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If the title of the article were accurate (which it's not, since the text of the article confirms the fund did not outperform in each of those 40 years), then t
by DavidSJ 12y ago
If the title of the article were accurate (which it's not, since the text of the article confirms the fund did not outperform in each of those 40 years), then that performance would be hard to explain by random chance. Assuming naively a 50% chance of beating the market each year, doing it consecutively for 40 years straight is 10^12 against, which is far larger than the number of people in the world, never mind number of funds.
Now, the naive assumption of 50% odds of beating the market is a little dangerous, since there are plenty of investments that are highly likely to beat the market but suffer occasional catastrophic losses -- i.e. without being particularly clever one can trade probabilities for magnitudes.
So at the end of the day, there's no substitute for understanding how a fund manager actually thinks and operates. It is possible to beat the market, and to do it consistently and for reasons other than luck. And it's possible, with diligence, to pick a fund manager to do it for you. But merely looking at the history of returns is not diligence, it's laziness, unless the fund has a truly astounding statistical record, which very, very few funds do, even the good ones.
- NhanH 12y agoI can't recall the statistical test being done in those papers that conclude how the funds don't do better than random chance right now, but I don't think random chance imply 50% chance to beat the market each year - so your maths following that won't hold. Why? I don't know the reason, but have a note: one year is a completely artificial cut off range. There is no reason to naively assume that it would be 50% chance of beating the market every year rather than 50% chance every 10 years, or 50% every other full moon. I think the maths will have to be done on something else and not a range period.
- DavidSJ 12y agoYou're right that it's an arbitrary interval, but the math is still valid if you assume (as I cautioned against) that each investment is a coin flip relative to the market. In that case, over any time period your relative performance is the sum of a series of coin flips, i.e. a binomial distribution with mean 0. This has a 50% chance of outperformance regardless of the interval -- what changes as a function of interval is the total variance, not the median result. One consequence of this is that the probability of outperforming each day over 40 days is the same as outperforming each year over 40 years. The latter sounds more impressive, but it actually isn't. The former would be impressive too if the null hypothesis really is a series of coin flips (but again, it's not).