Why is going with a more active management style a good idea when markets are in flux?
So much has changed now. Economic growth is becoming harder because of credit turning from easy to more expensive and harder to get. The collapse of all the “stupid” loans was just the start of it. Now commentators are saying we’re almost finished, but I say those bad loans—which were $400-to-$500 billion write-offs globally—were just the turning point. Eighty percent of banks are tightening [credit] now. Now it’s the reversal of a generation-long expansion of credit. The market is not ready for that. It’s the opposite of what you want when you own indexes. When you own an index, you necessarily own the most competitive companies and the least competitive ones—the ones who do OK because the environment is easy. When the business environment is more competitive, it starts to separate the men from the boys. It’s not an environment where you want to have to own the least competitive companies. When they’re all priced similarly after a long period of a good economic environment, the market
