The irrefutable defense of passive investing by one famous active fund manager

Most of you probably know that Buffett has often made the case for passive investing, which might be surprising regarding his own track record as the smartest active manager on earth.

But he is not alone…

Monish Pabrai, another famous active fund manager and follower of Buffett, Munger and Graham, explained the reason why people should consider passive investing.

Excerpt from his book The Dhandho Investor:

« Mutual funds as a group are so large that in aggregate they look like the market. Thus, if there were no trading costs and fees associated with mutual funds, as a group, they’d deliver returns that would match the broad equity market indexes. In this scenario, 50 percent of assets would lag the index and 50 percent would outperform, but we are not in fantasyland. There are very real frictional costs to investing in an actively managed mutual fund. When you factor in these fees of 1 percent to 2 percent a year (plus trading commissions), it is all but certain that 80 percent to 90 percent of mutual funds are likely to lag the broad indexes over the long-term. Said another way, just 10 percent to 20 percent of funds beat the broad indexes over the long haul. Because of these fundamental facts, investors are better off investing in an index fund versus most of the actively managed mutual fund univers. »

Point taken.

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