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Thursday, December 13, 2012

Nate Silver on Identifying a Superior Mutual Fund

Source: Amazon
For those of you who don't know, Nate Silver recently gained considerable notoriety for correctly predicting all 50 states in the recent Presidential election.  This is in contrast to Karl Rove, who denied the results even after they were in.

Understandably, Silver's recent book, The Signal and the Noise: Why So Many Predictions Fail -- But Some Don't,  has skyrocketed to the top of the business best seller list.  I plan to review it on the blog here someday but, alas, I'm 49 out of 114 on the Howard County Library waiting list.

I do have the next best thing for do-it-yourself investors - a review, "Nate Silver's Message for Financial Advisors" by Ben Huebscher and Michael Edesess from Advisor Perspectives, that mentions Silver's effort to find "...the next great mutual fund."

He looked at mutual funds’ performance from 2002 through 2006 and compared it with performance from 2007 through 2011, finding that “there was literally no correlation between them… there was just no consistency in how well a fund did, even over five-year increments.” His conclusion is that “you’re best off just selecting the one with the cheapest fees — or eschewing them entirely and investing in the market yourself.” If any more were needed, this provides further confirmation – from no less an authority than the “Lord of the Algorithm!” – that statistical methods are unlikely to work for finding a good active manager.
The "Lord of the Algorithm", so dubbed by Jon Stewart, is none other than Nate Silver himself.  Read the book and you'll find that Silver is adept at finding baseball talent but not so much at uncovering investment opportunities.

The tune 's the same, the singer's different.  Understand the role of " fees" in the investment process.

1 comment:

  1. Sounds a lot like John Bogle's "In investing you get what you don't pay for" (i.e., statistically speaking, the greatest determinate of future returns is cost).