If we could only get retail shareholders to think and act like shareOwners, instead of people betting at the racetrack – those of us who want more democratic, more accountable corporations – would be half way there.
The problem, of course, is that is makes no sense whatsoever for retail investors to be anything other than entirely passive. The principle is known as rational apathy. A rational shareholder will expend the effort to make an informed decision only if the expected benefits of doing so outweigh its costs. Given the length and complexity of proxy statements, especially in a proxy contest where the shareholder is receiving multiple communications from the contending parties, the opportunity cost entailed in reading the proxy statements before voting is quite high and very apparent. Shareholders also probably do not expect to discover grounds for opposing management from the proxy statements. Finally, most shareholders’ holdings are too small to have any significant effect on the vote’s outcome. Accordingly, shareholders can be expected to assign a relatively low value to the expected benefits of careful consideration. Shareholders are thus rationally apathetic. For the average shareholder, the necessary investment of time and effort in making informed voting decisions simply is not worthwhile.
Malkiel in fact does not really recommend anything else (McRitchie has to add "think like an owner, not a bettor" to Malkiel's take home lessons. What Malkiel wants retail investors to do--and what the economics of investing teach is correct--is to put their money in low-fee, low-expense, passively managed index funds and then walk away. Just walk away and let the power of passive management do the rest.
As the Guardian recently summarized Malkiel's message:
Markets are, broadly speaking, efficient. You can't beat them, so fire your financial adviser and put your money into index funds. These are unburdened by investment management costs, so they will always outperform the average active fund. Build an asset allocation model that suits your age and risk profile, then diligently put money in every month until you retire. Annually rebalance your portfolio – selling what's gone up, and buying what's gone down. And that's about it, really. Oh, and don't forget China.
So it's correct that one should not invest as a bettor. But it's equally true that trying to be an active owner is also the wrong strategy. Being a bump on a log is pretty much the best course of action.