Greenblatt on Why Passive, not Active, is Best for Most Investors

“I think the big move now is from active [investing] to passive, and that’s good for most people,” says Joel Greenblatt, Managing Principal of Gotham Asset Management and the guru Validea’s “Earnings Yield Investor” is based on. In a recent interview with CNBC, Greenblatt shared his opinion that “most people shouldn’t be picking individual stocks unless they know how to value businesses. That’s hard work, and a full time job.” When it comes to selecting active funds, investors are faced with challenges as well. For example, investors need to use their judgement and research to determine which fund managers are good and worth investing with. “That comes down to understanding and believing that their process makes sense,” he says, “and most people aren’t qualified to do that either.”

Greenblatt, an active fund manager himself, says that index funds generally do better than active managers, “not because they’re smarter, but because they make less mistakes.” Both active managers and index funds, he explains, experience rapid inflows and outflows of dollars when the market goes up and down. The difference for index funds, however, is that the fund performance factor is removed from the equation. That is, because index funds track market benchmarks, dollars don’t move in and out due to underperformance or outperformance against the market. So those fund managers, Greenblatt quips, “make half as many mistakes.” His bottom line? For most people, passive investing is a good way to manage their investments in the market.