Can Anyone Beat the Market?

So far this year, I have made two posts which point out that both actively managed mutual funds and individual investors have a difficult time beating the market. Well, continuing on that topic, here are two more articles which show that trying to beat the market is likely a waste of time. The first is titled, " How to Squander $170 Billion", and in it, we learn that plan sponsors, people in charge of pension funds, do a horrible job of picking investment managers. They hire and fire managers at the wrong times, thereby costing their funds billions of dollars. According to Professor Scott Stewart,

“Plan sponsors never make their money back. If they simply went on vacation, they could save their clients $170 billion – and that doesn’t count transaction costs.”

And then there is this report, Evaluation of Active Management of the Norwegian Government Pension Fund — Global, which is a pretty technical report, so I will summarize the findings. The Norwegian Government runs a sovereign wealth fund which is one of the largest in the world, with about $430 billion thanks to oil revenues. The fund spends considerable time and effort managing its assets, with an internal staff of 249 employees and hundreds of outside investment managers. Last year, the fund hired three academics to evaluate its performance, and they produced the report referenced above. Their conclusion is that "the overall behavior of the Fund is very similar to an index fund", which begs the question, why pay for all the staff and investment managers if your performance ends up just mimicking the market?

How Cool Is This!

Check out this article in this week's Economist about a new machine that prints body parts!

Science fiction and reality keep getting closer together.

I Have Seen The Enemy, and It Is Me

Here is a good interview concerning behavioral finance and how it affects individual investors. The finance Professor who is interviewed, Terrance Odean, makes the argument that due to behavioral biases like over-confidence, individual investors who actively trade in their accounts make a mess of their portfolios.

His advice to people is:

"Generally speaking, you should buy and hold, invest for a long horizon, pay attention to your trading costs and taxes, and diversify"

I couldn't agree more!

Another Optimist

In this morning's Wall Street Journal, Andy Kessler writes that there may be a way for the Federal Reserve to exit the current monetary expansion without killing the economic recovery. Not only that, he thinks his plan could avoid rapid inflation and make bank panics a thing of the past. His idea is to have the Fed increase the amount of reserves that banks are required to hold, thereby reducing the amount of leverage in the banking system and giving the fed more control over money supply.

I hope Andy is on to something and that Bernanke is thinking along the same lines. A more stable banking system would certainly help all of us, and I am all in favor of solutions that require less regulation and bureaucracy.

An Optimist

I read this article, "Why the Recovery Will be Robust" in yesterday's Wall Street Journal. What struck me is that this is the first time I've heard any economist claim that we will have a strong recovery. The general consensus has been that the recovery will be mild. I really have no clue how strong or weak the recovery will be, but I'm am often skeptical of consensus opinions. If everyone says the recovery will be weak, then I won't be surprised if it's stronger than expected.

I also like the article because it gives a pretty straightforward and simple explanation of how economies work. Here is a good example:

"The popular idea that the economy is driven by "stimulus" spending—as if politicians could capture and bring in resources from outside the economic system—is mistaken. Economies grow as the result of capital being put to work. Capital is plentiful. But it retreats in times of turbulence and uncertainty, coming back to work when uncertainty abates."

I agree that capital is currently plentiful, thanks to all of the actions by the Federal Reserve. Let's hope that businesses do a good job putting that capital back to work, resulting in a stronger than expected recovery.