Saul, I always note with wry amusement your line about intelligent stock picking can beat any index, followed by ‘How could it not?’. This cannot possibly be a disingenuous remark so a quick riposte is required. The plain, awful fact is that not only could it not, it manifestly does not! After any reasonable investment horizon, say 20 years, the number of fund managers left standing against the index is roughly the same as pure, random chance (the coin-flippers) would predict. Hell, there aren’t that many after 15 or even 10.
I know that you and I disagree about this, even in the face of my results over almost 30 years now. I’m surprised you are not more evidence based.
Basically, it’s because we are negotiating a little speed boat while the mutual fund managers are trying to turn a battleship. I remember in 2010 (after the big crash of 2008) when all the talking heads were talking about the lost decade for the markets (which apparently were where they had been at the start of 2000), and I was up 500% in those ten years (not a misprint) and didn’t know what they were talking about. Here’s what I wrote in the KB, with some additions:
You can beat any mutual fund over the long run. Since they are investing many millions, if not billions of dollars, they can only invest in very large established companies, and hope to find a pricing anomaly.
I don’t know of any fund manager or hedge manager with a run like mine. It went through a number of recessions and lasted 19 years until I finally had a down year in 2008. But again, if a fund manager does real well for a year or two, not only does his fund get larger because of capital gains, his fund get flooded, swamped, with inflows of dollars and he can’t duplicate what he did when the fund was small.
Also, investors pour money into the mutual fund when it’s at the highs, and the managers, who usually have to be 95% invested or something, have to buy at the top. Then the investors pull money out at the bottom when everyone is shouting “Sell!” and the managers have to sell at the bottom to cover withdrawals. It’s no wonder we always beat them.
Also a mutual fund can’t be concentrated like our portfolios can be. They usually have to be invested in at least 50 to 100 stocks and finding 50 stocks that might rise 40% or 50% on the year is a LOT harder than finding and following 10 or 15. they can’t possibly follow what’s going on with all their stocks.
Also they have lots of people looking over their shoulders for quarterly results (are they equaling their benchmark each quarter?) It makes it hard to get good results, I’m sure. It’s the old “You never get fired for investing in IBM” syndrome, which makes them avoid taking chances on little companies the way we do.
So saying that mutual fund managers don’t beat the indexes has nothing to do with what we can or can’t do.