John Bogle on Investing: The First 50 Years

8

SELECTING EQUITY MUTUAL FUNDS

WHY IS IT VIRTUALLY IMPOSSIBLE TO PICK THE WINNER,YET SO EASY TO PICK A WINNER?AND WHAT SHOULD YOU DO ABOUT IT IN THE 1990S?

Journal of Portfolio ManagementWinter 1992

INVESTMENT MANAGEMENT is a field fraught with fragility and fallibility, a field in which today's careful, rational fund selections are too often tomorrow's embarrassments. There is little doubt in my mind that few portfolio managers actually believe that there are easy means to providing performance superiority, and that few financial advisers or intelligent investors believe that such superiority can be consistently recognized in advance.

This article considers what I believe to be a peculiar paradox of investing: how difficult it is to pick “the winner.” I would like to present the logic of my observations in the following manner:

1. A study of the randomness of equity fund performance that shows, using past performance as the criterion, how difficult it is to pick the winner in advance.
2. A real-world long-term study of the actual results achieved by an intelligent and careful system of fund selection.
3. Given the results of that study, an obvious means of owning a winner, and being guaranteed never to own a loser.
4. Assessment of techniques for evaluating past performance that are emerging in the “information explosion” regarding mutual funds today.
5. A look at a theory of “rational expectations” for stock market returns during the decade of the 1990s, and its implications for equity fund ...