QOTD: Cliff Asness in defense of indexing

A central complaint hurled at indexing has long been that it piggybacks on the work of others. Others -- in this case, skilled stock pickers -- put in the work to set accurate prices. Then the free riders come in and use these prices themselves without putting in any work at all. The shame!

What is left out of these complaints is that this isn't something specific to investing or active management. For most of the goods and services we all consume, we naturally rely on existing market prices that we made no effort to determine ourselves. Some of these prices come out of an implied auction process and the so-called wisdom of crowds. But many are the result of explicit calculation, research, judgment and the effort put in by only a few of us. If a magazine such as Consumer Reports does a good job reviewing air conditioners and its influence is felt in the marketplace, vast numbers of purchasers of air conditioners benefit.


Cliff raises an interesting point that was not brought out in last week’s discussion of the original Bernstein note that launched a thousand blog posts.

Read more about that here: Bernstein: Passive Investing Is Worse for Society Than Marxism (Bloomberg)

We rely on market signals in virtually all facets of the real economy – signals that are largely not of our own making and that are generated by the activity of others. What’s so important, therefore, about consumers creating their own signals in the course of their asset allocation decisions?

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