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 We
now know that stock and time picking are strategies that
do not work for investors. Manager picking is also a worthless
endeavor; however, there are still investors out there
who think they can select an all-star manager or financial
guru who can beat the odds.
There are many managers who are willing
to try to beat the odds for their clients or mutual fund
shareholders for a hefty fee. Like all speculators, these
managers do win occasionally, attracting lots of media
attention and new clients. The great majority of expenses
and fees in the investment industry are paid to money managers
who gamble with other people’s money. It would behoove
the investing public if these managers answered the following
questions:
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Do you have skill or were you just
lucky?
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Were you the beneficiary of the
market’s random walk, or did you really know
tomorrow’s news and how it would affect the investments
you picked for your clients?
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Is there persistence in your performance?
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Is a three to five-year time period
long enough to judge your success?
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Statisticians say we need twenty
years of data. How many managers manage a mutual fund
for twenty years or more?
"Star money managers" attract
about seventy-five percent of new mutual fund investors.
Today's top ten mutual funds often fall from the sky within
three years. Susan Dziubinski, University editor with Morningstar.com,
says in Five Lies about Fund Manager Talent, “Former
Oakmark Fund manager Bob Sanborn, Yackman Fund’s
Don Yackman, and former internet fund manager Ryan Jacob;
these once-revered fund managers have fallen to earth.”
What usually happens is that investors
first invest in a “star” fund when they read
about the “latest and greatest funds.” Then
they sell their investments within a few years when they
become disenchanted by the mutual fund's descent. This
trend supports the findings of a Dalbar study that shows
investors hold mutual funds for an average of 2.6 years,
buying at the highs and selling at the lows. This results
in the average investor greatly underperforming a market.
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Education
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