The Earth Does Revolve Around the Sun
Professors of Finance
Western Kentucky University
March 23, 2010
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The evolution through which the literature on passive investing has gone is striking. Early writers started out with a point to prove: that passive investing is the only way to invest that makes sense. Today, the writing in this area has moved beyond “proving a point” to expanding on what is a settled issue.
The issue was settled by William Sharpe’s 1991 Financial Analysts’ Journal short article, “The Arithmetic of Active Management.” Of course, others like John Bogle had been making Sharpe’s argument for some time, but he was able to show the logic of why passive investing must work without resorting to data mining to prove his hypothesis. Of course, his Nobel laureate status added heft to his argument.
The books we review below, then, are the ones that essentially take passive investing as a given and expand to consider other aspects of investing over one’s lifetime. The passive approach is a long-term approach, and all of the sources we mention below are dedicated to investing for the long term.
Further, several of the books we discuss below in some way respond to the recent conflagration in the stock market. As one would expect, we’ve lately seen no small outpouring of advice about the inefficacy of passive investment management — many have gone so far as to one more time pronounce the death of the passive approach. The early data on fund flows suggest, however, that passive investors have remained true to their approach, and not fled to the beckoning arms of the active managers. That restraint is to the credit of the authors who have continued to make the case for passive investment, and who are doing a service to the investing public.
Fairness and common sense requires that we start with John Bogle’s recent (2010) update of his 1999 classic, Common Sense on Mutual Funds. Bogle uses the very effective technique of inserting highlighted sections labeled “Ten Years Later,” in which he updates a specific topic at that point in the book. Similarly, with data tables he highlights the updated data. This is a comprehensive book and essentially covers the waterfront of investing in general and passive investing in particular. Bogle has, of course, written numerous books, blogs, etc., in his tireless quest to make the passive approach the norm.
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