Still Waiting for a Stock Picker's Market
Eugene Fama is not surprised.
The chart above is from the latest installment of the S&P Dow Jones Indices annual survey report, S&P Indices Versus Active (SPIVA). It is an apple-to-apples comparison of the performance of active managers in their own category against the applicable index benchmark.
It is a straightforward method of seeing how tough it is to add value as a stock or bond picker. There is a wealth of information at the link—I encourage you to check it out.
Pejoratively, I refer to it as the report showing how my industry is full of hubris and charlatans.
The OVERWHELMING majority of professionals managing money by trying to actively choose individual stock or bond investments do not add value for clients.
My caution to you is: Beware those looking to take your money for the privilege of letting it grow slower than it otherwise would AND FOR A HIGH FEE NO LESS.
What makes them think they can out guess the market? What makes you think you can select the few of them who do?
Finding one who seems to is an underrated problem. Separating skill from luck is very, VERY hard.
And don’t get me started on those of you who don’t have an army of analysts and 24/7 resources devoted to trying to pick stocks and bonds. Would you expect to show up at The Masters, et al. thinking you had a chance?
This is one key reason why in my practice and at my firm we do not endeavor to be stock and bond pickers investing in individual securities. There is no way we (or anyone similarly positioned) would be world class in that entire field, and it would be highly unlikely we could be great in any one subset of it.
Even if we seemed to be good at some aspect of it, it is, again, very hard to separate skill from luck. And even if we were good at it, we would not likely be able to sustain that advantage over long periods of time (persistence is its own area of difficulty). All these managers claiming to have been great are never going to walk into a meeting one day to declare: “Turns out we aren’t (weren’t) good at this now (after all)—we are fired!”
A very select group of active money managers have had meaningful, persistent outperformance (alpha). Finding them is very hard. Getting access to them at reasonable fees adds to the difficulty. Investor beware.