Chapter 11. On Investment Relativism: Happiness or Misery?
More than at any time in the history of the financial markets (or so it would seem), the quest for investment success has come to center on relative performance over the short term. We have entered what we might call "The Age of Investment Relativism." All eyes seem focused on a comparison that has become as much a part of investors' lives as the daily fluctuations in the stock market: "How did my equity portfolio perform relative to the Standard & Poor's 500 Composite Stock Price Index?" Our happiness or misery seems to depend on how we answer that question.
Some 150 years ago, the impecunious and mercurial Mr. Micawber (in Charles Dickens's David Copperfield) bestowed happiness or misery according to the following formula: "Annual income, twenty pounds, annual expenditures nineteen six, result happiness. Annual income, twenty pounds, annual expenditures twenty pounds six, result misery."
Too many mutual fund portfolio managers and shareholders now seem to operate in a system representing a new form of Micawber's formula: Market return, 17.8 percent, my return 18.3, result happiness. Market return, 17.8 percent, my return 13.2, result misery.
That last set of returns, in fact, describes the shortfall of the average domestic equity mutual fund compared to the stock market (as measured by the S&P 500 Index) over the past 15 years: 17.8 percent versus 13.2 percent. The 4.6 percentage point gap suggests why most equity fund managers ...
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