I believe one of the main reasons money managers underperform the market is diversification. Robert Haywood from the University of Denver showed that if you took most money managers’ top ten stock picks, they outperformed the market. But, when you add the other 100 plus stocks , which most money managers have, their results decline significantly. I call this, deworsification.
Sometimes, less is more. Evaluating each company and its potential for innovation and growth is extremely important to ensuring successful investments. R.W. Baird did a study in which they examined over 4,000 mutual funds. They found only 370 produced an annual average of at least one percent better than their benchmark over a period of 10 years. And, not one of those 370 top performing funds worked on a computer model. Every single one of them had an active money manager – a real person who selected the stocks.
Equations are nice. They are simple and predictable. Unfortunately, neither life nor the market are simple and predictable. It takes human intuition to weed through and determine which companies will fail and which will succeed.
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