There's an old saying that goes "I'd rather be lucky than good," and nowhere is that quip more relevant than on Wall Street. The truth is, whether you call them falling stars or statistical anomalies, very few money managers - if any - can consistently beat the market.
If fact, while John Paulson's reversal of fortune may have been the most widely followed, he was in good company last year, as passive or unmanaged index funds beat 80% of their peers, says Larry Swedroe, author and director of research at Buckingham Asset Management in St. Louis.
"Past performance has NO predictive value whatsoever," Swedroe argues, playing off the well worn SEC disclaimer that ''past performance is no indication of future results."
He says reams of data and studies suggest that stock picking is a very poor strategy for individuals and professionals alike. Even though conventional wisdom compels people to put their money with managers that have great track records, Swedroe says the problem is there is no way to differentiate between luck and skill, or to know why and when a certain manager will lose the Midas touch.
He cites Legg Mason legend Bill Miller as an example, who beat the S&P 500 15 years in a row. "The next five years he (Miller) underperformed the market by 10% a year, ranking in the 98th or 99th percentile almost everyone of those years."
Notably, Swedroe's harshest criticism is reserved for hedge funds, which he refers to as ''horrific investments" that are ego-driven status symbols that have more in common with wearing a Rolex watch than with making money.
"The last nine years the HRFX hedge fund index has underperformed every major asset class in the world," he says, while hedge funds clearly took on more risk and delivered highly tax inefficient results along the way.
Of course there are prominent success stories, but Swedroe attributes these spurts of outperformance to little more than luck or randomness. Thus, he steers his firm's $14 billion of assets into passive, well-diversified investments where the typical portfolio indirectly owns more than 11,000 stocks.
"Yesterday's masters of the universe are most often tomorrow's cosmic dust," Swedroe concludes.
His bottom line advice: Take a ''postage stamp'' approach instead, and stick to what they have selected rather than chasing after performance that has already been delivered.
When it comes to investing, is it better to be good or lucky? Let us know in the comment section below or visit us on Facebook or follow me on Twitter @MattNesto.
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