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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Tuesday, January 10, 2006

Have We Come to Expect Too Much?

Perhaps the question I should ask myself is, "Have I come to expect too much?" and then follow it up with, "Are other investors like me?"

While walking home from the gym today, my post-workout euphoric mind started thinking about yesterday's post "Investment Professionals". I will admit my writing was perhaps a tad harsh. I said that many investment professionals provide little value to the client. What I mean is that after countless hours of working, most fund managers still underperform the S&P 500 index. Now, if you are one of the few who can historically beat the index over the long-term, congratulations. You are rare. And you should have a job for as long as you wish to work, as long as you keep your motivation to continually perform (you may not every year, but it's about long-term returns).

With that being said, I still maintain that most investment professionals are not in this category. Statistically speaking, it is a well known fact that somewhere between 75 and 85 percent of funds cannot beat the S&P 500 and what's more is that the percentage who DO beat it on a yearly basis changes almost every year. Again, there are some talented people out there who can do it, though. For example, one of the founders of Adage Capital Management is a very successful UW ASAP graduate. He was a former portfolio manager for Harvard Management Company and when he left, Harvard kept much of their assets with him. He is a very skilled portolio manager. It's no surprise that Adage's website is kept behind lock and key.

But, have we come to expect too much? "Beating" the S&P500 can be defined in many ways. I could purchase a fund that might beat the S&P on a risk-adjusted basis. This is great, and should be considered "beating" despite the fact that the return may be lower, on paper. But, if on a yearly basis investment pros can't beat the S&P 500, why not just buy the SPY Exchange Traded Fund, pay the 0.28% commission, and go play golf?

Like I said yesterday, this is why many people have flocked to the Hedge Fund world (as well as the ETF world). Of course, these investments are only available to the wealthy, but my guess is that as time goes on, Mutual Funds will start to act more like Hedge Funds do today. It's human nature for those fund managers to want to have some of the freedoms in choosing assets that hedgies do.


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