I gave John Bogle the “active investor” business earlier this week when I said he is an active investors in passive clothing so this recent article from Burton Malkiel deserves the same treatment. In this Bloomberg interview Malkiel says:
Bloomberg: We’re into the season of the “year ahead” predictions. How useful do you think those are?
Malkiel: There isn’t anybody who can tell you what’s the best asset class for 2015. Nobody. I’ve never known anybody who can time the market. I’ve never known anybody who knows anybody who can consistently time the market.
Yes, don’t people wish they’d avoided Malkiel’s politicized predictions in 2014! Last year at this time Malkiel wrote an article for the Wall Street Journal in which he stated that Treasury Bonds would perform terribly in the upcoming year:
“Governments wrestling with large budget deficits, huge unfunded liabilities for entitlement programs, and high unemployment rates have adopted policies of keeping interest rates extraordinarily low.
Ten-year U.S. Treasury bonds yielding 3% provide neither generous returns nor an adequate margin of safety to make a shift from equities to high-quality bonds an unambiguous risk-reducing strategy.”
That couldn’t have been more wrong. The 10 year T-Note has generated over a 10%+ return in the last 12 months with absurdly low volatility. The long bond has done even better with returns over 25% in 2014. Malkiel kept investors out of the best performing asset of the entire year by going against his own “passive” methodology! Instead, he chose to let his political bias invade his thinking.
Malkiel goes on in the Bloomberg piece saying you should avoid advice that results in home bias, but why then does Malkiel advocate avoiding the world’s largest bond market (the US government bond market)? I guess Malkiel is okay with foreign bias in bonds, but if you have a bias in equities then you’re doing it all wrong. Or maybe Malkiel’s view is being exposed for what it really is – a political bias? Look, we all make implicit forecasts in constructing a portfolio of any type and there are bound to be errors along the way. That’s fine, but the contradictions here are part of a much bigger problem.
You see, Malkiel is just another Efficient Market guy who hates the idea of government debt and discretionary spending and has spent his life building strawman arguments that make his finance work appear consistent with his underlying economic and political work. And this ultimately gets into the nasty underlying foundation in the “passive indexing” and “efficient” market thinking – these people aren’t working with a sound underlying theoretical framework. They have constructed a political view of the world to argue against discretionary intervention in the markets without realizing how often they contradict themselves. This sort of political bias in finance and economics is extremely dangerous as it often leads to false conclusions.
Theories like the Efficient Market Hypothesis are not internally consistent. They are theories created by people who hate the government and discretionary intervention and who claim that “the market” is some all knowing all seeing thing that is smarter than anyone who tries to intervene in a discretionary manner. And they’ve relentlessly strawmanned people like mutual fund managers in an effort to make their political points appear statistically valid. It’s a bunch of politicized nonsense that needs to be taken out back and put to rest.
Don’t get me wrong – I am a huge advocate of low cost indexing and I greatly respect Burton Malkiel’s work, but I do fear it has a strong political bias that is counterproductive. You see, there’s an undertone in the Efficient Market Hypothesis and the rationalization for “passive indexing” that is both internally inconsistent and politically destructive. Exposing this sort of contradictory commentary is only a starting point for exposing much larger inconsistencies that have persisted in the world of finance and economics for far too long.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.