My 2 Cents on Active versus Passive and Tony Robbin's "Money"

I'm working my way through Money, Master The Game by self-help guru and motivator supreme Tony Robbins.

One claim he continually makes is that passive management, using low-cost indexes, beats active managers who try to time the market and/or pick stocks, 96% of the time.

I think most people would agree that Tony Robbins is an exaggerator of the highest degree; and this, in my opinion, is an example of it.

Interestingly, there is no definitive percentage of active management underperformance.  When people throw out a number, they are basically referring to an average of numerous studies using various approaches.  Whether active managers can beat the market has been studied by academics, i.e. non-partisan researchers, for various time periods, various asset classes, and even for different countries.

My belief, from studying the results, is that passive wins 70% to 80% of the time over longer periods after all costs are taken into account.  If this is closer to the truth, then there are a fairly large number of managers and individuals beating the market by actively investing.  For every 1,000 investors in this category, 200 to 300 fall in this special group.

But, still the odds obviously favor the passive approach for most investors who are saving for their retirement.

I break it down to simple terms when I explain this to people trying to get to a successful retirement.  I say the active versus passive decision is like trying to draw a blue ball out of an urn that contains 200 to 300 blue balls and 700 to 800 red balls. Is this what most investors want to attempt when it comes to their nest egg?

Another point to understand, that Tony Robbins I think misses, is that many people who have underperformed just don't know it and actually believe they are doing well.  Consider that a simple 65% stocks/35% bonds portfolio more than quadrupled over the past 20 years.  For someone whose manager has tripled their assets over this period, he/she will likely feel they have done well.  In other words, they are clueless how much their manager has taken in fees and/or underperformed!  Probably they will go around touting their manager as a superior investment manager!

Keep in mind that there are always people who break the rules and win big.  In one of my favorite books, Rocket Boys, the memoir by Homer Hickam, the mother put every last cent in Johnson & Johnson stock because she saw all the kids in the neighborhood constantly needing bandaids etc. for their recurring scrapes.  She undoubtedly would look befuddled at the mention of diversification.  But her one stock approach bought her a nice place in Myrtle Beach!
 
A final point made in this ongoing debate is on the failure of superior performance to persist.  This means that picking the 200 to 300 market beaters over the last 10 years is futile.  What is generally missed, however, is that some percentage of the underperformers from the first 10 years will outperform by such an extent over the next 10 years that they will be superior performers over the 20 years!  Like zombies they come back!

Other than the irksome (to me) percentage, Tony Robbin's book is interesting albeit way too long and too much of a pump-it-up infomercial for my tastes.