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Rekenthaler Report

3 Paths to Outperformance

Find the market's dummies, accept more risk, or use cash effectively.

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Roads to Success
Earlier this month, the CFA Institute published an article ("Active vs. Passive Investing and the 'Suckers at the Poker Table' Fallacy") that consisted of thought experiments about alternative versions of the stock market. The author, Druce Vertes, ponders how profits would accrue under different structures. For example, what if the only stock owners were index funds plus one active manager? Would that active manager fare better than in a marketplace that consisted of indexers, a single insightful active manager, and several "dumb" managers?

I enjoyed the discussion, although being a second-rate abstract thinker, I am not qualified to judge the results. (That's not faux modesty; I have no idea if Vertes' conclusions are on track.) But the discussion did get me wondering about a more manageable question: What are the possible paths to stock market outperformance in the existing world?

John Rekenthaler has a position in the following securities mentioned above: BRK.B. Find out about Morningstar’s editorial policies.

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