Against Passive Investing

Martin Whitman of Third Avenue Funds and the rest of his team spend a lot of time in their 2014 Fourth Quarter shareholder letters explaining why deep value investing such as theirs is better for investors than passive index investing. They point out that passive investing becomes more popular after long bull runs, such as the current one, when stock investing seems easy and safe. The also levy specific criticisms of the factors many use to tout passive investing.

To prove that fundamental research is useless for passive market participants, EMTs correctly point out that no active investment vehicles (from Mutual Funds to ETFs) outperform a market or benchmark consistently. Consistently is a dirty word meaning all the time. Consistency is an absolutely phony test because it de facto imposes a short termminvestment horizon. The most any active investor (or any investor for that matter) can hope to achieve is to outperform (or at least equal the performance after fees) most of the time, on average, and over the long term. Some mutual funds, such as those managed by Third Avenue, are value funds where buy, sell and hold decisions are made based almost wholly on examining in depth companies and the securities they issue. Other mutual funds are run by high volume traders who place primary emphasis on forecasting near term market movements and near term security prices. Many value funds, including most of those managed by Third Avenue Management (TAM), do outperform most of the time, on average, and over the long term as was demonstrated to investors at the October 2014 Third Avenue Value Conference. I do agree that the average mutual fund which concentrates on forecasting markets and security prices probably has a very tough time trying to outperform consistently. But those Funds are not TAM Funds.