Many people invest their money through mutual funds, which means your money is managed by professionals who have the right education and stock picking skills, right ? Well, that is theory, but is backed by sound evidence. A number of studies have shown that is not the case, click here to read about one such study. Studies indicate a minuscule percentage of the managers managed to beat the market or Index funds in a long run.
Does vast majority of the managers have the stock picking skills, I am not sure. Let say we have a bunch of 100 chimpanzees randomly pick stocks, by sheer statistical probability some of the chimpanzees will do better than the market in the first year, even fewer will do better in the next year and one of them will beat the market for 5 consecutive years, which by then will be hailed as investing genius!!
Vast majority of the fund managers success is down to mere statistical probability. No surprise that top performing fund for the past 5 years is highly unlikely to do so in the next 5 years. For instance, I invested in SBI Magnam Tax gain fund in 2008 looking at it performance 5 years prior to 2008, however in the next 5 years it performance was mediocre to say the least. And currently the best performing fund in my portfolio is an Index fund ‘Money Builder Index UK Index’ from Fidelity which has outperformed other active funds in my portfolio, I am now fairly convinced that most active fund managers are no better than a bunch of proverbial chimpanzees throwing darts at stock board, their success or failure is all down to chance.
Stock picking skills is a rarely in the investment world and very few possess it. It does not mean it does not exist. There are few Fund managers like Anthony Bolton who have beaten the market by a good margin for a longtime. Vast majority will underperform the market after taking into consideration the cost of managing an active fund. An investor is better of investing in Index or passive funds, as the probability of identifying the next Anthony Bolton in advance is next to zero.