Individuals Pick Winners

Individuals pick winners.

Individuals pick winners consistently. The myth about not being able to identify superior mutual fund managers ahead of time is only a myth. Individuals do it all the time.

In terms of where individual investors put their money, actively managed mutual funds outperform the stock market (i.e., the S&P500 index). Christopher Carosa demonstrated this convincingly in his October 2005 article: Passive Investing: The Emperor Exposed.

For more details, see to my NOTE: News Alert: Explosive Article in this month's FPA Journal.

Notes (Updated: November 29, 2005)

The rhetoric about individuals is inconsistent. We are told that individuals underperform market averages because they follow fads. We are told that nobody can outperform the market consistently. Logic suggests that we should be able to beat the market easily. All that we have to do is avoid the fads that cause so many others to fall behind. If lots of other people get below average returns in an easily discernable manner, we have a great opportunity. Somebody has to get above average returns. Why not us?

Where individuals stumble is in their timing. They follow trends. They get in too late. They leave too late.

We are told without qualifiers that nobody can time the market successfully. Logically, this is ridiculous. Logically, this tells us that we can never discern when valuations are high and when valuations are low, not even by the coarsest of measures. Logically, this tells us that no one even suspected that there was a bubble.

Missing in such discussions is that different investors have different objectives.

Many Different Objectives

A Natural Arbitrage

It makes sense for retirees to seek consistent income and for younger investors to seek higher returns. There is a natural arbitrage. Older investors are willing to give up part of their long-term return to gain consistency. Younger investors are willing to accept more short-term variation in exchange for higher returns.

Now for a dirty little secret.

Older investors are likely to get both: better consistency and higher returns.

I admit that this is only speculation. It is only an opinion. But I believe that younger investors are willing to pay much too much for the possibility of higher returns. They make the mistake of assuming that higher risk guarantees higher returns. A rational investor never accepts a risk without a reasonable expectation of higher returns. A rational investor demands to be paid well for accepting risk. A gambler does not.

Have fun.

John Walter Russell
January 27, 2006