![]() ![]() Buffett's recent performance has been quite ordinary, as a study by Salil Mehta, an independent statistician, found earlier this year. "The market shows some efficiency in recognizing the occasional genius," Mr. One reason was that if anyone starts to beat the market in a noticeable way, imitators will eliminate his edge. ![]() Buffett could be expected to have difficulty keeping ahead of the competition in the future. Buffett as an outlier, an investor who appeared to have "flair." Yet he said that even Mr. Indeed, in a 1989 paper, Professor Samuelson pointed to Mr. "Paul thought that Warren Buffett was a true genius," Professor Nordhaus recalled. Samuelson also believed that some investors were truly talented - even if they faced steep odds in beating the market consistently. Index funds would be a better choice for most people, he said. Bogle to create the first index fund at Vanguard, Professor Samuelson said that deep, liquid markets like the stock market were efficient enough to make short-term investing very much like a random draw. In "Challenge to Judgment," a 1974 paper that inspired John C. ![]() Paul Samuelson, the late Nobel laureate from M.I.T., with whom Professor Nordhaus collaborated on the textbook "Economics," wrote several influential academic papers that dealt with the issue. The hypothetical monkey, or a serial coin flipper, beat them in several other tests, too. Dow Jones Indices didn't do as well as a blindfolded monkey. Read More Strong appetite for meals, but not stock splitĪs a group, managers who ran the 2,862 funds examined by S.&P. "Taken to its logical extreme, it means that a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts," he wrote in his guide to investing, "A Random Walk Down Wall Street." ![]() Malkiel, the Princeton finance professor, once described as "a random walk." Still, the dismal results of the real-world fund managers were very close to what Burton G. This means that if mutual fund managers had just flipped coins, roughly three of them - not two - would have been expected to end up in the top quartile for five years in a row. (We're flipping the coin twice for each year of mutual fund performance.) That's a bigger probability than the 0.07 percent scored by the actual funds. Repeat those double flips five times and you'll find the probability of a mutual fund ending up in the top quartile five times in a row through chance: 0.098 percent. Because there are four possible outcomes for the two flips, there's a one-in-four, or 25 percent, chance that your coin will land on heads twice in a row. If you flip it again, the probability that the coin will land on heads the second time is also 50 percent. Is it heads or tails? There's a 50 percent chance of either outcome. And if you compare it with a series of coin flips - a series of random choices - it looks even worse.įor those interested, this is how the coin-flipping comparison works: You toss the coin. That's an unimpressive performance, to be sure. Read More This 295% gain is a big reason to own stock In the real world, he said, it's possible that some rare individuals may actually possess exceptional investment talent. The empirical data supports the inference that it's wise to use passively managed index funds for the core of most people's investment portfolios, he said, but it doesn't rule out the possibility that some investors excelled for reasons other than dumb luck. Nordhaus, a Yale economics professor, said in a phone conversation. "The results were actually very close to what you'd find in a random draw - or a series of coin flips, except they were a little bit worse," William D. But as many astute readers observed in emails, tweets and phone calls, I didn't say how mutual funds would have fared if their performance had been a matter of pure chance - a random draw, as statisticians sometimes call it. Dow Jones Indices study that I summarized in last week's column. The real-world statistics to which I'm referring were contained in a recent S.&P. ![]()
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