The Little Book of Common Sense Investing, Updated and Revised

Chapter TenSelecting Long-Term Winners

Don’t Look for the Needle—Buy the Haystack.

MOST INVESTORS LOOK AT THE disappointing past returns of mutual funds as a group and think, “Sure, but I’ll select only good performers!” Sounds easy, but selecting winning funds in advance is more difficult than it looks. Yes, there are always some winners that survive over a quarter- century, but not very many. But if we pore over records of past performance, it is easy to find them.

The mutual funds that we hear the most about are those that have lit up the skies with their glow of past success. We don’t hear much about those that did well for a while—even for a long while—and then faltered. And when they falter, they often go out of business—liquidated or merged into other funds. Either way, they vanish, consigned to the dustbin of mutual fund history.

But easy as it is to identify past winners, there is little evidence that such performance persists in the future. Let’s first consider the records of funds that have won over the very long term. Exhibit 10.1 goes back to 1970 and shows the 46-year records of the 355 equity funds that existed at the start of that period. The first and most obvious surprise awaits you: fully 281 of those funds—almost 80 percent— have gone out of business. If your fund doesn’t endure for the long term, how can you invest for the long term?

A fund failure rate of almost 80 percent.

EXHIBIT 10.1 Winners, Losers, and Failures: Long-Term Returns of Mutual ...