Burton Malkiel Lauds Index Funds, Ignores Latest Passive Investing Research

Burton Malkiel Lauds Index Funds, Ignores Latest Passive Investing Research

Princeton academic Burton Malkiel is well-known in finance for his support of passive investing and the efficient market hypothesis. His book, Random Walk Down Wall Street, debuted in 1973 and is currently printing its 13th edition in 2023. After delving in to modern portfolio theory and the capital asset pricing model (CAPM), the text makes the case for investing in index funds, due to the fact that active investment managers fail to outperform the market consistently.

So it should come as no surprise that Dr. Malkiel is still pushing the narrative that index funds are the best strategy for investors without acknowledging the latest academic research or the mounting risks in having a majority of individuals and institutions pursue an identical investing strategy that buys largely the same exact stocks in identical proportions.

This month, he has an op-ed in the Wall Street Journal [free registration required] that urges investors to invest passively, even though he admits that equities are richly valued based on the market’s cyclically adjusted price-earnings ratio of 30.

It is unsurprising that an individual whose career is grounded in the notion that passive investing is the one true way would ignore groundbreaking research like Gabaix and Koijen’s Inelastic Markets Hypothesis, which shows how $1 invested in the stock market increases the market’s aggregate value by about $5. The paper was published in 2021, so certainly Dr. Malkiel had time to become acquainted with this work.

In fact, Michael Green at Simplify Asset Management has argued in recent interviews that Gabaix and Koijen’s work understates¬†the effect of passive, suggesting that $1 of flows into passive investments increases the market’s value by¬†much more than $5. Stay tuned to Passive Parabellum for much more on this topic.

Suffice it to say that by not even addressing the latest academic work on passive investing in his recent piece, Dr. Malkiel looks more like an evangelist than a economist who goes wherever the facts lead him.

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