Thanks to an invite from local bloggers, I had the pleasure of listening to Larry Swedroe speak earlier this week, discussing the numerous merits of passive investing.
For those who don’t know much about Larry, he is the Principal and Director of Research for Buckingham Asset Management. Larry is also an accomplished author who has published 11 investment books, has appeared numerous times on CNBC and runs a popular blog called Wise Investing. His most recent book, The Quest for Alpha is now available and I have a copy.
When it comes to passive investing or investing in general, Larry knows his stuff. So, when I had the opportunity to hear Larry speak on Monday night, I jumped at the chance.
During Larry’s 75-minute presentation in Ottawa, hosted by the fine folks at PWL Capital Inc., I took a few notes. Here are some of my takeaways from that event.
Larry on types of investors:
Investors fall into two basic categories: active investors or passive investors. Active investors believe in trying to time the market and pick winning stocks. Passive investors believe in capturing the returns markets provide and do so in a low-cost, tax-efficient manner. Larry strongly believes, based on overwhelming amounts of evidence, data and his own research that most individual investors are far better off using passive investing versus active investing. He gave an example of a Mensa investing club who underperformed the stock market by almost 13% per year for 15 years.
Could you do better than a Mensa club? No way I could.
Larry on efficient or inefficient markets:
Conventional wisdom says that markets are inefficient – you can add value (and more returns) to your portfolio through careful stock selection and market timing. You can get “alpha”. Modern Portfolio Theory (what Larry believes in, what Buckingham Asset Management and PWL Capital believes in) says markets are efficient. This means you always get the best estimate of the correct price by following the market and thus, efforts to try and outperform markets are highly unlikely after trading costs or other expenses. He gave an example by saying: “Anyone here ever buy just an average mutual fund or stock?” Of course not, he added, “you only buy what you think is the best investment right?”
Larry on stocks, brokerage houses, active management and more:
“90% of stocks are sold by institutional not individual investors. Think about that the next time you buy a stock.”
“The brokerage world will always tell you ‘we can do better’.”
“If you invest in actively managed funds, you have the hope of outperformance. However, the evidence demonstrates that it is the triumph of hype, hope and marketing over wisdom and experience.”
When asked by an audience member how to plan for today’s markets, Larry said “Take virtual certainty that there will be many more crises like these. Today’s markets are normal. Expect uncertainty – construct your portfolio that way. My crystal ball is always cloudy.”
No doubt I subscribe to the premise of Modern Portfolio Theory, but I have to admit I was a little taken back by Larry’s aversion to owing and holding stocks in a DIY portfolio. He said it was a game you’re certain to lose playing. OK, I get that markets’ process information much more rapidly than I ever could and I certainly don’t have an ounce of the brainpower large pension plans or institutional investors have or will ever have, but I find it hard to believe that avoiding some Canadian bank stocks (for an example) is not a decent long-term investment. Some Canadian financial stocks have been paying dividends; income, for over 100 years! Will that occur for the next 100 years? I don’t know, but for a part of my investment portfolio, I’m willing to take that risk.
In closing, I’m a big believer in passive investing. Almost all of our RRSP holdings are constructed with index products. But I don’t discredit the value and place holding established dividend-paying companies have in my portfolio, building passive income as time goes on regardless if the market goes up or down. At least not yet.
What’s your take on passive investing? Is that the Holy Grail of investing staring us all right in the face?
Do you believe some stock selection, particularly dividend-paying stocks have their place in a portfolio?
Tell me what you think!