That man is Abraham Okunsaya, and his article “Who do you think you are? Warren Buffett?” can be found here on the Adviser Lounge.
It’s about active versus passive investing. Passive is where you just allocate your money into one of a basket of index linked funds. It’s active when you pick and choose, and try to beat the indices. The gist of the article is that people like Warren Buffett are smarter than you when it comes to active investing; therefore, you should foughedabouddit and stick to passive investing.
Now, I certainly don’t want to contradict Abraham and I won’t, but I will, but I won’t, but I will.
In most cases, the advice to the client to choose an index fund is the right thing to do. I would often choose this approach for my clients.
Further, as a rule, I don't give investment advice to friends that way they remain friends, but when pressed on the matter (and suitably fortified with that stuff that the bearded bloke from Nazareth turned water into), I tell them to do the following:
- Get some index funds.
- Dollar-cost average those until you are old and grey and require a mistress.
- Rebalance a couple of times a year.
- Rebalance after a financial bust and go directly to the pub to calm your nerves.
So as you can see, I definitely agree with Abraham 100%. I'm so confident in this form of investing that it's how my children will be able to afford to go study in any university they please.
But, but, but. Let’s philosomophosomosise a bit. You know, like those great thinkers: Socrates, Donald Trump, Al Gore, and John Lennon, and let us for a moment imagine a world in which there are only index fund investors.
Now you may say I'm a dreamer,
But I'm not the only one,
I hope someday you'll join us,
And the world will be invested in a single equity index-linked exchange-traded fund.
Now, if we do ever get there, think for a moment about the repercussions. If the primary form of investment in the world is an automatic computer algorithm generated transfer of assets into a basket of companies then these questions should activate our brain cells:
- How will companies raise capital through the markets?
- What happens when there is a crisis and people start to redeem their funds?
- What happens to the fee structure?
- What about counterparty risk?
I guess what I’m asking is: What the hell will happen to the financial markets? And, more importantly, what will happen to my children's college fund?
I don’t pretend to know the answers to all the above questions, but they sure do bear thinking about. Do they not?
So, before we all decide that passive investing into index-linked funds are the Holy Grail of investing, let us remember that for them to remain successful and viable we need a market where there are still investors willing to take a punt and be active.
Someone needs to take an active position on the opposite side of our laziness.