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Registered User
Joined: 10/7/2004
Posts: 319
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This past weekend I read an article that claimed only 5% of average investors consistently beat the S&P500 and that only 10% of professional money managers beat the S&P500 on an annual basis. If this is true, maybe its best just to invest in the ETF: SPY. Any thoughts or personal experience on this anyone?
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Registered User
Joined: 10/7/2004
Posts: 2,126
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That is a lie and my guess is that the article is trying to get you to buy something.
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Registered User
Joined: 3/14/2005
Posts: 64
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My experience, with constant montoring, results have been more then 2 times the sp-500.
One of my favorite quotes:
Concentration is the key to economic results...no other principle of effectiveness is violated as constantly today as the basic principle of concentration...Our motto seems to be: Let's do a little of everything."
Peter Drucker
Good thing Peter Drucker was born before modern portfolio theory became the guiding light.
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 Gold Customer
Joined: 3/12/2005
Posts: 6
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This is generally statisticly true, perticularly with reference to mutual funds. However the impulse to index was one of the causes of the insanity of the tech bubble. In the last cycle, for example, if one didn't buy lots of Cisco, JDSU etc. one could not hope to match the index on the way up - and yet the valuations were absurd to anyone with a practised eye. Cisco, for example, when it had a market cap of 600B and was forecast by PRU to go to 1.2 Trillion would have been about 11% of the then GDP. The money kept pouring into index funds (or quasi index funds - virtually every large fund out there - except for just a few- and therefore money kept going into the Cisco's of the world. When everyone had finally spent their money the whole thing unravelled. Index investors in the S&P fell 50% and in the Q's 70%. So - the reward of the index investor is to participate in "the madness of crowds" and suffer the consequences. It is far better to use some sensible valuation criteria, such as contained in Peter Lynch's books (PEG ratio), use some common sense, and keep an eye on the supply demand picture as per the Worden service.
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Registered User
Joined: 12/19/2004
Posts: 457
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Problems with these statistics:
1. Of course, if you examine a large enough sample of market participants, you won't find evidence of skill because everyone IS the market. Only a small percentage can make excess returns. The real question is: is this evidence of skill, or is it merely luck?
My question is: why do so many underperform the market anyway? If returns were truly random, there should be more even numbers of outperformers and underperformers. The fact underperformance is so prevalent suggests there are psychological and structural factors that make underperformance all too common.
2. Most mutual funds are closet indexers anyway. In order to have a chance of beating the market, you have to do something unconventional. Most portfolio managers are risk averse when it comes to doing the unconventional if it means they might lag behind the markets.
Related to that, most mutual fund managers use the same tools and techniques, which is guaranteed to lead to mediocrity. Most are also limitted to going long only.
There are studies that suggest certain hedge fund long/short techniques have an element of alpha, or skill, involved.
3. The S&P is revised fairly regularly to include the best performing stocks. Those that lag are discarded from the index. This cutting of losers and adding to winners makes it very hard to beat.
4. It all depends upon what timeframes you examine. Sometimes it is very hard to beat the index, other times it is easy.
The SP is cap weighted. In the late 90's, most stocks were going down, based on various breadth indicators. The market was propped up by the bubble in tech.
Likewise, just comming out of a bear market, stock selection is a bigger factor in performance, allowing skill to be displayed.
5. Mutual funds have so much money, that it is very hard to outperform for extended periods. Stocks that are the most likely to lead to superior returns are not liquid enough for a large manager to take a position that would have meaningful results on a multi-billion dollar fund.
Rob aka Sir Knowledgable Skeptic
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