WORLDVIEW: Is it passive investing that’s lying – or active?

In an op-ed the Financial Times, writes that passive investing is built on a lie, the pitch: “Don’t look for a needle in a haystack. Just buy the haystack.”
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In an op-ed in the Financial Times, Lex columnist John Guthrie writes that passive investing is built on a lie, namely passive guru Jack Bogle's pitch: "Don't look for a needle in a haystack. Just buy the haystack."

According to Guthrie, the idea behind Bogle's bon mot is that by going passive, investors can avoid the human error implicit in active investing: the chance that the active manager will buy a bunch of hay while looking for the elusive needle – and will miss the needle too.

Guthrie argues that this is a lie because the "haystack" in this metaphor – that is, the constituents of a particular index or the relative valuations in the stock market as a whole – is built by active managers in the first place. Active managers pick and choose stocks (in theory, at least) and by doing so, assign them relative values. Passive managers then sweep in and free-ride off active managers hard work by buying, say, the constituents of the S&P 500, which active managers picked.

___STEADY_PAYWALL___

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