Swedroe: Hedge Funds Are A Disaster

ETF.com Staff
April 26, 2012

From his bully pulpit at Buckingham, Larry Swedroe keeps preaching the fiery gospel of a true indexer.


If you look the other way too long, Larry Swedroe, research director at St. Louis-based Buckingham Asset Management, has probably published another book.  One of the most prolific (and intelligent) authors operating in the investment space, Swedroe has a new book coming out titled, "Playing the Winner’s Game in Life and Investing."  It will follow on last year's successful offering, “The Quest for Alpha: The Holy Grail of Investing,” as trenchant and readable an indictment of active investing as you’ll ever encounter.

IndexUniverse.com Managing Editor Olivier Ludwig caught up with Swedroe recently to talk about the new book. Swedroe said it’s designed for people who won’t read a book, so expect him to take fewer prisoners than he usually does as he dismantles active management. In the interview, Swedroe saved his most incisive attack for absolute-return hedge funds, which he said were absolute only in the sense of being “absolutely awful.”


Ludwig: I have to tell you I really did enjoy your “Quest For Alpha” book. You took no prisoners and had the zeal of a convert. Here’s a guy who was deep inside the citadel making fallible predictions every week and then …

Swedroe: … I had a conversion, as I like to say.

Ludwig: So tell me about your new book.

Swedroe: A lot of the advisors we work with say, “Larry, we really need a book for people who won’t read a book.” And over the years I’ve tried to cut down on the length and the complexity of my books.

Ludwig: So what are you calling the new book?

Swedroe: It’s called “Playing the Winner’s Game in Life and Investing.” The first two chapters of the book are an attempt to get people to read the book. So if you want to be like Warren Buffett, then start to think like him and, more importantly, act like him. Because most people often do the exact opposite. Don’t most people want to pick stocks and time the market? Well, Buffett says you shouldn’t do that.

The second chapter talks about what I call “Stage One” vs. “Stage Two” thinking. Stage One thinking is taking bad news—say, markets are collapsing—and panicking and selling.

Buffett does what I would call “Stage Two thinking”: “While the news is bad and that’s why prices are already low, I fully expect that governments and central banks will take actions to correct the problems. While I know there’s no guarantee that they’ll be successful, history says it’s a pretty good shot that they will be. And I like buying where prices are distressed, because you have big risk premiums, and therefore high expected returns. So that’s when I’m buying, when everyone else is panic-selling.”

That’s what he does, and I call it Stage Two thinking—thinking beyond the problem to focus on the resolutions and actions that get taken.


Massive inflows into U.S. equity funds on Monday, Dec. 22, propelled total ETF assets to a new record.

'SPY' raked in more than $12 billion Monday, Dec. 22, pacing State Street's issuer-leading inflows on the day, as total U.S.-listed ETF assets jumped to $2.005 trillion.


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