Passive Management: It's Not an Oxymoron

These days, it seems investors have decided active management means frantically throwing money at whatever part of the market shows promise, while passive management is defined as investors too paralyzed to do much of anything.

It's time for some new definitions.

Passive management, which sounds like an oxymoron, has been employed by portfolio managers and institutions for decades. The strategy is based on the belief that the markets are "efficient" -- in the words of Eugene F. Fama, who coined the term in a 1965 Financial Analysts Journal article entitled "Random Walks in Stock Market Prices":

"In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value." ...