You know how in the Olympics when a runner wins a race they take a victory lap around the stadium draped in their nation’s flag. These are often heartwarming scenes that few want to see end. However in the financial markets victory laps are usually the sign of complacency and often end badly for the celebrants.

Josh Brown at The Reformed Broker has a piece up today talking about the “Passive Investing Taliban” and their desire to convert everyone it seems to their cause. Those who followed this approach through the financial crisis to today are doing far better then those who bailed in 2008/2009 and are only now contemplating returning to the market. Josh correctly notes that for the vast majority of investors a passive portfolio management approach, if followed religiously, would produce better returns than the ad hoc decisions most investors make.

Josh isn’t debating the substance but rather the tone. Investors who think they have it all figured out are oftentimes standing at a big inflection point. There may no be great comeuppance for passive investors at this point in the cycle, but those who stuck it through are in all likelihood a small minority at best.

The passive investing crowd should be wary of trying to derail active management.The fact is that active managers make the market, to the degree to which it is efficient, efficient. We can all declaim the hordes of hedge funds out there that are charging their investors 2&2o with little to show for it. But they are the crowd that tries to keep thing from getting too far out of whack.

Hedge fund managers like Paul Singer of Elliott Management are a rare breed. It is no wonder that he does not want his performance to be compared to other hedge fund managers. He is in some sense an “artist.” However true hedge fund artists are a rare breed. And now more than ever it seems that some of these artists have been doing it with inside information. But why would we want to prevent other managers from trying their hand at becoming the next Paul Singer?

Josh talks about how the downfall of passive investing will come when there is no one left to value the assets that are still trading. He writes:

You may want to consider that there is a major paradox at work here – the more successful passive investing is in converting the masses, the less successful it will be going forward. The last thing a passive indexer should want is for everyone to stop guessing and trading in the markets. Massive amounts of speculation is what fuels the winship of the passive approach over other strategies. If there were only a handful of institutions left picking stocks and the whole world was sitting in a Vanguard fund, the returns of the pros would probably become incredible thanks to all the unexploited inefficiencies. And so, counterintuitively, the Taliban should be celebrating the Seekers of Alpha, not looking to discourage them or insulting them at every turn.

In the end we all need to do what is best for ourselves and our portfolios. However we should not kid ourselves about the our performance. As Cullen Roche at Pragmatic Capitalism wrote in light of Paul Singer’s comments:

Benchmarking is a crucial and very necessary part of evaluating portfolio managers.  If we don’t have proper benchmarks to compare managers against then we can’t see whether they’re adding value or if they’re just sucking fees out of our pockets for no good reason.  Unfortunately, most people I know and most of the fund services I see don’t benchmark properly and don’t know how to evaluate a fund’s performance.

There is no magic bullet when it comes to investing. Keeping costs low, diversifying, indexing and rebalancing regularly gives the greatest number of investors the best shot at achieving their investing goals. However we need to recognize we are all in this together. Where investors go awry is when they kid themselves about how they are doing. Investors should take very seriously this idea of benchmarking. Because investors cannot claim to have a good idea about the effectiveness of their strategy if they are not measuring it accurately. As the noted software engineer Tom DeMarco says:

You can’t control what you can’t measure.