The NY Times reports that dumb luck often produces better results than that of a fund manager, a result that has been reported before in such places as by Nobel Prize Winner Daniel Kahneman in his best seller, Thinking Fast & Slow. The NY Times article begins:
Imagine a world where investors in the stock market have no skill whatsoever. The investors themselves don’t understand this, however, and many truly believe that they are good at what they do.
But in this thought experiment, there’s no doubt about the underlying reasons for fund managers’ success: When they turn in an outstanding performance, it’s just a matter of dumb luck.
What would stock fund managers’ performance numbers look like in such a universe? Very much like the world we live in now, but with an important difference: Over the last five years, actively managed stock mutual funds have performed even worse than would have been predicted if the fund managers were flipping coins instead of picking stocks.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.