Active vs. Passive Management
By Rex A. Sinquefield
The following paper is a transcript of Rex Sinquefield's opening statement in debate
with Donald Yacktman at the Schwab Institutional conference in San Francisco,
October 12, 1995.
Let us agree on what we are debating, discussing and disagreeing about: active vs.
passive management. Active management is the art of stock picking and market
timing. Passive management refers to a buy-and-hold approach to money
management. It can be applied to any asset class: big stocks, small stocks, value or
growth, foreign or domestic can all be accessed by passive techniques. Neither
label, "active" or "passive," is perfect, and there will not always be a complete
dichotomy between them. In any event, this is a debate about both market behavior
and investor behavior.
With respect to market behavior there are, at the extremes, two views. At one
extreme is the well-known efficient market hypothesis which says that the prices
are always fair and quickly reflective of information. In such a world neither
professional investors nor the proverbial "little investors" will be able to
systematically pick winners... or losers. At the other extreme is what I'll call the
market failure hypothesis. According to this view, prices react to information slowly
enough to allow some investors, presumably professionals, to systematically
outperform markets and most other investors.
At the level of investor behavior, this discussion deals with how a financial advisor
should handle his or her clients' money. It is my contention that active management
does not make sense theoretically and isn't justified empirically. Other than that, it's
O.K. But it's easy to understand the allure, the seductive power of active
management. After all, it's exciting, fun to dip and dart, pick stocks and time
markets; to get paid high fees for this, and to do it all with someone else's money.
Passive management, on the other hand, stands on solid theoretical grounds, has