"This is one of the great mysteries of finance. Why do people believe
they can do the impossible? And why do other people believe them?"
Daniel Kahneman, Professor of Psychology, Princeton University
The poster child for active management has to be Peter Lynch. In 12 years with
the Fidelity Magellan Fund he achieved a 29% return, while the S&P averaged
15%. Most of the difference, however, occurred in his first six years, when
the fund was small. During the second half of his tenure he barely exceeded
the index. If he had a "system", he couldn't explain it to his successor,
for in the years since Lynch left, the fund had an average annual return about
2% below the S&P index.
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Since 1993 Mr. Lynch has written an investment column for Worth magazine. In
the February 7, 2000 issue of FORBES, the authors calculated that following
Lynch's advice, an investor would have doubled his money---in a period when
the S&P tripled. Fact is Peter Lynch was just another active manager
who had a hot streak ---and the streak is over. Luck comes and goes. However,
even if he had beaten the market with skill, the extreme rarity of his run proves
futility of active management.
"Investors, as a group, can do no better than the market,
because collectively they are the market Most investors trail the market because
they are burdened by commissions and fund expenses."
Jonathan Clements, the Wall Street Journal, June 17, 1997
"Given their poor performance, how do actively managed
funds get away with charging high fees and incurring large costs? It's simple:
Investors let them ….…investors don't receive a bill labeled management
or trading costs "
Larry Swedroe, Journal of Accountancy, January, 2000
"If you can look into the seeds of time and say which grains
will grow and which will not, speak then to me."
William Shakespeare, Macbeth (Firing his fund manager at Morgan Stanley?)