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.
Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.
By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives.
The math you need for most of finance is ninth-grade algebra, and most people feel reasonably comfortable with that. But I think the financial world there has been - I don't know if it's by design, or this is how it's evolved - there are bad actors who have wanted to obfuscate because you can benefit from the lack of transparency.
How did you go bankrupt?" Two ways. Gradually, then suddenly.
The first step in taking control of your money is to stop borrowing money. Start using cash today.
Mutual funds with superior performance records often falter.
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