If there’s a consistent theme on this website it’s that I am trying to establish a consistent taxonomy and set of understandings of financial concepts so that people can better navigate the monetary world we live in. Sadly, finance and economics is filled with words that are used in such a general manner that they have virtually no meaning. For instance, the word “money” means a million different things to different economists. The word “investment” has no relevant meaning in the context of how most people use the term. Or the word “debt” which is almost never discussed in accordance with its corresponding twin sister, “assets”. Or the term “passive investing”, which is actually a combination of two words that have virtually no meaning in the context they are generally used.

In this Q&A I want to (again) touch on the last term, passive investing because I think our industry has a long way to go before this confusion goes away. This terminology is a serious problem since it allows funds to market themselves as something they are not. This is especially bad for the average retail investor who already wastes billions of dollars a year in fees and is more likely to waste even more as this confusion leaves the door open for misleading sales tactics. Further, at a higher level it leads to an inconsistent macro framework for understanding the world, confuses how assets are priced and misleads as to how involved we should be in “managing” our financial system. This debate has wide ranging and important ramifications for both the future of our politics and the future of financial management.

This edition of “Yeah, passive investing isn’t a real thing” comes to us courtesy of Howard Marks and his latest quarterly letter. I love Howard Marks and his missives, but I think this one missed the mark. Marks is clearly not a big fan of indexing and what he calls passive investing. We see this a lot from more active high fee managers, but we don’t usually see it from people of Marks’ caliber. So let’s explore some of his comments and his questions specifically.