I guess the name calling starts when your arguments are weak.

I could not pull up the article from the link. It must have been removed.
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by JoMoney » Tue Aug 13, 2013 10:29 pm

HAH! :D He couldn't take jihad that followed his blasphemy. It was working yesterday. I thought it was intentionally sensational to just get internet traffic, now that it's gone I wonder...
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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by bottlecap » Tue Aug 13, 2013 11:05 pm

The apology was done well.

JT

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Re: The Reformed Broker- "Memo to the Passive Investing Tali

Post by YDNAL » Wed Aug 14, 2013 5:27 am

matjen wrote:
Joshua M Brown wrote:I could go on and on, the actual facts in this debate are almost completely one-sided and they are legion.

But the data misses one important aspect, something that is bigger than any statistical fact or researched conclusion:

We are human beings.

The Taliban's efforts to talk people into doing the perfectly rational thing is admirable, except where it becomes disdainful of the fact that for roughly 3 million investors, this is a hobby. There are seven million millionaires in the United States and not all of them want to take their chances with a passive portfolio - even if it's the best thing for them. Some of them want to try their best to do better. Some of them want to employ professional stock pickers and live vicariously through the ups and downs, the triumphs and defeats. Some of them have the majority of their portfolios conservatively and passively managed and then use a percentage for gambling or entertainment trading.
After agreeing with "the data of statistical fact or researched conclusion" re: passive investing, he goes on to say that we are human beings that should use a percentage of portfolio for gambling or entertainment trading, and employ professional stock pickers [read: pay him] to live vicariously through the ups and downs, the triumphs and defeats.

That guy appears to be losing tons of business and his wallet [not brain] was writing that blog !!!
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