In the summer of 2015, investment bank Goldman Sachs restricted its interns to a 17-hour workday and told them not to work past midnight! Without doubt, the other Wall Street investment banks have a similar work climate. If there ever was a “the-harder-I-work-the-luckier-I-get” environment, driven by greed, Wall Street has it.
The expression, the title of this blog, has been credited to Sam Goldwyn, Thomas Jefferson, Gary Player and others. There are variations. All state the same philosophy. Every one of us has experienced better results with harder work in school, on the job, music lessons, hobbies and more – in other words, in everyday life.
Unbelievably, that is not the case with the stock market investing! To quote Mark T. Hebner of Index Fund Advisors, Inc.:
Professors came to
a shocking conclusion
The active advantage
was just an illusion
We are talking here about active investing versus passive investing.
From Rompotis, Gerasimos Georgiou, Active vs. Passive Management: New Evidence from Exchange Traded Funds (February 4, 2009). Available at SSRN: https://ssrn.com/abstract=1337708 or http://dx.doi.org/10.2139/ssrn.1337708: “This paper expands the debate about “active vs. passive” management using data from active and passive ETFs listed in the U.S. market. The results reveal that the active ETFs underperform both the corresponding passive ETFs and the market indexes.”
The academic literature has many papers supporting these findings.
Some active, stock-picking investors do outperform market indexes. The percentage of those who do is much closer to 0% then it is to 10%. Active investors however, enjoy the process.
Many people enjoy English, history, math, geography, chemistry and more. If they could be guaranteed 95% on an exam in any of these subjects without studying, the choice would be easy. Passive investing gets these great results with little effort. How?