My personal take is that both schools of thought are correct.
- But Malkiel and Bogle have incentives to push their brand of passive, dollar cost averaging via indices or benchmarked funds for monetary reasons: Wealthfront and Vanguard. And active managers are right too in the potential to find inefficiencies to generate alpha. And they too are monetarily incentivized to argue for their brand of investing.
- But at the end of the day, for me it comes down to chapters 8 and 20 of The Intelligent Investor. Human emotions. As humans we think we are individually different and special, but we all have similar emotions that drive our behavior. Hence, even if we think we are doing something different, our common, underlying emotion to overestimate our luck and skill to make money, pick lottery tickets or time the future, is a shared emotion and cause us to act more similarly than we wish to acknowledge.
- Passive index investing solves this by taking human emotion out of the equation via dollar cost averaging and buying regularly regardless of the valuation in the markets. But there is a big assumption in what they say - would this have worked in other markets outside the US over the last 100 years? What Bogle and Malkiel imply in their brand of passive investing is assumed growth in US GDP. This has worked thus far. If they are (now) pushing other markets, they are assuming growth in GDP of those markets whether they say it or not.
- Active investing solves the human emotion problem via data and analysis and practice that reduces our sense of uncertainty about future outcomes. So if the data and analysis, instead of our ego, fear, greed, need to follow the herd, etc. override or mitigate our human behavioral tendencies and drive our decision making process, then we may have a shot in actively outperforming. But this takes time. It takes time and energy more than smarts.
- For instance the easy path is to have others form opinions for you or reinforce what you already feel or believe. You're a republican so you watch FOX and feel reinforced. You're a democrat so you read the NYT and feel reinforced. The easy path is not to read the primary sources, much less research the other side's point of view. After a hard day's work, who has the time and energy to do such things? The easy path is to watch Cramer or listen to your friends' stock picks or chase returns by extrapolating the recent past.
Jim Rogers once said:
The best advice I ever got was on an airplane. It was in my early days on Wall Street. I was flying to Chicago, and I sat next to an older guy. Anyway, I remember him as being an old guy, which means he may have been 40. He told me to read everything. If you get interested in a company and you read the annual report, he said, you will have done more than 98% of the people on Wall Street. And if you read the footnotes in the annual report you will have done more than 100% of the people on Wall Street. I realized right away that if I just literally read a company’s annual report and the notes — or better yet, two or three years of reports — that I would know much more than others. Professional investors used to sort of be dazzled. Everyone seemed to think I was smart. I later realized that I had to do more than just that. I learned that I had to read the annual reports of those I am investing in and their competitors’ annual reports, the trade journals, and everything that I could get my hands on. But I realized that most people don’t bother even doing the basic homework. And if I did even more, I’d be so far ahead that I’d probably be able to find successful investments.