Practical analysis for investment professionals
02 September 2016

Weekend Reads for Investors: The Passive vs. Active Debate Continued

Posted In: Weekend Reads

I have many stories for you this month, so out of deference to your busy schedules and to get you to the non-work part of your weekend faster, let me jump immediately to the reads!

Passive vs. Active Investing

The cold war between passive and active investing has heated up considerably in the last two years. For the record, I am a staunch supporter of active investing . . . and passive investing. However, I believe that there are few actual active managers, and that many of them routinely shoot themselves in the foot (see my extended Alpha Wounds series for the deep dive). (Enterprising Investor)

I also believe it is very difficult for the average retail investor to identify superior active managers. I do not, however, think this is the direct responsibility of active managers. Passive investing has one large advantage over active that is difficult to overcome — expenses. Because expenses are explicit and returns implicit, it is tough to win the expense argument. I believe that there is still huge opportunity for active managers to improve their results, if only they would adhere to the tenets identified in this interview with C. Thomas Howard. (Enterprising Investor)

Also, I do not agree with the recent refrain from some commentators that active investing should be defended (and legislated) as a necessary public good. Active management should defend itself by returning its focus to client goals and how to achieve them, rather than solely on how to most quickly acquire assets under management (AUM) via marketing. True passive investing can lead to unintended consequences, such as this pension fund’s massive ¥5.3 trillion loss that is tied to management’s passive strategies. (Bloomberg, Japan Times)

One thing active managers can do to improve their returns is to actually do the research. Believe it or not, in this era of BIG data and artificial intelligence (AI), a human being’s unparalleled ability to contextualize and to think creatively still results in insight, not just data. Don’t believe me? Check out this story of how one of Lending Club’s biggest fans uncovered some shady loans using his brain — gadzooks! (Bloomberg)

Another opportunity for active investors is to look at areas with poor digitization of data, poor data gathering, and low liquidity. Surely this is the purview of only the craziest of emerging market funds, right? No! As this story makes clear, large pension funds are changing portfolio composition to contend with the current investing environment. (Financial Times)


The most remarkable thing about the current investing environment is that the words of global central bankers are the only factors that matter. How else can you explain equity markets rising despite five consecutive quarters of declining earnings? Maybe anxiety about earnings is finally about to become important. Who knows? (FactSet, Wall Street Journal)

You know that the only reason corporate performance looks good is because of a denominator, right? That denominator is share count. Buy back enough shares and you can manufacture almost any earnings per share (EPS) number you want. Too bad that EPS serves as a proxy for business performance, otherwise investors, traders, and others might start to focus on critical competitiveness issues. Thankfully, there are steps to take analytically to tell the difference between real business performance and fakery. (The New York Times)

Here is a story about something critical to your job that rarely garners any attention from investors: trade settlement. Did you know that there is now only one firm settling US Treasury transactions? Yes . . . only one. The ramifications of this are potentially huge. (Wall Street Journal)


Have you noticed that Bloomberg is quietly (and successfully, I’d say) remolding itself as the 21st century’s business news provider? I am routinely impressed with its news coverage and especially the format of its website. Very well done! Furthermore, Bloomberg is covering interesting stories, including this one about the hunt for new ways to measure the success of economies across the globe. (Bloomberg)

Have you ever wondered about the size of the global capital stock? Ever wondered about the proportion of the global capital stock we cannot observe? Fortunately, several ace researchers have tried to tackle the problem. (Social Science Research Network)


Recently I added Medium to my list of news sources. In particular, I like its emphasis on purpose-led organizations that focus not just on profits, but also on how to better the world through economic activity. In large part, this requires technological innovation plus new business models and new business philosophies. Here is a curated list of 10 types of innovation for your consideration. (Medium)

I am not sure what to make of this piece that summarizes a new thought by mad man Ray Kurzweil. In short, he believes that the mind and the brain are simply organically based computers. He further believes that researchers are close to replicating human consciousness electronically. Maybe. Though, as I have written before on Enterprising Investor, I believe he and other researchers lack an understanding of quantum physics, and therefore operate with a false model of consciousness. In any case, Kurzweil believes that people will be able to purchase extra brain capacity via cloud-computing-accessing mobile devices. Since access will cost money, it means that the rich will have yet another leg up on the poor. What a very science-nonfiction era in which we live! (VentureBeat, aeon, Enterprising Investor)

Behavior and Psychology

This article features the work of my friend, Denise Shull of The ReThink Group. Shull and I became friends because of our mutual interest in the mind, and how understanding it can lead to better decision making for investors. Here, Shull and The ReThink Group have their day in the sun. I believe you will find their work of benefit. (Bloomberg)

I found these PowerPoint slides presented by Werner Erhard and Michael Jensen about how to create tomorrow’s leaders terrific. I hope that you do, too. Many of the skills discussed are “soft skills,” which employers are finding increasingly in short supply. Did you know that CFA Institute has an inventory of soft skills content? (Social Science Research Network, Wall Street Journal, CFA Institute)

Fun Stuff

Investors are a renaissance lot. In order to succeed we cannot just be specialists. In fact, we need a broad knowledge base. So this story is a way to widen your horizons, and I am certain it will lead to interesting discussions between men and women. Research by some scientists suggests that “Men May Have Evolved Better ‘Making Up’ Skills.” Why? To avoid prolonged and deadly conflict. If you disagree, I can already see how and why . . . wars. (BBC)

Last, should you use dental floss or not? A recent study says its benefits are unproven. I feature this story because it highlights an ongoing issue with conventional wisdom: that what is oft repeated does not necessarily make it so. Or similarly, just because experts say it’s so doesn’t necessarily make it so. (BBC)

Enjoy the waning days of summer in the Northern Hemisphere and the waning days of winter in the Southern Hemisphere!

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

7 thoughts on “Weekend Reads for Investors: The Passive vs. Active Debate Continued”

  1. Savio Cardozo says:

    Hello Jason
    I read with great interest your post on the active versus passive debate as I am on the far right of the active spectrum.
    If I may add a thought, I would lke to rephrase this debate as the fundamentals versus the quants.
    Much like the question that Vanguard poses of can you beat the indices (before or after expenses) I think that competing with the low cost base of quants will be difficult for active managers.
    In my research I have discovered that mean-variance optimization (adjusted before and after the fact for the many excellent variables espoused in the CFA program) will consistently outperform the best of the best fundamental guys – consistency over the years being the key – on both an absolute and sharpe ratio (risk) adjusted basis.
    I trust you had an enjoyable summer – I absorbed every blazing moment of it as I am confident that I will need this in the winter ahead.
    Kind regards and a pleasant long weekend

    1. Hello Savio,

      Thank you for your comments, as always. I think if the business models of active managers remain what they are then, yes, it is difficult to compete against passive funds. However, passive funds also underperform the benchmarks, too, by their expense ratios; and this result is guaranteed. I remember all of your work on application of CFA Institute fundamentals relative to other active managers and passive managers, too.

      The encroachment of winter is approaching…ugh!


  2. Well written…thanks for your commentary on this mosaic of thought!

    1. Hello Dominique!

      Thank you for taking the time to share your thoughts. I hope to continue to provide valuable information to you.

      Yours, in service,


  3. Julia Clark says:

    Hi Jason,

    Lots of interesting food for thought, as always. Are there any books or articles that you would recommend on the idea of non local consciousness? I’d like to find out more.


    1. Hello Julia,

      There are books about this subject, and they range from easy to understand, such as Dr. Amit Goswami’s “The Self-Aware Universe,” and “The Holographic Universe” by Michael Talbot; to the ‘written for knowledgeable quantum physicists,’ such as Dr. Henry Stapp’s “Mindful Universe.” Of these, I would start with Goswami’s. There are maybe 20 or so others I could name, but this is a good fundamental base for this topic.

      Yours, in service,


  4. Julia Clark says:

    Thank you Jason – will look forward to taking a look at those.

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