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The Negative Externalities of Absolute Free Trade for the USA
The positive effects of free trade stem from the concept of comparative advantage and have been well studied and understood. Comparative advantage says that the country that sacrifices less to make a good A relative to good B should produce good A. When countries specialize in areas with a comparative advantage, the global economy can…
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Rebuilding Through Production: How ‘Learning by Doing’ Increases Manufacturing Innovation
Kenneth J. Arrow, a Nobel Laureate in economics, introduced the concept of ‘Learning by Doing’ to explain how technical change and productivity improvements emerge from practical experience in production. According to Arrow, as firms and workers produce goods, they don’t just repeat tasks—they gain knowledge, refine processes, and innovate. This hands-on experience leads to greater…
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Tariffs: the good, bad, and the risks
The Trump administration’s tariffs are a bold gamble with significant trade-offs. On the upside, they could revitalize domestic industries, strengthen labor’s bargaining power, and push for fairer global trade. On the downside, they risk higher prices, lower corporate profits, and a destructive trade war. Their success depends on smart execution and effective integration with policies…
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Why by definition, active investors cannot outperform passive investors.
The financial market is a vast arena where participants buy and sell securities based on their beliefs and financial needs. While some investors prefer active management, which deviates from market weights, others opt for passive management, which mirrors the market weights. The concept of active versus passive management has been a topic of debate for…
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What are the disadvantages of mutual funds?
The open-end mutual fund structure has been around since the 18th century, thanks to a Dutch merchant. Mutual funds were introduced to the United States in the 1890s and gained popularity in the 1920s. The modern mutual fund has forgone additional changes to satisfy regulations. Currently, most retail assets are managed in open-end mutual funds.…
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What are the disadvantages of exchange-traded funds?
ETF expense ratios are usually significantly lower than similar mutual fund competitors. That’s not surprising, given ETF providers do not have to perform in-house accounting, budget for marketing costs, and pay enormous fees for asset managers. But not all ETFs cost the same for issuers to manage because of differences in methodology, liquidity, and composition.…
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What entails being a passive investor, and why are most not?
The common perception is that if one invests in ETFs or indices like the S&P 500, one is being “passive”. The media has additionally confused the definition by considering any rule-based or systematic strategy as passive investing. This poor understanding has led many investors astray, creating passive portfolios with poor diversification. Furthermore, it has introduced…
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Why do markets need active investors?
Active investing is an investment strategy in which investors trade based on preferences to outperform a given market. The market can be US stocks, international bonds, art, etc. In contrast, the purpose of passive investing is to match the market return. For example, to accurately match the return of the US stock market, a passive…
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Why do active managers underperform?
Participants in financial markets are engaging in a zero-sum game. Someone must underperform for any investor to generate excess returns over the market. Alpha works the same way; for every manager that has produced positive alpha, there must be someone that produced negative alpha. Yet, we know superstar managers who have made their clients rich.…
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Does active management outperform passive investing in down markets?
The short answer is no. One of the prime active manager’s pitches against passive investing is that they outperform in bear markets. The argument is that active managers can foresee downturns and position their portfolios accordingly, adding value through better selection into more defensive securities, compared to an index fund manager who must track the…
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