Comments on: When an Active Mutual Fund Manager Beats the Market is it Luck?

By: The Simple Dollar » The Simple Dollar Weekly Roundup: Book Club Reboot Edition

Wed, 09 Jan 2008 14:00:54 +0000

[...] When An Active Mutual Fund Manager Beats The Market, Is It Luck? I tend to think so. I also think that if you have more than a decade of beating the market, it might be time to get out. That’s what Peter Lynch did. (@ all financial matters) [...]

By: Dylan

Dylan — Fri, 04 Jan 2008 23:48:32 +0000

Div Guy – Assuming minimal tracking error an index investor will never beat the market and will always match it less expenses. This is not a bad thing because the index investor will still fair better than the average investor because of lower costs.

Every time someone wins the lottery, they overcome odds far greater than beating the market for 15 years and that is all luck. The strange thing about probability is that it often runs counter to what feels right.

By: The Dividend Guy

The Dividend Guy — Fri, 04 Jan 2008 22:57:32 +0000

15 years seems like an awful long time for luck. However, I don’t think that a person, or even a passive investor will meet or perform better than the market very year. William Bernstein makes the point in his book that there will be periods of time when even an index investor will not beat the market due to certain factors.

2 years is a short-term timeframe to judge Miller’s performance.

The Dividend Guy

By: Dylan

Dylan — Fri, 04 Jan 2008 20:30:08 +0000

Andy makes a good point. And let us not forget about all of the mutual funds that started and petered out over the last 15 years. One might even ask why there weren’t more managers like Miller.

It is difficult for me to call something skill when it happens with the same frequency that random chance allows for, especially when there is no basis for such skill to even exist.

If a stadium full of people tried to guess the outcome of 15 coin tosses in a row, there would be a scattered group of random individuals who were correct 15 times. If you were to ask them how they did it, you might even get a believable sounding description of their coin-flip-calling methodologies, but there is no basis for this skill either.

By: Paul

Paul — Fri, 04 Jan 2008 20:20:23 +0000

First, why does it have to be all one or the other? Maybe the manager had above average skill that contributed to his past success. Maybe he also was a bit lucky.
I think that it is not possible to draw conclusions regarding the performance of a specific fund manager. However, I think it can be said that the total distribution of fund performances is not significantly different from a distribution of performances based on chance. In a chance distribution one would still expect some exceoptional fund performances.

By: Eden

Eden — Fri, 04 Jan 2008 19:15:55 +0000

15 years of luck seems unlikely. I would attribute the good performance to skill and the performance decline to the difficulty in managing more and more money. That is a common problem for ‘hot’ funds that grow quickly.

By: Andy

Andy — Fri, 04 Jan 2008 19:01:24 +0000

Value has higher expected returns than growth, so a Large Value fund maybe has a 60% chance of beating the S&P 500. Then the chances of 15 years in a row are 1 in 2500.

Is that unlikely? Well, Bill Miller was the only one to do it. There are probably over 2000 managers, so the probability of having at least one person do it in 15 years are over 50%.