Academic Papers

 

The Loser’s Game

Gifted, determined, ambitious professionals have come into investment management in such large numbers during the past 30 years that it may no longer be feasible for any of them to profit from th eerrors of all the others sufficiently often and by sufficient  magnitude to beat the market averages.

Disagreeable data are streaming out of the computers of Becker securities and Merrill Lynch and all the other performance measurement firms. Over and over and over again, these facts and figures inform us that investment managers are failing to perform. Not only are the nation’s leading portfolio managers failing to produce positive absolute rates of return (after all, it’s been a long, long bear market) but they are also failing to produce positive relative rates of return. Contrary to their oft articulated goal of outperforming the market averages, investment managers are not beating the market: The market is beating them.

Faced with information that contradicts what they believe, human beings tend to respond in one of two ways. Some will assimilate the information, changing it – as oysters cover an obnoxious grain of silica with nacre – so they can ignore the new knowledge and hold on to their former beliefs; and others will accept the validity of the new information.

Instead of changing the meaning of the new data to fit their old concept of reality, they adjust their perception of reality to accommodate the information and then they put it to use.

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