3 ms·

Makes you wonder why the 89% of fund managers that fail to beat the market don't just pick "value" stocks.

bombcar 5y ago
Because back-testing is really easy to pick value stocks, forward picking is really hard. (Fun fact I've heard, funds beat the indices before expenses but fail after expenses ...)
SamBam 5y ago
My uneducated guess is because they are driven to try and "win big," and they consistently overestimate they chances of doing so, and are uninterested in safe-but-boring.
bumby 5y ago
I suspect there's a lot at play, including cognitive biases. For example, value stocks tend to be contrarian plays. The stock is a good value because the price is down, meaning the majority don't have faith in it. Fund managers don't want to be holding these stocks when others are crushing it because people will look at their holdings and have FOMO. When, say, tech is flying high, people want to see that their fund manager owns tech. Another example is leverage limits may incentivize fund managers into high-beta stocks. These are the one's that are most likely to win (or lose) by a large margin compared to the market. Over-optimism bias makes fund managers think they can disproportionately pick the winners.
pavlov 5y ago
Because the way to get ahead as an active fund manager isn't to deliver returns that match S&P 500, it's to deliver returns that are uncorrelated with the primary market. Once you're in top half of that 11% who consistently beat the market that way even if by luck, survivorship bias will have customers beating a path to your door. Nobody remembers the 89%.
JKCalhoun 5y ago
You're a true Boglehead like myself. That was my exact thought reading the article. Seems the crux of the problem is ... how can you pick value stocks? I'm not Warren Buffett who can spend my entire career weighing a companies value.
paulpauper 5y ago
many companies are cheap for a reason, such as slowing growth.

Because back-testing is really easy to pick value stocks, forward picking is really hard. (Fun fact I've heard, funds beat the indices before expenses but fail after expenses ...)

SamBam 5y ago

My uneducated guess is because they are driven to try and "win big," and they consistently overestimate they chances of doing so, and are uninterested in safe-but-boring.

bumby 5y ago

I suspect there's a lot at play, including cognitive biases. For example, value stocks tend to be contrarian plays. The stock is a good value because the price is down, meaning the majority don't have faith in it. Fund managers don't want to be holding these stocks when others are crushing it because people will look at their holdings and have FOMO. When, say, tech is flying high, people want to see that their fund manager owns tech. Another example is leverage limits may incentivize fund managers into high-beta stocks. These are the one's that are most likely to win (or lose) by a large margin compared to the market. Over-optimism bias makes fund managers think they can disproportionately pick the winners.

pavlov 5y ago

Because the way to get ahead as an active fund manager isn't to deliver returns that match S&P 500, it's to deliver returns that are uncorrelated with the primary market. Once you're in top half of that 11% who consistently beat the market that way even if by luck, survivorship bias will have customers beating a path to your door. Nobody remembers the 89%.

JKCalhoun 5y ago

You're a true Boglehead like myself. That was my exact thought reading the article. Seems the crux of the problem is ... how can you pick value stocks? I'm not Warren Buffett who can spend my entire career weighing a companies value.

paulpauper 5y ago

many companies are cheap for a reason, such as slowing growth.