In the
era of perpetual reality TV offerings it is no surprise that Big Foot has finally
nabbed his own TV series. And like most
outrageous reality TV I caught myself watching for a few minutes.
While
it’s almost impossible not to enjoy the spectacle of grown men and women
hunting down the elusive beast and honing their Big Foot Call, most rational
viewers shake their head at the futility of the exercise. Where is the substantial proof? This is not the 1960s. Fuzzy videos are ancient history. We have night vision goggles, infrared
cameras, and HD video in the hands of almost every cell phone owner. Surely some irrefutable evidence would have
surfaced by now. If you are to convince
me I want an image so clear I can count his pearly whites. That is the type of evidence the technology
today demands.
It is
precisely this same thought that went through my head when I read the words
from a recent WSJ article mentioning the performance of actively managed mutual
funds for the first two months of 2012.
“Many fund managers are doing a far better job of
beating stock-market benchmarks this year than they did in 2011. Among
diversified large-stock funds, 64% beat the Standard & Poor's 500-stock
index in the first two months of 2012, versus only 20% in 2011, according
to Morningstar Inc.”
“It’s the
Sasquatch!” I thought. Or you may know
him by his other name “The Active Manager.” He has poked his head out for us to
have a glimpse, but surely he will scurry into the bush just in time to leave
the image on our photos blurry.
It may
seem like a farfetched illustration, but follow my logic for a moment. Much like the camera technology of the 1960s
pales in comparison to what is available today the stock market data is very
similar. In fact, it was virtually
nonexistent until the Center for Research in Security Prices (CRSP) was founded
in 1960. Since 1960 academics have
gradually filled in the gaps. Rex
Sinquefield and Roger Ibbotson first published their comprehensive book “Stock,
Bonds, Bills and Inflation” in 1984 based on their original 1976 study taking
multiple data sets back to 1926. Eugene
Fama, Kenneth French, and James Davis subsequently extracted stock market
factor returns also going back to 1926, completing the entire data set for the
first time in 2000, and it was not until 2006 that CRSP released their latest
update of data which now contains daily stock market returns from 1926 to
present.
If Big
Foot hunters in 1960 had access to Kodachrome then investors in search of
successful stock pickers at that time might as well have been trying to
decipher hieroglyphics. Thankfully this
is no longer the case and the fact is we DO have significant data resources at
our finger tips. Data is plentiful and
computational power is cheap. So what
has the new information provided us? Has
the active manager come into focus?
It
appears the answer to the second question is no. Researchers and academics continue to publish
research that reinforces the idea that active management is a negative sum game
(after fees) and even if there are successful active managers it is impossible
to distinguish them ex-ante. It is much
more likely the active managers’ results are a product of luck than skill (See
“Luck versus Skill in the Cross Section of Mutual Fund Returns” Fama 2009).
On the
other hand, analyzing the historical data continues to strengthen the case that
a broadly diversified efficient market portfolio will provide a return
commensurate for the risk you take. And more importantly it can predictably guide
you to retirement and beyond. This begs
the question: “If I don’t need active management to reach my goals, why bet my
retirement on something that may or may not exist?”
So the
next time you are checking your Morningstar Ratings or listening to CNBC argue
over stock picks. Remember the Sasquatch
and ask yourself: “Why is this investment picture so blurry?”
No comments:
Post a Comment