Nobody Tries to Beat the Market

When was the last time that you saw an advertisement for a fund that hoped to beat the S&P500 index by 0.5% (after all expenses and fees), annualized, at the end of a decade?

I cannot recall having seen one either. Yet, this is the kind of return that a responsible mutual fund manager can deliver. If luck is on his side, he will deliver an additional 1%.

What I do recall are promises to trounce the averages, gain an edge each and every year and so on. Those promises make great sales pitches. But they lead to lousy investments.

I contend that the typical mutual fund manager does not even try to beat the market. Rather, he tries to outperform it by a wide margin. If he lucks out, he is blessed with untold wealth. If he doesn’t, he has short tenure

The key to his success is to gamble. Skill can improve his odds. But he still has to gamble. Responsible investing leads him directly to the unemployment line.

I assert that the typical mutual fund manager knowingly pursues a suboptimal strategy. If he doesn’t, he loses his opportunity to pursue any kind of strategy. The typical mutual fund looks as if it is run by a gambler because it is run by a gambler.

This is why Index Funds have an advantage. They get rid of the incentive to gamble.

Individuals can have an advantage as well. But many are caught up with the sales pitches and the television coverage. This is their downfall. They lose sight of what is reasonable.

Have fun.

John Russell