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Automatic Bid: Flows from Active to Passive

Research from Arizona State professor Hendrik Bessembinder looked at how equities performed versus treasuries from 1926 to 2016. Bessembinder found that only ~4% of companies made up virtually all value created (and returns generated) over the 90-year period. In each group of 25 stocks, roughly 24 (96%) did not outperform treasuries.

This work effectively invalidates the idea that stocks broadly outperform government bonds. Only a very select number of stocks outperform. The study also gives ammunition to evangelists on both sides of the passive-active debate. One could say it makes little sense to index into a large, broadly diversified set of equities when only a small portion will do well over time. Another might rightly retort that one must be able to select ex-ante which those four percent of outperforming equities.

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2022 Investor Letter II (Fall)

A preview of our second investor letter for 2022. Click here to read the full letter. “In order to outperform, by definition, you have to depart from the crowd. You have to hold a different position.


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