Analyzing Securities Is Becoming Futile in the Era of Passive Investing

CFA Enrollment Plummeting as Analyzing Securities is Becoming Futile

The CFA or Chartered Financial Analyst designation has long been the gold standard for professionals in the investment industry. To earn the CFA credential, candidates must complete a three-level program covering topics such as ethical and professional standards, investment tools, financial statement analysis, and portfolio management. Individuals also must have relevant securities industry experience to qualify.

The course is self-study (no classroom attendance required) and the exams have a reputation for being notoriously difficult and for requiring many hours of reading and practicing problems from dense textbooks.

However, in this era of passive domination of the financial markets, why bother analyzing stocks when the S&P 500 beats everything with zero work required?

Is analyzing securities becoming futile in the age of passive investing?

Professionals have taken this advice to heart and enrollment in the CFA program has plummeted. Clients are withdrawing money from active management firms and investing in index funds and ETFs. As active loses assets under management (AUM) they are firing analysts, portfolio managers, and support staff. Companies such as Schwab, Prudential and Invesco have cut jobs, with more sure to follow as more money flows to passive investment strategies.


Of course, if one thinks about this logically for a moment, one wonders how securities will be priced accurately to conform to real-world business values if fewer and fewer people are actually doing the analysis. After all, index funds and ETFs only buy every stock in their designated index in proportion to its float-adjusted market capitalization. So they do not pay attention to growth in sales, profits, cashflows, or changes in margins. Academics and even Jack Bogle himself, founder of indexing giant Vanguard, have stressed the need for informed market participants to set prices. As Bogle himself said, everyone can’t index, it would be a disaster.

This leads to the paradox where active management is necessary, but it is also unperforming badly because the only thing that matters for stock price performance is cash flowing into the indexes. So where will the suckers come from to do all the hard work analyzing stocks when there is no reward, only a penalty?

Sadly, the securities markets are becoming more dysfunctional as a result and this is leading to an untenable siltation. If analyzing securities is becoming futile, the foundations of passive investing rest on quicksand.

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