|What investors need to know about probability.|
The theory tested here is that professional investment managers tend to produce subpar performance after fees are accounted for over a longer period of time. Mountains of evidence have been amassed examining past mutual fund performance, over long periods of time, and none has shown the pros beating indexes after fees and expenses.
The evidence offered today is real world and comes from Andrew Hallam, author of the forthcoming The Millionaire Teacher to be published by Wiley. The experiment is real world and ongoing. A year ago he asked readers to name their best mutual funds and their worst stocks. The professionally managed mutual funds for which investors pay a lot in fees and hidden expenses would surely outperform the worst stocks, right? In fact, it is difficult for DIY Investor to think of a way to set the bar lower for professional managers.
DIY Investor suggests that you read Andrew Hallam's post to see his results. Beyond his results, the list of worst stocks is interesting and informative. Look at some of the names: Kimco Realty, Ford, Alcoa. Out of 23 stocks, 6 had returns of more than 20%. But these are stocks DIY Investor would never choose, and he is sure his readers would never choose. The news on these stocks a year ago was horrendous. Recall that auto companies were on the verge of going under and banks were imploding. DIY Investor would have LOL at a Krispy Kreme recommendation (+44%).
Very few people would choose to hold these stocks. In fact, they were probably held by people so shell-shocked in recent years they couldn't hit the "sell" button.
But here's the kicker: if you invest in the total stock market, you would have a position in the stocks that you wouldn't choose and apparently the professional managers didn't choose. These are stocks that, at a given point in time, have been driven down by bad news. In fact, the news for most of them has been so bad that it has to get better. Nevertheless, very few investors can stomach buying them. Instead, human nature leads investors to buy stocks where the news has been surprisingly good. But...their prices have been pushed higher by the good news.
But buying and holding them is what is rewarding. The best way is with a low-cost, index fund. At least that's DIY Investor's take.
What say you?