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But that assumes that one could predict in advance what those highest performing funds would be. Of course the highest performing XXX will be above average. The
by dhosek 6y ago
But that assumes that one could predict in advance what those highest performing funds would be. Of course the highest performing XXX will be above average. The point is that no one can consistently predict which ones will be the highest performing XXX. Worse still, regression to the mean indicates that if, in 2021 you invest in the highest performing XXX of the preceding X years, you're more likely to get returns below average.
And let's suppose that there really is a fund staffed by a group of super-geniuses who can reliably pick the best performing stocks. There are two possibilities: They take on more and more investment capital until their returns end up getting closer to the mean or they don't accept new investments and the hypothetical new investor is left out in the cold.
- fractionalhare 6y agoNo I didn't assume that, I fully agree with you. Funds which are capable of consistently (and safely) beating the market on an absolute basis eventually cap their AUM and return outside capital.
- kqr 6y ago> Worse still, regression to the mean indicates that if, in 2021 you invest in the highest performing XXX of the preceding X years, you're more likely to get returns below average. No, returns of the average. Regression to the mean means, well, what it says: it regresses to the mean, not past it. Your version is what we call the gambler's fallacy!
- CyberDildonics 6y agoThe gambler's fallacy is applying past events that have already happened to randomized trials in the future. This is not the same because outlier movement of macro demographics and financial policy does have an impact on the future. If the stock market were random on a macro scale it would average zero movement.
- kqr 6y agoI agree with all of that and I still think expecting an unusual low after an unusual high is indicative of the gambler's fallacy.