Passive Fingerprints Are All Over This Crazy Market

Posted by Michael Lebowitz and Jack Scott

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This topic is not just of importance to investors. The underlying theme has serious consequences for the economy.

Passive investing is, by definition, a misallocation of capital. Stocks are bought based on market cap. Passive investors do not acquire them for their ability to create productive economic growth and generate healthy earnings streams. The more capital squandered chasing companies with low growth potential and/or are poorly run, the lower productivity growth will be.

Passive strategies have taken enormous market share from active managers over the last decade. The clues are seen in short term inefficiencies like the table shown above. One can also witness them in long term, once dependable rules of thumb.

As we have written, productivity growth is essential. Without it, the economy will continue to rely on more debt to grow. That is an unsustainable model for prosperity.  Full Article