Active Failure

We strongly believe that active investing management (picking stocks, timing markets, etc.) cannot work. Study after study has found that the most likely explanation for the occasional success of some active managers is more easily attributed to luck than skill.

In fact, if luck was the only factor involved you would expect that, on average, about half of active fund managers outperform their benchmarks and half would underperform. Because of their higher costs, active managers don’t do anywhere near that well.

In a recent column, the Wall Street Journal’s, Jason Zweig, discussed research from Wharton (at University of Pennsylvania) that showed that a mere 9.3% of actively managed large company stocks funds beat the S&P 500 so far this year. That’s the worst performance by active managers, ever!

Zweig compares this year's pitiful performance with the 25-year stock pickers market beating average of 38.6%. Wow! That isn’t even close to 50%.

Don’t worry though. Active managers have a ton of excuses like the market's lack of “dispersion.” In other words, the markets are acting too darned efficiently.

Another problem is “extreme sector rotation.” Wait. Aren’t active managers paid to predict which sector will be hot and which will cool down?

One of my favorites: Good stocks aren’t good enough. One T. Rowe Price manager complained, “it’s harder for your good decisions to add more value than your bad ones detract.”

Hey, active managers, look at your numbers. On average, you never have, as a group, beaten the indexes. Yes, this year you looked particularly bad, but stop lying to investors and do the math:

Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs.
— Professor William Sharpe - Nobel Laureate - Stanford
Don McDonaldComment