In Search Of: A New Name For “Passive”

By Douglas A. McIntyre Published Apr 2, 2:56AM EDT

From Investment Intelligencer

One of the many reasons "passive" investing gets dissed is that its name–"passive"–is both misleading and deflating. Who wants to be "passive"?

The folks who do well in life are active, the ones who have gumption, the ones who get up off the couch and make things happen. "Passive" investing, moreover, isn’t passive–it’s active. Smart passive investors actively determine which types of stocks they want to invest in, actively screen the market to find such stocks, and actively manage their portfolios to make sure they contain only such stocks (and in the proper proportion).

So smart passive investors, the ones who wouldn’t mind earning some respect in addition to superior returns, are forever searching for a new term to describe what they do. Alas, to date, none has been found.

"Indexing" doesn’t work, because "indexing" suggests that the passive investor is simply trying to match the performance of the S&P 500, Russell 2000, or other index. And now that such strategies are popular, the style suffers from herding, index-reconstitution, and other problems (even thought it still outperforms most active strategies).

"Rules-based investing" doesn’t work because…well, because it’s boring and vague.

"Factor-based investing" doesn’t work because it’s mystifying.

"Dimensional investing" doesn’t work because…ditto.

"Quantitative" doesn’t work because it has already been coopted by "quants."

The latest suggestion, "Equilibrium-based investing", put forth by DFA’s Weston Wellington in a recent article, doesn’t work because it doesn’t mean anything that couldn’t just as easily apply to the "active" world. (Although it is arguably better than "passive").

So the search continues. One thing is certain, however. If passive investing continues to be called "passive," those who advocate the strategy will continue to operate at a major marketing disadvantage to their "active" competitors. In fact, given the inherent connotations of the words "active" and "passive," it is almost certain that the nomenclature was devised by a traditional stockpicker.

Posted by The Editors

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.