Passive Investing and the Fragility of the Medium – The Property Chronicle
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Passive Investing and the Fragility of the Medium Dr Peter Warburton looks at Christopher Cole's essay 'What is water in the markets?'

The Economist

Christopher Cole of Artemis Capital Management in Texas, published a research article in July entitled, What is water in the markets?, which has resonated powerfully with the investment community and performed a valuable service in identifying the inherent dangers of passive investing. Cole asserts that the most obvious, ubiquitous, important realities are often the ones that are the hardest to see and discuss. His title came from an apocryphal tale, summarised in Figure 1. His essay foretells a coming volatility storm in which confidence in the entire medium of modern credit creation and the formation of asset prices, from which all measures of financial wealth are derived, is shaken.

Figure 1. 

The essay spans liquidity, volatility, and passive investing, challenging conventional wisdom at multiple points along the way. He posits a shift in the dominant view from believing that value is independent of the medium and intrinsic to the asset, to believing that the medium (liquidity) is the sole determinant of value, as defined by continuous bid and ask prices. If an asset is only worth what someone is willing to pay for it, and value is ‘created’ by the medium of money, then there is no need to pay someone to find value through active investment management.

The Economist

About Peter Warburton

Peter Warburton

Dr Peter Warburton is director of Economic Perspectives Ltd, an international consultancy, and managing director of Halkin Services Ltd. He was economist to Ruffer LLP, an investment management company, for 15 years and spent a similar length of time in the City as economic advisor and UK economist for the investment bank Robert Fleming and at Lehman Brothers. Previously, he was an economic researcher, forecaster and lecturer at the London Business School and what is now the Cass Business School. He published Debt and Delusion in 1999. He has been a member of the IEA’s Shadow Monetary Policy Committee since its inception in 1997. He is a contributor to the Practical History of Financial Markets course run by Didasko, an education company, at Edinburgh University, and teaches occasionally at Cardiff Business School.

Articles by Peter Warburton

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