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Two weeks ago Roger Schreiner of Schreiner Capital Management wrote, The $100,000 Challenge to Passive Managers. Last week, Dave Loeper of Wealthcare Capital Management responded to Schreiner’s challenge saying he "stacked the deck" to make his challenge un-winnable, and offered his own, $2 Million Charity Challenge to Active Investors. The following is in response to Mr. Loeper’s article.
Last week David Loeper accused me of “playing a shell game” and “stacking the deck” in my $100,000 Challenge to Passive Managers. He attempted to discredit me by misinterpreting and misstating the rules of my challenge. The rules I laid out are simple, but you wouldn’t know it by reading Loeper’s criticism. I was clear: “In order to win the contest, a portfolio must have both higher return and lower risk. To calculate risk and return, we will use the statistical measures of total return and daily standard deviation.”
If the playing field isn’t level, it’s because of the ridiculous burden that every passive investor imposes on himself! By definition, a passive investor has no flexibility. They rely on diversification as their only risk management tool, a problem I wrote extensively about in a recent article, Diversification is Not Enough.
A passive portfolio has no escape plan, no way to effectively manage risk in a systemic crisis, and no way to defend itself against a market crash. Passive investors place their unwavering faith in the stock market, close their eyes and cross their fingers. The fact that passive investors do not allow themselves the ability to move to cash is their choice, not mine! Is that what you call stacking the deck, Mr. Loeper? The burden of the passive investor’s own choice? It’s ironic that active management is said to be more risky. In reality, the opposite is true.
One thing I have learned in my thirty years as an investment advisor is never to make a bet unless the odds are in your favor. Only a fool bets against the odds. If a passive investor is willing to relinquish control over their portfolio while allowing me to actively manage mine, I’ll make that bet any day.
It has been 193 days since John Bogle received my challenge by certified mail and almost six months since I opened my challenge to all passive investors. So far, no one has accepted. As I expected, a few people, including Mr. Loeper, have criticized me. But talk is cheap. As I stated in my original challenge, more debate cannot settle the longstanding dispute between active and passive investors. It’s time to put up or shut up.
Passive investors continue to miss the point. Any approach that willingly accepts losses of 30, 40, 50 percent and more is reckless. Active management may be difficult, but that’s no reason to assume unnecessary risk. Passive investing is not something to accept just because the alternatives require hard work and skill.
