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The 40th Anniversary of a Classic Investment Article

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We have recently marked the 40th anniversary of Nobel Laureate (and father of random walk theory) Paul Samuelson's Challenge to Judgment which originally appeared in the Journal of Portfolio Management. This was the article from Samuelson that provided the inspiration for John Bogle to start the first index fund for retail investors. Here is our write-up of Samuelson's later article acknowledging Bogle for making that bold move.

The byline of this article facetiously speaks volumes about Samuelson's view of active management:

"Perhaps there really are managers who can outperform the market consistently—logic would suggest that they exist. But they are remarkably well-hidden."

Samuelson pulls no punches when he suggests that the world would be a better place if most active managers simply quit:

"But a respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business—take up plumbing, teach Greek, or help produce the annual GNP by serving as corporate executives."

Regarding the investment professionals who disagree with the concept of market efficiency, Samuelson had this to say about them:

"They always claim they know a man, a bank, or a fund that does do better. Alas, anecdotes are not science. And once Wharton School dissertations seek to quantify the performers, these have a tendency to evaporate into the air—or, at least, into statistically insignificant t-statistics."

We at IFA have followed Samuelson's lead and conducted our own study of manager performance. As the chart below shows, saying that they lack significant positive alpha is putting it in the most charitable way possible.


We at IFA are very pleased to have received a warm endorsement from Samuelson for our own Index Funds book. Samuelson said, "It is a valuable reference; and it benefits from many perspicacious commentaries." For those of you who are rusty on your SAT vocabulary list, "perspicacious" means having or showing an ability to notice and understand things that are difficult or not obvious, according to Merriam-Webster. At the time Samuelson wrote this article, it was far from obvious that indexing would catch on. If he were alive today, we have no doubt that Professor Samuelson would be pleased with the progress that indexing has made.