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Sunday, May 16, 2010

Think you or your advisor can beat the market?

Mike Travaglini is the executive director of the Massachusetts employee retirement system-one of the largest pension funds in the country. Pension funds of this size have huge staffs of very smart analysts searching the world for the most talented investment managers. They had hired Bill Miller of Legg Mason, manager of the Value Trust Fund which had beat the S&P 500 for 15 consecutive years. They fired him in 2006 after his luck ran out and "...decided to get out of actively managed U.S. stock funds and stick with passively managed funds..." Mike Travaglini went on to say "The extra cost to hire a money manager didn't seem worth it." "If Bill Miller can't do it on a consistent basis, then nobody can".
If you think you or your investment advisor are smarter than Bill Miller and have as much information as Bill Miller and can actively manage assets to beat the market, then go for it. It goes without saying that Bill Miller at one time could pick up the phone and talk to the CEO of any major company in the U.S. Do you or your advisor have that kind of access?
The end result is that, according to an article on the front page of the Baltimore Sun today, Legg Mason is making major cuts in its work force.
This is just another piece of evidence supporting the thesis that individual investors should go with low cost index funds and stop paying self proclaimed "gurus" excessive fees to try to beat the market.


  1. I've invested both with both Bill Miller and Robert Hagstrom (author of the Warren Buffett Way books) at Legg Mason. Boy was that a wild ride, and a mistake I'll never repeat again. The performance didn't live up to the hype, and the high expense ratios were tough for any manager to overcome consistently.

  2. And the thing is...these guys are super smart and have access to all kinds of info!

  3. Just ask them, they'll be happy to tell you how smart they are any day of the week. Hagstrom still keeps trying to sell that he can beat the market through a concentrated portfolio of outstanding companies a la Buffett, but his results have fallen far short of the hype.

  4. Big S&P 500 type companies comprise over 80% of of total US market capitalization.

    By definition, this is where most money will be invested, so it stands to reason that this is where most professional time and energy will be directed.

    For this reason, any investor interested in these kinds of companies would probably be better off sticking to a passive investing strategy.

    However, for a disciplined value investor, there
    there are 1000's of smaller companies, often with no analysts and little institutional ownership, which are much more likely to be mispriced (sometimes obviously so).

  5. re: Parker

    Hey, if you've got the time, the resources, and the know how then go for it.

    Doing it yourself is a huge advantage. Having a "pro" do it for you costs so much that in the long run a small cap ETF is a better choice, I believe.

    I recommend to my clients that no more than 20% of their retirement funds be invested like this because of the risk involved.

    Interestingly, two gurus of low cost indexed investing - Charles Ellis and Burton Malkiel - state in their book "The Elements of Investing" that they buy individual stocks for their portfolios because it's fun!

    Thanks for the comment!