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Matthias Knab, Opalesque:

Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU, writes on Harvest Exchange:

In my last post, I pointed to the shift towards passive investing that has accelerated over the last decade and argued that much of that shift can be explained by the sub-par performance of active investors. I ended the post on a contradictory note by explaining why I remained an active investor, though the reasons I gave were more personal than professional. I was taken to task on two fronts. The first was that I should have spent less time describing the problem (poor performance of active investors) and more time diagnosing the problem (the reasons for that poor performance). The second was that my rationale for being an active investor, i.e., that I enjoyed investing enough that I would be okay not earning excess returns, could never be used if I sought to manage other people's money and that a defense of active investing would have to be based on something more substantial. Both are fair critiques and I hope to address them in this post.

The Roots of the Active Investing Malaise

There is no denying the facts. Active investing has a problem not only because it collectively under performs passive investing (which is a mathematical given) but also because the drag on returns (from transaction costs a......................

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