Back in 1973, when I was running a stock portfolio as
business manager of a foundation, Burt Malkiel published a book on the stock
market that showed the stock market to be a random phenomenon. The argument was overwhelming and convincing
to me as a statistician.
More than 30 years later the Wall Street Journal (8/9 Smartmoney Fund Screen) inadvertently published a table that supports Malkiel and shows that even the most knowledgeable and professional investors can’t beat the average of the market.
The WSJ in its Smart Money Fund Screen was able to find only six mutual funds that out performed the S&P 500 for the past ten years and since the inception of the mutual fund.
That number looks right to me.
Ten years ago there were 9,000 mutual funds. If each year 50% did better than the S&P and 50% did worse, we can calculate the number of funds that would have randomly done better after ten years. At the end of one year 4,500 would have done better. At the end of two years 2,250 would have done better. At the end of ten years 8 would have done better than the S&P 500.
But only 6 mutual funds actually did better, so the other two random funds that did well in the past ten years had a poorer than average record from their inception until 1995.
The relevance is that all mutual funds have professional managers with a salaried research staff and plenty of inside information. They still didn’t do any better than a random dart-throwing contest.
Most of my money is in index funds, including some Japanese index funds, an Indian index fund, an Israeli index fund and three U.S index funds.