[lend000]

Active investing is not the same as day trading. Most people do not realize that "passive investing" is basically zero sum (albeit harder to calculate because of being stretched over long periods where inflation becomes significant), just like short term trading. Value creation only comes from active investing (long term focused, but active and researched). The kind of active investing that Warren Buffett does is more similar to what VC's and private equity firms do than someone who buys and holds an index, spreading their money evenly across all big companies without any regard to which companies are deserving of investment.

[kulkarnic]

Passive investing isn't zero sum - it's positive sum. If you could buy a fraction of earnings from every business in the economy (i.e. both businesses that currently exist, and future businesses that are founded in the future), then you get a rate of return that is roughly the growth in GDP.

Concentrated portfolios are also positive-sum, and have returns higher than passive investing if you are smart or lucky.

[lend000]

Passive investment has been a good strategy for collecting wealth, but it adds no value to society. Instead of efficiently placing capital to generate new wealth, you are spreading just as much capital to companies that will fail or squander their current valuation as companies that will succeed and should have more capital. It's only more profitable than mutual funds because ETF's have lower fees due to special tax rules around rebalancing. Add in that the capital gains tax bracket is significantly discounted and that the Fed will rescue the stock market at all costs, and you have a solid 8% annual growth (but as a result of a misaligned economic system, not because your money is actually contributing to GDP).

Putting your money in the bank is probably a better contribution to the economy (because banks have trading desks dedicated to more efficiently allocating capital), although it is a terrible personal investment strategy in today's low interest, inflationary environment.

I just want people who demonize active investing to understand that their passive investment strategies contribute less or equal value to society, contrary to popular belief.

[lionhead]

That makes no sense. Trading desks at the banks are not dedicated to "efficiently allocating capital", they are there to turn a profit no matter what. What's good for a trading desk might not (and often is not) always good for the economy.

You say that passive investment provides no value to society because it provides capital for failed and successful businesses equally. But there you said it: it contributes capital to companies that will succeed. How is this "No value to society"?

>It's only more profitable than mutual funds because ETF's have lower fees due to special tax rules around rebalancing.

No, it's the other way around. It's because ETFs have been found to be more profitable on average than mutual funds, that it was heavily incentivized to invest in them. ETFs are profitable for structural reasons, because it's really hard to beat the market on average.

[lend000]

> it contributes capital to companies that will succeed. How is this "No value to society"?

Because pumping up the market value of a "bad" company contributes negatively (not zero) to the economy. Any benefits that a future innovative company would reap from your capital are canceled out by the same benefits that their wasteful competitors reap for talent and secondary stock offerings (which can be spent on anything, potentially bidding up prices of raw materials, real estate, etc. for the "good" companies).

Is it a perfect 1:1 cancellation? Probably not, but it requires too much data for either of us to calculate it directly. But a fair assumption is that blindly investing in the entire stock market via a passive index, even if you are hugely wealthy, has negligible benefit to GDP, compared to active investing (assuming you are good at it).