Larry Swedroe: More Evidence Against Active

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Random Walker
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Larry Swedroe: More Evidence Against Active

Post by Random Walker » Mon Jun 19, 2017 8:57 am

http://www.etf.com/sections/index-inves ... nst-active

Results of a study performed by DFA. Emphasizes Bogle's "Costs Matter Hypothesis". Also emphasizes that taxes are frequently our greatest investing expense, not ER or trading costs.

Dave

invst65
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Re: Larry Swedroe: More Evidence Against Active

Post by invst65 » Mon Jun 19, 2017 6:22 pm

Okay, I give up. The "unanswered posts" search shows both a Larry Swedroe case for Active Management and an Evidence Against Active Management thread.

garlandwhizzer
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Re: Larry Swedroe: More Evidence Against Active

Post by garlandwhizzer » Mon Jun 19, 2017 7:07 pm

Thanks for posting this article, Random Walker. Read it and enjoyed it. I really miss Larry's input on the Forum and these posts are helpful at keeping us in touch with Larry's insights.

Garland Whizzer

Random Walker
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Re: Larry Swedroe: More Evidence Against Active

Post by Random Walker » Mon Jun 19, 2017 10:50 pm

Invst65 and others who believe they've seen a change in Larry's perspective over time or contradictory beliefs on his part, I'm not Larry, but I've read a lot of his books, essays, and posts. I have found him to be tremendously consistent over time. He has seen an era when skill in investing was apparently very demonstrable. I believe I've read that about 20% of managers could consistently beat the market in the 80's. Now that number is at most about 2%. He explains how the competition in the investment industry is getting tougher and tougher all the time. What was previously alpha gets "discovered" by academics and turned into beta. He describes this in the incredibly shrinking alpha. This is why he adamantly advocates passive investing.
If there is one common theme to all of Larry's writings, it is that he goes where the academic evidence takes him. He is a staunch advocate for passive investing, but he has never said that markets are perfectly efficient. As academic evidence uncovers factors that help explain returns, Larry has incorporated those into his passive philosophy. Thus his Factor book that looks at market, size, value, Momentum, profitability/quality. Single factor CAPM explained about 65-70% of a portfolio's returns, Fama-French added size and value is able to explain better than 90% of a portfolio's returns, and now Factor models that also account for Momentum, profitability/quality explain about 95% of a portfolio's performance. So Larry now strongly emphasizes passive factor investing, specifically diversifying across factors. He does not believe the market or factors can be timed, and always advocates passive access to the factors.
I believe Larry is a strong believer in modern portfolio theory. When he considers potential new investments for portfolios, he emphasizes how these investments mix with the other portfolio components. We have seen Larry write about Cross Sectional Momentum, Carry Trade, Time Series Momentum, Alternative Lending, Reinsurance. These are certainly more esoteric investments than the S&P 500! But they still fit within the overarching theme of Larry's investment recommendations. They are passive vehicles, they provide diversified access to the given source of return, they improve portfolio efficiency when mixed with more conventional portfolio components. These esoteric funds might be expensive by Boglehead standards, but according to Larry they provide value proportionate to their cost.
So while some people have said they "miss the old Larry", I would say It's always been the same Larry. He believes we should invest in markets as though they are perfectly efficient, use passive low cost vehicles, cost per unit value added is what matters, and how potential investments affect the portfolio as a whole is what matters. He goes where the evispdence takes him. Very consistent indeed!

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Theoretical
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Re: Larry Swedroe: More Evidence Against Active

Post by Theoretical » Mon Jun 19, 2017 11:24 pm

invst65 wrote:Okay, I give up. The "unanswered posts" search shows both a Larry Swedroe case for Active Management and an Evidence Against Active Management thread.
The "Case for Active Management" one was an article that quoted something positive in reference to active and then showed how it didn't tell the whole story. He's consistent in this respect. Both were anti-active.

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House Blend
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Re: Larry Swedroe: More Evidence Against Active

Post by House Blend » Tue Jun 20, 2017 9:45 am

Because taxes are typically the greatest expense for taxable investors (greater than the expense ratio or trading costs), the percentage of winners would be much lower for funds held in taxable accounts.
I do agree that tax is often the largest cost associated with taxable investing, but that doesn't mean that accounting for taxes will automatically make the performance gap for an active fund worse.

My point is that you have to compare fund performance with some baseline alternative. Whatever that alternative is (an index fund perhaps?), it too will be exposed to taxes. If the active fund manages to avoid cap gain distributions (as tax-managed funds often do), and has the same yield before expenses as the cheaper index, then accounting for taxes will improve the relative performance, because the higher expenses are taken out of the yield.

An analogy: Investor shares of the 500 index will always look worse in comparison to Admiral shares, because of the 10(?) basis point gap in expenses. Add taxes to the mix, and the gap shrinks, because the Admiral shareholder will pay more tax.

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