The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Investing Fashion

In his 1958 book titled The Affluent Society, economist John Kenneth Galbraith popularized the expression “conventional wisdom,” which describes the consensus opinion of the day.  He wrote extensively about how “wisdom” becomes “conventional” but not as much about how that consensus changes over time.

In the investing world, Benjamin Graham’s classic Security Analysis in 19344 gave birth to the notion that only an extensive analysis of a company’s financial statements, accounting and footnotes qualified a person to have an opinion on a particular stock.  He had charts and graphs to prove investors using his method outperformed those who didn’t.

Recognizing that the vast majority of investors had neither the talent nor the time to conduct such painstaking analysis on every stock, mutual funds were born, which substantially outperformed the typical investor.  They had charts and graphs to prove it.

As the investing fashion evolved, then came “passive investing,” which demonstrated that the average mutual fund did not perform as well as the stock market, as a whole.  While they could not demonstrate ALL mutual funds under-performed the market, they had charts and graphs to prove the AVERAGE mutual fund that actively managed their portfolio was not as good as an un-managed or passively managed index fund, which merely mirrors an index such as the S&P 500.

That conventional wisdom morphed index funds into exchange-traded-funds (ETFs), which had several advantages over mutual funds, especially on costs.  To nobody’s surprise, they had charts and graphs to “prove” that cheap ETFs outperformed the average mutual fund.

Now, the conventional wisdom or fashion-of-the-day is that the active management used by regular mutual funds improves the performance of passively-managed ETFs.  And, they have charts and graphs to prove it.  Benjamin Graham must be smiling . . .

While I cannot predict hemlines or the next investing fashion, I can predict they will have impressive charts and graphs to prove . . . whatever!