A Traders Open Letter to the Passive Investing Taliban

2013-08-13T19:02:35Z

Kudos to Josh Brown for his great post “Memo to the Passive Investing Taliban,” which has deservedly wended its way around the financial blogosphere.

(Note: Hopefully you caught it on the viral upswing, because now it”s been taken down and replaced with an apology. Lame!)

The piece helped crystallize some long-held thoughts for yours truly — ideas that have been knocking around for quite a while. Speaking as a trader (and someone who favors no-holds-barred opinions), I feel there is something to add the discussion.

Hence a somewhat spontaneous rant…

First some background. Since you can apparently no longer read it, the “Passive Investing Taliban” was Josh Brown’s colorfully descriptive name for the aggressive evangelists of passive investing. If these guys had figureheads, Jack Bogle would be the Grand Mullah, Burton Malkiel would be Chief Imam, and so on.

In his post, Josh gave the Passive Investing Taliban kudos for winning the war, so to speak, via all the evidence amassed (mostly by way of mutual fund stats) that market timing “doesn’t work.”

Josh then took the Passive Investing Taliban to task, more or less, for 1) beating a dead horse with the fervor of a crazy person, and 2) being humorless, obtuse and brutal (just like the real Taliban!) in pounding their message into the dirt, with no perspective on the fact that millions of investors are merely “human” and want to pursue active ideas as a reasonable pastime.

Basically it was a chiding call for the Passive Investing Taliban to chill out and show some perspective, since redacted by Josh (I am assuming) because of the shit storm it caused within a community where he seeks to maintain good ties.

But the piece was up long enough to have impact, in terms of stirring up iconoclastic thoughts, leading to the unfiltered “wall o’ text” now before you…

I like the acronym “Passive Investing Taliban” creates, PIT, because these guys’ viewpoint is the pits when it comes to pursuit of excellence. Their message, in very condensed form, is “don’t try (to beat the markets) because you will fail… and any active manager you invest with will fail (or just be lucky)… and if you believe otherwise you are a fool.”

Again, Josh put up a disclaimer / apology to replace his redacted post – now fallen down a 1984-like memory hole — in a contrite spirit of regret. (Ironic, no, that a group accused of Taliban like tendencies would facilitate such a denouement?) I think the phrase has a lot of merit, though, because the PIT stance is essentially one of ideological zealotry. (And man would these guys be downers at parties!)

As Winston Churchill once put it, “A fanatic is one who can’t change his mind and won’t change the subject.” This well describes the PIT mentality, as does the online dictionary definition of the term “zealot:”

A person who is fanatical and uncompromising in pursuit of their religious, political, or other ideals.

“Other ideals” being broad enough to cover the thunderous conviction that the findings of Eugene Fama are equivalent to Moses’ stone tablets delivered from the Lord on High via Efficient Market Mount Sinai, and that anyone who dares even glance at the golden calf of active market participation deserves to be impaled on a charlatan’s spike and burned at the rhetorical stake, consumed by the greedy flames of dogma and the dry kindling of academic study.

To use a Joshism, “yeah I said it.” The Passive Investing Taliban crew, aka PIT crew, is aptly named.

Outliers Exist, Yo

I believe there is enough objective evidence to state credibly and plainly, for one, that those who refuse to admit the existence of trading and investing excellence are zealots.

Shove all the damn academic studies making a mountain out of a generalized mediocrity molehill with no intellectual regard (or even common-sense respect) for the undeniable presence of outliers. It is, quite frankly, intellectually embarrassing and (from an honesty standpoint) more than a bit infuriating that the existence of outlier talent — not the relative frequency of it, mind you, but the very existence of it — is still debated by self-blinded luddites in this day and age.

I mean for pete’s freakin’ sake. Read The Superinvestors of Graham and Doddsville. Read the Market Wizards and Steven Drobny interview books. Consider the track records of talented winners who have been winning not just for years, but decades. (They are not hard to find. Here’s one posted right on the interwebs for the all to see.)

And consider that, if the track records of the greats were random, as a mass coin-flipping argument would suggest, there should be no correlation of habits and activities, which is clearly not the case at all. (Buffett made this argument more eloquently in his “Graham and Doddsville” talk.) Great value investors vary widely in stripe, but they all share similar core philosophies and do the same essential things. Great macro traders, same way. Great short-term traders, same way.

If market outperformance were a random phenomenon, then the collectively presented wisdom of, say, value investors as a group or global macro practitioners as a group or CTA trend followers as a group would be a hodge-podge of random nonsense. But surprise surprise, it isn’t this way at all. When you study these guys, really study them, you find a very clear crystallization of philosophies and conceptual rulesets.

When you generalize across the success data set, you draw workable and powerful lessons. And the reasons why the winners win make sense, from a conceptual standpoint, when comparing their winning ways to the typical non-winning ways of the average practitioner who loses.

Mutual Funds = Straw Man

The PIT crew love to cite studies about how mutual funds can’t outperform to save their lives. But talk about a straw man target! Mutual funds, on the collective whole, intrinsically suck because mutual fund managers, as a group, violate many (if not most) of the key tenets of outperformance:

* don’t get so big and unwieldy you lose your flexibility

*don’t ignore risk control because you have to stay fully invested

*don’t chase fads because your peers are doing so

*don’t choose to “fail conventionally” rather than succeed unconventionally

*don’t fear periods of underperformance in pursuit of long-term outperformance

*don’t diversify your portfolio into irrelevance

*don’t be afraid to really be aggressive with your best ideas

*don’t hug your benchmark for dear life

*don’t drink the kool-aid and carbon copy your b-school buddies

*don’t shackle yourself to the worst instincts of clients

*don’t fall prey to Byron Biggs’ “secular violence of market cycles”

Mutual funds on collective balance violate EVERY SINGLE ONE of those “don’ts.” Every single one. Is it any wonder there is study after study citing why they suck and why, on balance, any one mutual fund is kinda mostly pretty much as good as any other? (By the way, read this post on Why Mutual Funds Don’t Beat the Market for more on this exact phenomenon.)

Here is a simple homework assignment for anyone with an open mind:

Accumulate the track records of a handful of managers who have been beaten the market soundly (by a meaningful margin) for 20+ years. (Yes, they exist.)

Try to get some diversity: Value guys, macro guys, CTA trend followers, short-term traders, etc.

Without passing judgment on good luck or bad, generalize across the data set in pursuit of answering the following question: What do these guys do differently?

To provide a cheat sheet of sorts, you will find that they do things like:

*Completely ignore standard benchmarks (or at least feel no constraint from them)

*Stick to their guns even when — or especially when — popular conviction runs against them

*Size their funds appropriately to market opportunities at hand, rather than getting too large

*Take aggressive sized, possibly even huge sized, positions when conviction is greatest

*Resist temptation to act in size, or act at all, when true opportunities are non-present

*Have a very distinct style and methodology, with intimate knowledge of how and why it works

*Tend not to march to the b-school, identikit, flying-on-autopilot-to-the-land-of-groupthink drum

Talent and Sturgeon’s Law

In his piece “10 Reasons Why Economics is an Art, Not a Science,” Barry Ritholtz beat me to the punch in citing Sturgeon’s Law: “90 percent of everything is crap.”

This idea — Sturgeon’s Law — is very powerful and worth expanding on as one debates the merits of the PIT view. An expanded refresher:

Sturgeon’s revelation, commonly referred to as Sturgeon’s law, is an adage commonly cited as “ninety percent of everything is crap.” It is derived from quotations by Theodore Sturgeon, an American science fiction author and critic: while Sturgeon coined another adage that he termed “Sturgeon’s law”, it is his “revelation” that is usually referred to by that term.

The phrase was derived from Sturgeon’s observation that while science fiction was often derided for its low quality by critics, it could be noted that the majority of examples of works in other fields could equally be seen to be of low quality and that science fiction was thus no different in that regard to other art.

- Wikipedia

We don’t hear much about how bad the average musician is… or how deluded the average entrepreneur is… or how hopeless the average golfer is. Why not?

We can accept the notion that most output will be somewhere between mediocre and awful in many walks of life, including white collar professions where this is a distinctly unsettling notion. (Sadly, there are a lot of terrible doctors out there. And lawyers. And teachers, and etc and so on.)

So why is it so surprising that, in a field as aggressively competitive as trading and investing, the norms would be even more exaggerated?

Most people are mediocre at everything. That is what mediocrity is. It is just that, in many fields we do not notice it, because mediocrity generates a passably acceptable standard of performance (sometimes just barely).

When you move into a high performance realm of activity, then, wouldn’t it seem perfectly normal for mediocrity to overwhelm? Wouldn’t Sturgeon’s Law naturally dictate, through observation of statistical generalizations across the dataset, that most practitioners in a given field are going to suck relative to a small handful who display more talent? Why is this surprising?

The reason I say “surprising” is because so many with a PIT crew mentality act surprised, or even offended, at the notion that trading and investing talent even exists. When you point out that some traders and investors are actually very good (and very successful) at what they do, they react as if you are citing blurry photo evidence of Bigfoot.

But this deliberate obtuseness, this surprise to the point of taking offense at the idea that talented money management exists, is ridiculous.

Were Forrest Gump sitting in on this discussion he might add: “Ahm not a smaht mayun. But ah know what dumb is…”

We can understand and articulate the basic parameters of what makes a great investor or a great trader.

We can also understand and articulate the powerful reasons why the average individual, on balance, will fall far short of this standard.

We can yet ALSO understand and articulate, quite in depth, why even most “professional” managers — constrained as they are by “career risk” and loopy institutional parameters (which serve other purposes) and other voluntary and involuntary factors — will fall woefully short of a process-driven and outlier-talent-infused excellence standard.

To put it another way, while resisting the temptation to shout:

Sturgeon’s Law is a manifestation of the fact that real talent is scarce.
Always has been, always will be.
A competitive zero sum game environment will only enhance this fact.
So we should not be surprised that outperformance is hard to come by.
Nor, however, should we pretend that outperformance does not exist.
Especially when we can understand, in generalized terms, what produces outperformance…
And how hard it is for anyone, pro or non-pro, to consistently replicate that standard.

A Poker Comparison

As long-time Mercenary Trader community members know, we are not just traders, but also poker players. And not just casual poker players, but serious ones.

A few months ago Mercenary headquarters was relocated to Las Vegas, specifically because cash game opportunity was confirmed to be so lucrative (while continuing to work with laptops at the table). This piece is being written within short walking distance of both the Aria and Bellagio poker rooms (the two best spots for high stakes action in Vegas). We routinely sit down in high stakes cash games where the average stack is $5,000+ and outlier stacks can run as high as $50,000 or more.

And we are versed enough in our well-honed cash game methodology, perfected over literally thousands of hours of observation, analysis, playing time, and conceptual ruleset development, that we can operate with a combination of fine-tuned discretionary judgment and clockwork mechanical efficiency — again, while doing market research at the table in between hands — and a degree of profitability confidence approaching five-nines reliability (99.999%) over statistically meaningful trial periods.

In other words, this ain’t beanbag. We know a thing or two about poker. And we also see a striking similarity between poker players, investors and traders. A few relatable observations:

Cash game poker is about capitalization, risk control, theoretically correct play, and avoiding or minimizing mistakes. The larger the stakes, the larger the potential exploitable gap between opponent mistakes and your lack thereof.

The size and frequency of observable, easily identifiable mistakes in cash game play, even at the highest stakes, is mind-boggling. And to the profit-oriented player, it is a joy to behold.

In numerous ways, the proper way to play cash game poker — the optimally theoretically correct play — involves doing certain things so far beyond the ken of the average player, it is like “another dimension” as the great Chip Reese once alluded to. The average player might as well not even be aware this other dimension exists.

Successful trading and investing have similar parallels…

In many ways poker is comparable to golf. Lots of people play poker as a hobby, just like lots of people golf for a hobby. The thing is, though, that hobbies cost money.

Meanwhile, there are amateur poker players who dream of playing “professionally.” But the realistic odds of their achieving consistent profitability are on par with the odds of an amateur golfer becoming a PGA tour pro. Is it achievable? For some, certainly. For the average individual? Well, that depends on a hell of a lot of things…

To bridge back to the original discussion, we could easily see the PIT crew throwing poker under the bus as an inherently unprofitable pursuit. “Don’t do it! Don’t try it! You’ll only lose!”

To the degree this reflects the general reality of the undisciplined masses, yes. To the degree this reflects the last word on reality, giving a pass to the innate assumption that profitable poker players don’t exist and that nobody can become one — hell no. Just because a gate is narrow, a path rocky, and a winding road long and steep, doesn’t mean that no one makes it through to the other side.

The Hyperactive Sheep Problem

In his original (now memory-holed) post, Josh makes the argument that the PIT crew should chill because a lot of investors like to chase performance as a hobby — “because we are human” — and also points out that, if everyone were won over to the PIT way of thinking, indexing would paradoxically become disastrous as there would be no more active professionals left to exploit dislocations in market value.

So true. And it shows why there is something inherently twisted, re, passive indexing as a religious experience. Its totalitarian advocacy is self-defeating, like a snake eating itself. In respect to what happens when too many professionals refuse to act rationally (i.e. manage actively), I like John Hussman’s “Hyperactive Sheep” observations from many years back:

Hyperactive sheep

As I used to say to my students, trying to keep an efficient market is a lot like trying to keep a drunk, hyperactive sheep standing on a nickel.

Suppose that there are a bunch of sheepdogs around. If they get a bone for nudging the sheep back onto the nickel, and if they get a bigger bone the more they have to move the sheep, and if the sheepdogs are very hungry and vigilant, then yes, the sheep will probably stay on that nickel.

But if the sheepdogs ever become convinced that the sheep will stay on the nickel,regardless of their own actions, and the sheepdogs start looking for free bones at Mr. Greenspan’s house rather than doing their job, the sheep may not even stay in the neighborhood.

In short, an efficient market cannot exist independent of investors who enforce that efficiency through their actions. It isn’t at all clear that investors are doing that now.

A bubble requires the complicity of professionals.

In general, there will always be investors who buy the high of the market, convinced that the uptrend is irreversible, and who sell the low of the market for the opposite reason. As long as those investors are a moderate fringe, rather than the core of investors, they become the source of profits for others, but there is no particular danger to market efficiency. Market swings are always partly driven by this sort of “bandwagon” effect.

When investment professionals begin to jump on the same bandwagon, however, nobody is left holding the brakes. See, one of the ostensible benefits of investment professionals is that investing is their profession.

Consider doctors. We all self-diagnose our colds and minor injuries, and we recognize when we’ve got a serious problem, but we don’t go and give ourselves an appendectomy even if we need one. We leave that to the professionals.

Similarly, it’s good for investors to have enough knowledge of finance to self-diagnose problems in their portfolios, but it’s really not the profession of most investors to properly evaluate and price all of their security investments. That’s what professionals are supposed to do. They’re supposed to have enough historical insight to understand what constitutes reasonable valuation. They’re supposed to have enough understanding of diversification not to over-concentrate client portfolios. They’re supposed to have enough understanding of asset management to roughly match the duration of a client’s investment portfolio with the duration of the lifetime liabilities that those assets are supposed to fund.

When the professionals themselves disregard those responsibilities, you get bubbles. You get guys who go on CNBC and talk about the stock market as if it is simply a thermometer of current economic conditions (rather than a discounted stream of very long-term cash flows). You get analysts more interested in justifying higher price targets than in managing risk and preserving the long-term financial security of their clients.

No, any idiot can make bad investments. It takes a team of professionals to really screw things up.

- John Hussman, Hyperactive Sheep

Hear hear. Any idiot can also invest passively right into the worst excesses of a bubble… or hold an asset class through a gruesomely extended period of devastating market decline…

Human Excellence is Active

I mean dammit, the more I think about it the more ridiculous the passive investing case becomes (when taken beyond logical limits and morphed into iron-fisted dogma).

First of all, as shown, the PIT crew are holding up a strawman — the terrible performance of mutual funds that all commit the same mortal sins in droves. Then the PIT crew accidentally advocate swapping one danger for another — because active management is so bad, go ahead and run the risk of passively investing your retirement over a cliff. “Oh and don’t worry, asset performance over the next 50 years will be just like the last 50, with no chance that your retirement funds hit a 10 or 20 year speed bump of perpetual decline. We can guarantee this because, uh, hey look at the time, got to go!”

And then there is just the basic conceptual recognition of what outperformance is in any field of human endeavor, and the generalized sources of where that outperformance comes from.

Outperformance in meta terms means being more insightful, more persistent, more creative… more disciplined, hungrier… more willing to dig and drill deeper… more willing to be bold at the right times… to be cautious at the right times… to relentlessly pursue conviction and immediately admit mistakes (while learning from them)…

In broad brush, big picture, “what makes humanity great’ terms, outperformance in and of itself is a function of the outlier manifestation of excellence, which is in and of itself active in setting one’s self apart from the mediocre crowd. And you say this can’t be done because your studies show a bunch of b-school guys who all drink the same kool-aid can’t do it, or because a bunch of also-ran hedge funds (mostly b-school guys once removed) populated by beta chasers and boring conventional-minded stock pickers can’t do it? Screw you, PIT crew, seriously!

I mean really, imagine if the PIT crew mentality was applied to the entrepreneurial class with the same zeal it is applied to the active vs passive investing debate:

Starting a business is inherently risky…

With a failure rate well above 90%, so…

The iron law of averages says the odds of you starting a successful business are trivial…

So we can thus generalize that you should never start a business, no matter who you are…

And even if you are the next Jeff Bezos or Elon Musk or Mark Zuckerberg, or even just the next local millionaire set to do right by your community, forget it! Stay home! Keep your soulless paper-pushing job with Dull Consolidated Incorporated if you know what’s good for ya! You’re a fool to think you can ever have anything beyond that paycheck! Just contribute to that 401K for the rest of your life… and hopefully become a millionaire, in inflation-adjusted terms, by age 75 or so…

But No Really, We Love You Guys

Truth be told though — and this is true confession time — we actually like this phenomenon.

We like the rise of the PIT mentality… the hand-waving dismissal of global macro… the broad and growing belief that active management is a fool’s errand, that risk control and position sizing are useless disciplines, that charts are a step removed from astrology, on and on and on.

That is because of the basic game theory nature of trading. The fewer true competitors seeking to extract informational value from the signal you are acting on, the better. The fewer people taking outsized positions in an area where you see conviction value, the better. The more your strategies are dimissed out of hand in a zero sum game — if they are valid strategies on the whole — the more long-run profitable they become for you.

Investing and trading bear another important similarity to poker in this way: The profitable practitioner does not care if you “believe” he is profitable. He has no need to justify the theoretical merit of his actions to an observing academic audience. He just goes on doing the hard things that his opponents do not do, or don’t know how to do, and makes a lot of money and is satisfied.

(On a macro note, in general terms I think the Bernanke Fed has been both awful for wonderful for markets. Awful by the manner in which so many traders have been ground to dust by the signal distorting, cognitive-dissonance-inducing disruption patterns wrought by the Fed. Wonderful to the extent that so many with lack of seasoning and staying power have been washed out, leaving a fatter and juicer harvest for those who have persevered.)

Service to the Masses? Hmm…

Let’s say you corner a PIT advocate and grill him on the above points. You get him to recognize, albeit grudgingly, that multi-decade track records of excellence exist in all major investing and trading venues, with a confluence of practitioner habits and principles that would not exist were outperformance random. You further get him to recognize that the overwhelming presence of mediocrity is no surprise… that the net costs of mediocrity would of course be higher in a hyper-competitive sum game… and that the relative infrequency of outlier quality performance is not the same at all as saying that outlier performance cannot be achieved or does not exist.

Say you get your passive investing guy to admit all that. What then will be his defense for continuing to beat the drum?

Quite possibly something like “Yes, what you say may be true, but the investing masses are better off hearing my message. What you point out will only confuse them, delude them, give them false hope. The bluntness of my passive indexing evangelism — my zealotry if you will — is in service to the population at large.”

Hmm, yeah. I call bullshit on that, with reasoning as follows:

Why not just tell the truth? Admit that outperformance does exist — even if not so much in the plain vanilla, strait-jacketed mutual fund world — with the obvious caveat that it is quite hard to attain and quite hard to find in an outside manager.

Why not add that passive investing is no holy grail, and carries risks of its own? This is one of the things that really tweaks me about the whole PIT crew mentality. They scream and yell about how outperformance is a myth, and then imply that passive investing is some kind of holy grail. It isn’t! News flash: You can get royally screwed by passive investing if you lose your nerve at the wrong time, or a secular downtrend kicks in vis a vis your retirement window at just the wrong time.

Why not add that, for a LOT of “ordinary Americans” (i.e. the sheeple you are preaching to), paying off high-interest debt makes a LOT more sense than ANY type of investing at all, passive or otherwise??? As long as we are talking about messages for the masses, here is something that makes zero sense: The guy or gal with tens of thousands of dollars in student loans, or worse yet credit card debt, making faithful contributions to a passive investing account. If you are running debt at an interest rate ranging from, say, 7 percent to 20 percent, paying off that debt is the essential equivalent of a guaranteed return on investment (for the dollars doing the paying) versus a non-guaranteed and likely much lower ROI on those same dollars going into a retirement account.

Why not admit that everybody is selling something, including the PIT crew? These passive investing evangelists have their own agendas. They have reputations to build, books to sell, financial assets to gather, wisdom halos to polish and so on and so forth. This creates drum-banging temptations and compromises every bit as real as those for the guy who is hawking active mutual funds for a fee.

One Size Does NOT Fit All

At Mercenary Trader we actively trade and invest. We eat our own cooking in heaping portions. And we aim not just to “beat the market” long-term, but to beat the hell out of it. Which is most doable, as our good friend Peter Brandt shows with a track record of +41% returns over 30 years.

So that makes us biased too. We are not just approaching markets as hobbyists “because we are human,” but as seasoned and aggressive professionals.

But here’s the thing. We don’t claim to be for everyone. Not by a long-shot. We are the polar opposite of one size fits all. We recognize that 1) excellence is a fat tail outlier, 2) pursuit of excellence is a serious commitment not appropriate for most, 3) achieving eand that 3) if such pursuit is not for you, that’s ok!

That is why we can agree with the merits of smart passive investing and smart asset allocation in generalized, “appropriate for the masses” terms. Does it make sense for MOST people to consider a largely passive investment allocation program? Almost certainly. (This is basically the Buffett and Munger view.) Does it make sense for MOST people to recognize they have neither the skill nor the passion nor the personal inclination to try and make trading and investing a professional level endeavor? Certainly, just as most people should never entertain, say, the idea of making a living at poker.

But does this mean that all references to talent should be expunged, and all attempts at outperformance “banned,” Taliban-style, in the name of converting the great unwashed masses to holy Bogle dogma, in order to save them from themselves? Hell no!!!

One size does not fit all. We not only respect that fact, we embrace it. And even if you can’t resist banging a drum for the masses, the “get out of debt” drum makes a helluva lot more sense as an “irrefutable first step” than the “passively invest” trumpet call. (Those already out of debt will know you are not preaching to them, for one.)

The Equal Access Delusion

Why is there so much fervent bad thinking stirred up around trading and investing anyway? Why are there so many table-pounders who have only partially thought things through, and seem determined to lop off conceptual arms and legs, bed-of-Procrustes style, to make their arguments fit?

It may be partially due to what we now dub “The Equal Access Delusion:”

The Equal Access Delusion: The persistent socio-democratically motivated belief that some way, some how, a high quality investment product should be cheaply available to the masses just because we all agree that such would be nice.

Almost nothing of outlier performance quality is available on a mass access level, at least as far as zero sum games are concerned — thus relating to why such performance is outlier-level in the first place. Why is this elephant in the room — the fact that a cheap and good solution may not exist — not discussed when it comes to the merits and dangers of investing at all?

Because the reality is so unpalatable from both a selling perspective and a socio-democratic perspective, that’s why.

It can hardly be seen as constructive (from a salesmanship and civic duty perspective) to tell the masses in brutally honest fashion:

“Sorry! There’s really no great place to put your savings with a near-total absence of judgment… if unicorns existed that would be nice too, but they don’t… if you want a solution that requires no thinking, yet is also in your true long-term best interests, you are probably SOL (as this is kind of a self-indulgently ridiculous demand in first place)…. not even democracy works when thinking participation is wholly extracted… sooo, as far as your cheap-but-good investment product choices go, the best we can come up with is a slightly half-assed solution (passive investing)… you might turn out ok with this (knock on wood!) but unfortunately you might also get screwed… hey, you didn’t want to think or participate or take personal responsibility, what are we supposed to do… if you can’t handle your money appropriately or find someone trustworthy to do it then maybe you shouldn’t be in markets, and if you aren’t in debt you should educate yourself on worthwhile opportunities to invest locally and possibly regionally, and if you can’t handle any of that at all, well, caveat emptor, these guys over here want your money but be warned they have gotten rich operating a mass market machine designed to soothe the worried brow of those who refuse to take active responsibility for their own savings such as yourself, and by the way, the holy grail of the whole “passive” thing, which sounds so wise and sober like an unalloyed honest-John force for good, is in reality just a fee-generating scheme like all the others, just one that exploits knee-jerk inclinations toward prudence over greed… it’s a Darwinist dog-eat-dog world… “

To condense and simplify, the obtuse refusal to acknowledge non-mass-access outperformance is, in itself, a possible byproduct of the self-imposed reality distortion field generated by subconscious commitment to the Equal Access Delusion.

Part of the problem, then, may be the implied assumption that a truly workable and desirable solution exists at all — and the simple refusal to admit that, for those who can’t take responsibility, no good answers are forthcoming.

Or, as Marlo Stanfield in The Wire put it: “You want it to be one way. But it’s the other way.”

Whirlwind recap: The equal access delusion. The myth of one size fits all. The myth of no talent and / or no ability to achieve outlier performance results with persistence and dedication. Overlaid with the myth that PIT crew advocates have no agenda, when in fact they are agenda-laden like just about everyone else, with plenty of commercial and professional reason to develop a voice and garner rhetorical notoriety for themselves.

Sure is a lotta shit on those shiny self-righteous shoes. As a humble trader, just sayin’.

The Open Letter

And finally, the open letter, at which point this cathartic outpouring comes to a close:

Dear “Passive Investing Taliban,”

We are hardened and seasoned professional traders. To borrow from Liam Neeson, we have acquired a very specific set of skills. We know what those skills are worth, and what they have rendered us capable of. We know that our edges are not replicable by the general public because the general public is nowhere near as disciplined, or as experienced, or as focused and dedicated as we are, in a relentless-focus, never-slack, on-the-job-every-day type of manner.

We have literally spent years acquiring our skills, evolving from one iteration to the next, making mistakes large and small and furthering our evolution by learning from them. We also know that the hard gauntlet, the long road we have traveled, is in some way the whole damn point; you do not train your ass off to become an ultimate fighter and then expect weekend warriors or soft-bellied b-schoolers to match you in the octagon.

And by the way: We also know our edges so thoroughly, so through and through, that we could articulate them through thousands of words and deeply layered statistically vetted presentations if need be; indeed, if such were ever called for (which will not happen) we could give a sixteen-hour graduate-level lecture series on the mechanics of poker, trading and investing, with key interrelations of such, and do so without reference to hand-written notes.

Oh Taliban, we know that you doubt our painstakingly aquired skills are worth anything at all. But we could not give the faintest hint of a rip in respect to what you boringly conventional mediocrity embracers choose to doubt or not doubt. Your kind has been doubting greatness, and the potential for greatness, since time immemorial. As Einstein said, “Great spirits have always encountered opposition from mediocre minds.” (Are we Einsteins? Hell no. Are we great spirits? Hell yes.)

Oh iron-fisted Taliban, are we managing your money? No. Do we expect to take investment funds from anyone who believes in your ethos? No. And what’s more, since we are not selling to you or your converts, we don’t have to give a damn about what you think in any form: logistical, professional, philosophical. As mentioned, successful practitioners don’t have to “justify” their skillsets to anyone — the results themselves do that. They just go out and “do,” making notable profits over time, even as academic types lob sour-grapes hand grenades via poorly designed “experiments” that do not reflect real world conditions, real world experience or real world innovations, for the purpose of supporting biased propositions. You try to make a meal of us, but we are not good eating.

Taliban, is it possible to teach trading and investing excellence? Yes, absolutely. This is an objectively true statement. Why? Because it does not assume such can be taught to everyone, and the weight of evidence never required mass market validation, only credible evidence that excellence can be handed down (in terms of knowledge and rulesets) and passed on to a persevering and dedicated few. As in virtually ANY skill-based endeavor where talent and persistence are factors — racecar driving, French cooking, Spanish guitar, fill in the blank — it is only needed that some, a select few with a sufficient modicum of drive, discipline, passion, and yes, talent, can learn the habits of the good and great, generalize across the best-practices data set, and recreate results on their own through a hell of a lot of hard work and dedicated focus.

Ah, but the masses can’t do this, you whine in your broken-record way. This is a siren song for the average man, you say. The average man needs to hear how in trouble he is. We are doing a service to “the people.” On and on.

You know what, Taliban? Screw your broken record paternalism. That is your attitude, not ours. Maybe it’s good that, in our diverse free market society, there are those such as you who take it upon themselves to evangelize for the hapless, and preach a message of mediocrity to save the average dubber from himself. As Thoreau once said, “the mass of men lead lives of quiet desperation.” Like carnival barkers in reverse, you have turned leeching off such desperation into an art form.

But we say, look at how our country was built. (Read “The Poker Face of Wall Street” by Aaron Brown.) Look where institutions of greatness, and accomplishments of greatness, come from. If guys like you had sway in the entrepreneurial world, there would be no Twitters or Facebooks or Apples or Amazons. There might not even be any great American waterways or Empire State Building or Chicago Mercantile Exchange. Everyone would stay meekly at home, working for Dull Consolidated Incorporated, hiding their light under a bushel because surely they aren’t good enough. Surely they aren’t talented enough. Surely they aren’t that outlier of drive and smarts and determination that can make something happen and see it through.

In all sincerity, f–k your stultifying message of wet-blanket mediocrity. Your message is appropriate for the dubber, quite true. (Unless he is deep in debt that is better paid off; see previous observations.) But some of us, those out on the performance edges — those of us who prefer to live our very lives on a statistical outlier of excellence — prefer to roll up our sleeves and show what we can do.

Are we inappropriate for the masses? You’re damn right. Are we too few and far between for the masses to reliably find us and invest in us? Probably so. But that doesn’t mean we don’t exist… or that your solution is holy writ because no better alternative exists for millions of poor lost souls with savings they cannot steward… and it certainly doesn’t mean someone with the balls (metaphorically speaking, no gender limitations here) and the drive to succeed can’t join us.

In sum, Taliban, we think you guys suck. This is, clearly, a subjective interpretation. We offer it qualitatively. Your message sucks in the manner that Vanilla Ice’s music sucks. We, unlike you, instinctively hew to the outliers of excellence and the inspiring possibilities of human achievement — not to mention the hard-nosed objective assessment of realities, both negative and positive, that a thorough examination of the evidence entails (including the evidence that those with the will to truly do it can find a way).

But, though you suck intrinsically, Taliban, your existence doesn’t bother us one bit. In fact, we merely had a little fun blowing off steam here in sharing how we feel. So by all means, follow that popular Brit exhortation: Keep Calm and Carry On.

With love,

Mercenary Trader

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