Few Professional Investors, Hedge Funds, and Mutual Funds Routinely Beat the Market

Wall Street, New York

Vanguard founder John Bogle, Warren Buffett, Charlie Munger, and many wise people have, with plenty of persuasive evidence, adviced that most people shouldn’t even try to beat the market or attempt to manage their investments actively. Instead, they should just pick low-cost index funds and assemble a balanced and portfolio based on their specific risk profiles and financial goals.

Few professional investors have actually managed to outperform the rising market consistently over those years. A study quoted in the New York Times indicates that perhaps only two mutual fund managers have beat the broad stock market indices: the Hodges Small Cap Fund and the AMG SouthernSun Small Cap Fund.

In other words, if all of the managers of the 2,862 funds hadn’t bothered to try to pick stocks at all—if they had merely flipped coins—they would, as a group, probably have produced better numbers. Instead of two funds at the end of five years, basic probability theory tells us there should have been three. (If you’re curious, I explained how the math works in a subsequent column, “Heads or Tails? Either Way, You Might Beat a Stock Picker.”

Warren Buffet’s The Million-Dollar Bet

In 2008, Warren Buffett bet that over a 10-year period the S&P 500 would outperform a sampling of hedge funds. Buffett’s The Million-Dollar Bet with was New York money manager Protege Partners pits the S&P 500, as represented by the Vanguard 500 Index Fund Admiral Shares, against five funds of hedge funds chosen by Protege Partners, the names of which have never been disclosed. A charity of the winner’s choice will receive $1 million or more at the end of the wager.

Fortune’s Carol Loomis mentions that, during the seven years through the end of 2014, the Vanguard 500 Fund is up 63.5% compared 19.6% for the Protege hedge funds of funds. Not all of the five funds had their final figures for 2014, when the Fortune article was published.

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