Passive Management: “It’s not a hypothesis – it’s arithmetic”

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

Eugene Fama, University of Chicago Booth professor, Nobel Prize winning economist and legendary whistle blower on active investment, is one of my heroes. This video produced by Dimensional, the U.S. investment firm that Fama has been a board member of since their first day over 30 years ago, celebrates his role in the evolution of modern finance.

Fama, a pioneer of extensive research on stock price patterns, has been leading the conversation on predictable markets since 1970 with his Efficient Markets Hypothesis. This asserts that prices reflect values and information quickly and accurately and that it is difficult, if not impossible, to capture returns in excess of the market without taking greater-than-market levels of risk.

If that sounds a bit hard to follow, he states it in the video very simply: “If there are smart active managers making money, they have to be making money at the expense of poor active managers, because passive managers are at a gain. They don’t respond to the actions of active managers”. The principle hypothesis that markets work well dramatically reduces the scope of investors to beat the market. The empirical evidence Fama says “is not a hypothesis, it’s arithmetic”. That’s why the majority of active managers fail to deliver on their market beating promise.

At Quadrant, we don’t try to beat the market. Rather we aim to capture as much of the market return on offer as possible, without taking unnecessary risks. Deciding which risks to take and which risks to avoid forms the core of our philosophy and determines the structure of our client portfolios.

Our WealthQuadrant financial planning process will allow you to sleep at night, so you can be as energetic as Fama at 75.

This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Andrew Pereira

Director, Wealth

Andrew has been working with families, high-net-worth clients and business owners for well over 20 years.

Learn more about Andrew Pereira