Every Dog has its Day: Part 2

One thing we often see in the financial media is the claim that some managers have manged to outperform the market, usually over the most recent 12 months. 

Seldom discussed is their 10 or 20 year track record, and that is because when you investigate, you usually find that the manager in question has not outperformed for any extended periods of time. 

One aspect of markets is momentum and in asset classes this means that for example stocks will outperform, say, gold for a 5 year period. At the end of those 5 years, there are numerous stories regaling managers that have outperformed. Often you find it is simply a matter of numbers. 

As Warren Buffett said, the more money managers you have, the more likely is that at least one of them will beat the market. This doesn't mean they have skill. It just means it was their turn to be lucky. 

That's why we talk about ETFs as a better investment than individual stocks. The primary reason why is that it is relatively easy (or lucky) to select one single stock that outperforms the market. It is more difficult as time goes by for that stock to beat the market. 

And it is even more difficult to select, say, 50 stocks over your investment career that beat the market. It is of course silly to suggest that every stock selection should beat the market, but for every loser, your winners really need to sing.

And studies by Prof. Bessembinder shows that a tiny handful of stocks are responsible for most of the outperformance. Charlie Munger, Buffett's old sidekick said that even Berkshire relied on a small cohort of exceptional winners to outperform.   

It's why market can be easy or hard. Selecting index ETFs is a lot easier than selecting 50 winners over a 20-30 year period. 

Selecting the right fund manager that will outperform over 20 or 30 years in nearly impossible. But at some point they will have their day in the sun and claim to have the secret formula. 

They don't.