It is not the strongest of the species that survives, not the most intelligent that survives. It is the one that is the most adaptable to change.” ― Charles Darwin
[B]he program “People Hotline” on NRK explained this week what few people who work in finance want you to know, namely that most managers, analysts or brokers are not able to beat the market.
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Most managers, however, will argue that they have these skills, the same way that 85% of male drivers think they are better than the average of male drivers to drive.
Tricks that managers use to prove to customers that they are better were also put forward. [I]The most common is that they suggest a particularly favorable time period in which they beat the market. Another is that you put down the bad funds so that the bad history disappears. Just check the number of Norwegian funds and investment companies that were closed down after 2008.[/I]
Another trick is to swap benchmark (benchmarks).
It has happened that equity fund managers bought a few bonds when they have lagged behind stock index and then call itself a hybrid fund.
The latter is a fund that has spread assets in both equities and bonds to lower risk. This does, however, the fund underperformed the stock market when the market is rising sharply.
The current managers have not had any reservations against using the history of the stock fund they in reality have managed with an index consisting of both stocks and bonds. This trick allows the manager suddenly and of course appears to be a genius.
The program “People Enlightenment” did a lot of simple and understandable metrics to show that most of the few who beats the market only have luck and you do not have any guarantee that luck holds.
Is measured over 5 years it is close to any managers who beats stock market index. This is despite 89% of Norwegians save money placed with managers who say they are able to beat the index and therefore require higher fees.
Even one of the most legendary fund managers, Bill Miller, was undressed.
Millers Mutual Fund (Legg Mason Capital Management Value Trust) beat the index in the entire 15 years in a row before he lost his “mojo”.
Most likely explanation is that Miller invested only in value stocks (as opposed to growth stocks) over the 15 years. A period during which these shares happened outperformed other stocks.
[B]As this trend reversed and growth companies again became popular, did Miller underperform the market. Investors abandoned him and Miller left the industry.
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There are of course a number of others who have come to the same conclusion as NRK program. The program did not mention was that the research also supports that there are a few managers who deliver returns that are above average on consistent basis.
So it will always be in a large enough population. It is becoming increasingly difficult to identify the expert so that you can be part of the journey.
The reason is partly that it requires a lot of data collection and analysis to distinguish those who are really capable of all those who only claim to it.
The second reason is that fewer and fewer of those skilled today are willing to take the trouble and cost of managing other people’s money. Their performance is consequently to small to civic benefit. We can thank the authorities.
The regulatory financial authorities did not its job when it came to prevent either the financial crisis or the European debt crisis. As Bethany McLean and Joe Nocera expressed it in his book, “All the Devils Are Here”: "The Financial Crisis was not caused by a lack of rules. The Financial Crisis was caused by a lack of regulators willing two Regulate. "
Instead of ensuring that the participants followed the existing rules, the authorities have instead gone off the shaft by creating a myriad of additional regulations.
It has now become so complicated both to interpret and follow the regulations that many in finance looks dealings with customers as a business risk they are not willing to take. It does not help nor that reactions from authorities do not follow the nature of the infraction, but practiced differently depending on which type of financial institutions that have made the infringement.
The result of this is that an increasingly smaller part of the skill, knowledge and return to the cleverest benefit society.
When it comes to excellence is it that the more transactions some doing, the better basis we have to argue about the results are based on luck or skill.
If you have for example been sitting in the same portfolio of value-based shares for 15 years where this type shares have risen more than the market, the figures tell less about skill in terms of stock picks. The result in this case tells probably more about patience and discipline.
On the opposite side has financial institutions that make many transactions per day. Many of these trades only intraday. That means they go home in the evening without any kind of risk.
The results of these are in very marginally affected by a “tide that lifts all boats,” or market trend as it is also called. This means that one can not exclude that there is randomness of this as the basis for the return.
Common to most of these financial institutions and funds is that they are technology-based and quantitative (mathematical and statistical) run. They are thus not vulnerable to human weaknesses that cognitive biases, fear, greed, lack of discipline or intimidated by gaudy newspaper cover with red and yellow arrows.
Many of these new companies are doing very well. One of them had only a single day loss in five years.
According to calculations made by “People Enlightenment” there is a probability of only 0.003% for that one manages a result corresponding Bill Miller. The probability of being able to make money in 1274 a total of 1275 days (5 years) is the comparison hardly measurable. If you choose anyway to try, one would have to write 400 zeros after the comma before the first number> 0 appear.
The result is not fantasy, but belongs to the US financial firm Virtu Financial. It is not without reason that much of the “smart money” today ends up in financial institutions few have heard about.
These are enterprises run by people who see opportunities rather than threats by change and who possess the abilities and skills to link these capabilities together with the latest technology.