After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only as good as a low-cost passive index fund. The other 97% can be expected to do worse.
Interpretation
Most managers fail to outperform a simple index fund after fees are taken into account.
Eugene Fama's quote highlights the reality of investment management, emphasizing that only a small percentage of managers have the skill to deliver returns that surpass the costs associated with their management. Despite some managers showing impressive past performance, this quote suggests that most will struggle to meet or exceed the returns of low-cost index funds, illustrating a significant challenge in active investing.
In practice
This quote can be used in a financial seminar to illustrate the challenges of active management.
The problem that people don't understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they're not really active. They have to make bets. What that means is there's a huge dispersion of outcomes that are totally consistent with just chance. There's no skill involved it. It's just good luck or bad luck.
Market timing doesn't work. If all the bubbles and all this mispricing really exist, how come so few people see it before it turns out that way?
There's quite a bit of evidence that even professionals don't show any ability to pick stocks or to predict market rollbacks. Most of the people we identify as skilled based on returns have probably just been lucky.
We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'
The research indicates that when we women invest, we women do tend to be more patient, take a longer-term perspective and as a result of it, tend to be better investors than men. But the messages we get are that investing is sort of 'the guys' world.'
Debt is so ingrained into our culture that most Americans can't even envision a car without a payment ... a house without a mortgage ... a student without a loan ... and credit without a card. We've been sold debt with such repetition and with such fervor that most folks can't conceive of what it would be like to have NO payments.
Most women file for bankruptcy in the aftermath of a serious medical problem, a job loss, or a family break up. It is hard to protect against those.
At long as a stock is acting right, and the market is right, do not be in a hurry to take profits. One should never permit speculative ventures to run into investments.
The difference between tax avoidance and tax evasion is the thickness of a prison wall.
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