Stock Picking Genius…Yea Right!

  Many people are seduced by tales of the prowess of the stock picking manager of their mutual funds. After all, this is why you pay them almost 50% of your after tax and inflation profits. This is why they make the big bucks. A commoner could never do what they do and you should be grateful that they are willing to choose individual stocks in their fund for you. There are just a few things wrong with this hypothesis. For one, the average mutual fund rarely beats the index it is designed to track. So basically you are paying a premium for having a person pick stocks that will make less money than the “dumb” index. You are told if you buy the index you will receive “average” returns. You should be so lucky! The average investor ends up with below average returns due to the fees and expenses of the stock picker. In investing there is a weird paradox, if you are average you are actually above average! Leave it to the marketing teams of the financial industry, they sure can create bizarre illusions. Second, the genius of your stock picker may be just plain old luck. It has been proven even when a manager outperforms the market, he cannot do it on a consistent basis. Actually outperformance is often followed by a period of underperformance. This means that whatever happened was based on fate, good luck, or random events. There are so many people out there using the same information, technology, etc., they literally cancel each other out. The final results are then determined by sheer chance. Our minds have a difficult time processing this because our brains our hardwired to see patterns when none actually exist. The marketing muscle of these firms knows this. They create stories about how great their mangers are to deceive our perceptions. The average investor then buys the fund after the fact and takes the loss when the reversion to the mean inevitably occurs. Tell the truth, No Way!!  How would that ad look? Buy our fund because our manger got lucky!  That would never fly, so the narrative is created and the beat goes on.    Anthony Isola




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