Seeking Alpha
View as an RSS Feed

Cullen Roche  

View Cullen Roche's Comments BY TICKER:
Latest  |  Highest rated
  • The Active Passive Debate Evolves By Necessity [View article]
    Hi Roger. Been reading your stuff for as long as I can remember. Big fan. Thanks for all you do.

    Cullen
    Mar 25, 2015. 10:54 AM | 1 Like Like |Link to Comment
  • The Active Passive Debate Evolves By Necessity [View article]
    Roger, Good piece.

    Varan,

    I don't think you've understood the point I was making in my comments on passive vs active. This is very important to understand for several reasons:

    1. A growing trend in asset management is the use of the term "passive indexing" (which is little more than a marketing term) to promote approaches that are supposedly superior to "active" management. So we're seeing more and more money managers and advisors claiming to be "passive" and then charging a high fee (upwards of 2% or more) for a "passive" portfolio based on the sales pitch that passive is necessarily better than active. This is highly misleading. A manager or advisor who picks a passive asset allocation might be smarter than a high fee closet index fund, but this doesn't mean they're not making active choices that could have high costs. More importantly, they're essentially selling a high fee version of passive indexing which totally misses one of the key points about indexing to begin with - it should be low fee.

    2. Passive indexing is sold as something that is necessarily smarter than active investing. But the reality is that we are all active investors to some degree. Passive indexers aren't necessarily smarter or better at choosing their asset allocations. They just do so in a tax and fee efficient manner. But at the end of the day we all end up making consistently active decisions in our portfolios even if we just choose to pick the S&P 500 and hold it for long periods of time. This is a very active deviation from global cap weighting and is nothing more than a more diversified version of active stock picking than what someone like Warren Buffett does. But buying and holding the S&P 500 is only as smart as the future performance of that index. Whether this will end up being smarter than owning a total world stock index is based on your ability to "pick" which assets will perform better. Indexers are all "asset pickers" which is part of what makes the active vs passive debate rather boring in a world where we are all becoming index pickers as opposed to stock pickers.

    3. Politically, this is hugely important. Passive indexing is a derivative of the efficient market hypothesis. The basic premise being that discretionary intervention in the markets is misguided. But once you understand that we are all necessarily active to some degree when we deviate from global cap weighting then this point loses its significance. But this doesn't stop people like Eugene Fama and other politically motivated theorists from arguing that this "active" vs "passive" debate proves EMH correct or proves that discretionary intervention is misguided.

    The fact that more active investors underperform a pre-fee and pre-tax index is not proof of EMH. It is just math. In the aggregate we all generate the post-fee and post-tax return. The more active you are the higher your taxes and fees are and the higher the likelihood that you will underperform a lower fee and lower tax approach. This doesn't say anything about aggregate "skill" in asset picking. It is just math. Yet we continually see investment "professionals" using this strawman argument to sell their idea of "passive indexing" and promote an anti interventionist agenda. When applied to the political spectrum this thinking is not only factually wrong, but it is disingenuous.

    I hope that clarifies my reasoning for focusing on this discussion.

    Thanks for hearing me out.
    Mar 24, 2015. 12:35 PM | 1 Like Like |Link to Comment
  • 3 Things I Think I Think - Dollar Contagion And Dumb Markets [View article]
    Au contraire bon jour!!

    The fact that index funds beat more active managers does NOT prove that the market is "efficient". An index is a pre-tax and pre-fee benchmark. IT WILL BEAT EVERYONE GIVEN A LONG ENOUGH TIME FRAME. This isn't "proof" of anything. It is just math. In the aggregate we all generate the post-tax and post-fee return of the global financial asset portfolio. EMH defenders use this as "evidence" that "active" management is bad and that EMH is right, but it doesn't prove that at all. In fact, an index is nothing more than a discretionary compilation of human picked assets. They are every bit as "active" as many mutual funds. They just charge lower fees and are more tax efficient so they beat higher fee funds on average. So what? That doesn't prove anything.

    EMH is anti-government and anti discretionary intervention. Very consistent with the Chicago School from whence it came....And largely based on political nonsense.
    Mar 18, 2015. 11:12 PM | 1 Like Like |Link to Comment
  • 3 Things I Think I Think - Dollar Contagion And Dumb Markets [View article]
    Bad joke on my part. Nerd humor I guess. :-)
    Mar 18, 2015. 11:07 PM | 1 Like Like |Link to Comment
  • Voluntary Or Involuntary Unemployment? Who Cares If We Get The Solution Wrong! [View article]
    Tax cuts are great. Government spending or tax cuts essentially do the same thing - they raise the deficit which adds to non-govt saving. Reagan massively expanded real govt consumption and investment in addition to cutting taxes. He ran huge budget deficits which is part of why the economy did so well under his terms.
    Mar 9, 2015. 01:01 PM | 3 Likes Like |Link to Comment
  • Vanguard Shuns Bogle, Increases International Exposure [View article]
    @Ba1k3es,

    I don't agree that the discussion is pointless. I encounter a tremendous number of people who are actually deceived by the term "passive indexing". They think they aren't making decisions about their portfolio or, worse, I see an increasing number of financial advisors charging high fees and selling the idea that they use "passive indexing" because it performs better than "active" management.

    I think the term "passive indexing" was created by certain companies to establish brand differentiation. That is all. It's largely a marketing gimmick that misleads people about what is actually being done when they choose to actively buy an index fund.

    I think these details matter. People should understand their investment process, the necessary actions involved in it and should stop using industry jargon that is little more than branding designed to attract assets.
    Mar 7, 2015. 01:10 PM | Likes Like |Link to Comment
  • Vanguard Shuns Bogle, Increases International Exposure [View article]
    The S&P 500 is comprised of stocks chosen by the S&P Index Committee. It is not computer generated and any fund that tracks it is tracking a human construct.

    This is precisely my point. People often assume that index funds aren't "active" just because they're low fee or because they're called an "index". But the reality is that the SP 500 is about 15% of all the world's financial assets. It is a relatively small slice of the world's assets PICKED by a human committee. It is active.

    The point, which most people don't get, is that if you deviate from global cap weighting then you are active. So the whole active vs passive debate is pointless.

    Do computers pick better asset allocation models than humans? Who cares? A computer algo that picks assets is only as good as the human who wrote the algo. So we're back to square one again....It's all human discretion in the end. There is no computers vs humans. There is no active vs passive. That's all just marketing junk sold by certain companies to promote their own agenda....

    See my point?
    Mar 6, 2015. 09:45 PM | 1 Like Like |Link to Comment
  • Vanguard Shuns Bogle, Increases International Exposure [View article]
    You still miss the point. Index funds are actively managed. See the inclusion of Apple in the Dow today. Some people like to call the Dow a "passive" index because they don't know how it's comprised. But Dow Jones actively CHOSE to include Apple in the index. And the most interesting part is that stocks that are tossed from the Dow actually outperform the Dow itself. You're better off owning the stocks that Dow Jones chose not to include.

    http://bit.ly/1Fl2n3C

    The reasons index funds beat "active" managers (we should call them high fee managers) on average is primarily due to the fact that active managers are tax and fee inefficient. It has more to do with taxes and fees than it has to do with how the components are "picked".

    Regardless, anyone who puts together an asset allocation using index funds must do so by making active decisions. Even index fund investors are active investors. So the whole debate is a moot point to begin with. The "passive" vs "active" debate is almost entirely about fees and not about whether we're "asset pickers". We're all asset pickers. It just so happens that some people are tax and fee inefficient and just not very good at constructing asset allocation models....So they perform poorly.
    Mar 6, 2015. 12:44 PM | Likes Like |Link to Comment
  • Vanguard Shuns Bogle, Increases International Exposure [View article]
    This is a contradictory view. Bogle's whole model is based on the idea that financial markets tend to generate positive returns in the long-run and that worrying about the short-term is a misguided approach. Likewise, currency markets tend to generate no aggregate change in the long-run (they are the ultimate zero sum game). Therefore, justifying no exposure to currency fluctuations due to short-term fluctuations, is a contradiction in views. If this were a justifiable view, then no one should own stocks either because they're volatile in the short-term....

    So, Bogle is either contradicting himself or has a strong home bias. Either way, I think his view is wrong.
    Mar 5, 2015. 11:40 AM | 2 Likes Like |Link to Comment
  • Economics Myths [View article]
    Hi Steven,

    Good article. A couple of corrections though:

    #4 - You say "The government doesn't create wealth". This isn't actually true in any sense. From an accounting perspective deficit spending results in the creation of a private sector asset, but not a private sector liability. This means that the private sector's net worth increases in financial terms as a result of deficit spending. This is an incontrovertible fact.

    This doesn't mean that all deficit spending is good. Just like it would be foolish to think that all private sector spending is good. But the idea that govt spending doesn't or can't create wealth is incorrect.

    #5 - You have to understand my view on "money" to understand the context of the idea that QE isn't "money printing". Yes, QE creates reserves and deposits as a result of the Fed's balance sheet expansion. But QE swaps T-bonds (or other assets) with reserves/deposits. I view all financial assets as a FORM of money. That is, all financial assets have a degree of "moneyness". Stock options, for instance, can be used to pay people. Banks often use short duration instruments to settle payments. "Money" is a very broad term. And if we think of T-bonds as having "moneyness" then it's wrong to say that QE results in more money. It's better to refer to QE as "asset swapping". And QE does not alter the quantity of financial assets in the private sector. It simply changes the composition of outstanding financial assets.

    This is the primary reason why QE didn't result in the high inflation just as I predicted it wouldn't back in 2009.

    See this article on Understanding Moneyness for a more thorough explanation of the concept discussed above:

    http://bit.ly/1C4gkVI

    I hope that clarifies.

    Best,

    Cullen
    Feb 27, 2015. 10:20 AM | 1 Like Like |Link to Comment
  • Policy Decisions Are Always Discretionary [View article]
    If you promote the efficient market hypothesis you are supporting a view that is inherently anti-govt. Whether supporters of EMH actually understand this or not is not relevant. The entire underlying framework of EMH is anti government. Once you learn the economics of it it becomes abundantly clear....
    Feb 23, 2015. 03:14 PM | Likes Like |Link to Comment
  • Policy Decisions Are Always Discretionary [View article]
    @ giorgiolb,

    It's not that passive investing is antigovernment. It's that it's derived from the same basic underlying economic principles that were established by Markowitz, Fama and Friedman in the 1970's. If you really traverse the economic and finance sides of these concepts you see that passive investing has all the same core principles that laissez faire economics has....
    Feb 20, 2015. 03:42 PM | Likes Like |Link to Comment
  • Policy Decisions Are Always Discretionary [View article]
    Most of the concepts that helped develop the idea of "passive investing" have roots in the Chicago School and Efficient Market Hypothesis. In essence, you should be passive because the market is smarter than any individual and regular engagement in it is useless.

    This isn't a political statement. Study the history of Modern Finance and where the Efficient Frontier and concepts like EMH came from. If you understand the economics of the 70's and you cross over to Modern Finance you find that the frameworks are derived from the same basic efficient market type thinking.

    Some investors, like Bogleheads, claim they're doing something different than EMH believers. But they really aren't. Their frameworks are essentially identical even if Bogleheads don't strictly adhere to the principles of Eugene Fama....
    Feb 20, 2015. 03:34 PM | Likes Like |Link to Comment
  • Beware The Macro Value Trap [View article]
    "value investing", as proposed by Warren Buffett, is VERY different from "value investing" as proposed by Eugene Fama. Buffett looks at businesses as something that can be understood uniquely while Fama just used "value" as a lazy sort of way to explain discrepancy in the Efficient Market Hypothesis. I find Buffett's approach to be of some value in certain circumstances, but I find Fama's view to be a lazy case of datamining and terminological abuse to what Ben Graham originally thought of as "value investing".
    Feb 18, 2015. 01:47 AM | 1 Like Like |Link to Comment
  • The Big Lesson From A Bet With Warren Buffett [View article]
    I've actually audited hundreds of hedge funds. Most of them are not worth their fees.

    And if you need $100MM to qualify for a good hedge fund then your point is inapplicable to about 99.99% of the entire world because that's the percentage that can't even access the funds. So who even cares about those funds if no one can even invest in them? You might as well become an advocate for living on Mars. It's about as equally relevant to the discussion at hand.
    Feb 14, 2015. 11:49 PM | 3 Likes Like |Link to Comment
COMMENTS STATS
262 Comments
626 Likes