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Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection, + Website, 2nd Edition by Joseph Belmonte

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Chapter 4

My Theory of Why Most Money Managers of the World Cannot Outperform the Market Averages

I would like to take a time out from numbers for a little bit while we let the last chapter sink in. Let's take this occasion to discuss the academic world that spawns the future accountants and finance professionals (analysts and money managers) of the world.

If you look at the statistics of money manager returns you will see headlines in any given year such as, “75 percent of the money managers (of publicly traded stock mutual funds) UNDERPERFORMED the market averages over the past year.”

One study showed that out of the 25 percent of the money managers who were able to outperform the market in any given year, 67 percent of those money managers did not outperform the averages the following year. Of course, by market averages we are speaking of the Dow Jones 30 Industrials and/or the S&P 500 Index.

Over the longer term, fewer and fewer money managers are able to outperform the averages over the entire time period. I recently read that over any 10-year period, just 4 percent of the money managers are able to outperform the S&P 500 Index on a risk-adjusted basis. Please remember when we speak of outperforming or not outperforming the averages, we are speaking about portfolios, which exhibit the same risk or have the returns adjusted for the same risk as the Dow or the S&P 500.

The aforementioned performance statistics lend credibility to the followers of the efficient market hypothesis. ...

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