Whether or not you’re a finance geek, the Academy Award-winning filmmaker Errol Morris’ “Tune Out the Noise” is a compelling, timely documentary.
It’s an engaging chronicle of the academic breakthroughs that transformed investing from guesswork and gut feelings into a more scientific endeavor. And it’s a reminder of an era where many of the truisms we take for granted now —such as a diversified portfolio and the benefits of an index fund — weren’t always common practice.
The film, available on YouTube, explores the rise of passive investing and the people and conditions — like the computer revolution — that came to dominate the thinking behind millions of Americans’ retirement accounts.
But it also raises questions about the limits of passive investing and whether its glory days are over.
What is passive investing?
As the name implies, this investing strategy does not try too hard: It aims to replicate the performance of a market index rather than trying to outperform it through day trading or stock selection.
So instead of stock picking or betting on individual winners, passive investors buy and hold a broad, diversified mix of assets, such as index funds or exchange-traded funds. The goal is to invest in the long-term growth of the entire market, minimizing costs and avoiding the pitfalls of market timing and speculation.
“Instead of pulling your hair out and watching financial news all day long, tune out the noise,” David Booth, a founder of Dimensional Fund Advisors, says in the film. The investment firm was involved in the production of the documentary.
“Instead of outguessing the market, let me make all these thousands or millions of people who are investing work for me. I’m just going to sit back and let them duke it out,” Booth says.
The allure of finance as a science
The documentary traces the roots of the passive approach to a period of intellectual renaissance in the 1950s and 1960s, when a group of young, hungry financial economists at the University of Chicago began to challenge Wall Street’s conventional wisdom.
Before this era, most investors believed that skilled professionals who were well-informed could outsmart the market by uncovering hidden opportunities.
“The conventional wisdom at the time was to find a person who has access to information, works really hard — not to trust the markets to do their job,” Eugene Fama, a director at Dimensional Fund Advisors and one of several Nobel Prize winners who work at the firm, says in the documentary.
The film shows how these academics used data and mathematical models to poke holes in this thinking.
The turning point came in 1952, when Harry Markowitz published his groundbreaking work on portfolio selection. Markowitz’s insight was simple but profound: Rather than focusing on individual stocks, investors should construct portfolios that balance risk and return through…
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