Paul Meloan – Vested Interest

What is the opposite of religion?

I had to think about this the other day.  In a discussion with a professional at a different firm, the conversation turned to the classic investment question of passive versus active management.  If you know the argument, skip ahead three paragraphs now.

A “passive” investor believes that the most an investor can ever hope to earn over time is the market return itself, minus costs.  It has nothing to do with being aggressive or conservative.  A passive investor can be either one, but he cannot believe in any expectation of excess return over the market over time.

An “active” investor believes things like research, insight, market timing, and security analysis yields higher returns.  One thing is for certain: all of those things raise the cost of investing.  What has not been proven is if it can raise expected returns.  In fact, all of the evidence thus far makes a highly persuasive case that it does not.

When it came to the argument, he knew our shop to be fairly “religious” (his term, not mine) in our adherence to passive investing.  I let the comment stand without challenge, but now I wish I had said something different.  I knew he meant to say how devout we were to the cause, but his comment still got under my skin a bit, and it took me a few days to determine why.

Our investment philosophy, in fact, is the opposite of religious.  (I say this as an ordained elder of the Presbyterian Church; I do not consider it an insult to be accused of being religious).  Presbyterians believe, among other things, that the sole route to salvation is faith.

There is no faith in our investment philosophy.  There is only evidence.  It seems logical that faith has to begin where evidence ends.

Our counterparts who believe in active management must continue to do so based only on faith, as the evidence now mounts over multiple decades that there is no persuasive argument to make active management attractive.

Does it require faith to believe that water poured from a glass will fall downward?  The laws of gravity provide the necessary evidence to make faith redundant and useless.   Scientist Neil deGrasse Tyson scored points with me by saying the beautiful thing about science is that it is true, whether you believe in it or not.

Investing based solely on the evidence without regard to faith must therefore be the opposite of  ‘religious.’

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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