Of course, some portfolio managers and analysts are better than others. Some may even justify their relatively high fees. But many of the most talented managers don’t always have the best track record. They are often confined to restrictive guidelines or accounting objectives, required to meet specific return or yield targets regardless of overall value, and compensated to either avoid losses versus seeking gains or worse, paid to take oversized risks to meet unrealistic investment goals. Or, they are just plain unlucky. Even Warren Buffett argues that trying to one of those elusive few is a fool’s errand and has dictated that his trustee largely invest in index funds.
Academcis Gene Fama and Ken French agree. They have found that although a small subset of investors are likely talented enough to overcome their fees (3% in their study cited on the right), it is impossible to determine which among the elite are simply lucky or good. Bill Miller, as one example, was heralded as the savviest of PM’s throughout the 1990s and first half of the new millennium. By 2005, after having beaten the market 15 years in a row, he had cemented his guru status. His willingness to keep investing in out of favor stocks like Amazon throughout the technology bust of the early 2000’s, though, served him much less well in 2006, 2007 and 2008 as he increased his weight in out of favor financial stocks.
Bill Miller fell from his pinnacle in 2005 to ranking dead last in its Lipper category by 2011, but we don’t need to pile on. In fact, we admire the quote from his 2005 WSJ interview: “We’ve been lucky. Well, maybe it’s not 100% luck. Maybe 95% luck.” And we agree with his buy and hold, contrarian biases. What needs to be retold, though, is that even his outperformance over 15 years is likely to have occurred by chance at some point, by some manager. Caltech physicist and author of “The Drunkard’s Walk” Leonard Mlodinow calculated that with well over 1,000 active mutual fund managers over the last 40 years, at least one of them had a 3 out of 4 chance of beating the market every year for 15 years straight. It’s just plain hard, arguably impossible, to separate the lucky from the good.