21 March, 2018
Relying on Market Prices
At Walden Capital we subscribe to the theory that active management through stock picking is unlikely to provide long term benefits for investors. We hold this view because of the significant evidence that although in theory it is possible to identify mispriced stocks, the cost of doing so consistently exceeds the benefit that being a stiock picker can bring.
There is however a widely held view that once a certain percentage of the market is pursuing evidence based passive strategies that the market will become distorted, and prices will begin to diverge from being rational. This is a very easy theory to accept - indeed it is common sense that if no one is examining individual stock prices, then it is likely that they will become distorted. However there is quite a gap between 'a certain percentage' and 'no one' - and there is very little research regarding exactly what percentage of the market has to be passive for passive investment to cease to be an effective way of capturing returns.
Here we have an article from Brad SteinmanVice President at Dimensional Fund Advisors reviewing some of the evidence, and demonstrating that whilst it may be the case that one day active management will 'win' against the evidence - for the time being at least the additional costs you spend are not rewarded.
Download the PDF >>>
by John Stirling