Investing is not like tennis

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On the tennis court, the top players dominate. At Wimbledon this past week, no singles player seeded below #8 made it past the quarterfinals. Roger Federer won his seventh title and Serena Williams won her fifth. We expect top players to win their matches and they generally do.  The cream just rises to the top through superior physical talent, court strategy and mental toughness.

Many expect the same of “star” money managers. We expect fund managers with a year or two of winning performance to lead the way indefinitely. But that’s not how it works. 

Talent is temporary, or maybe it’s just luck
When a fund manager posts impressive performance, it’s easy to attribute it to skill and expect that skill to persist year after year. It rarely does. Consider the saga of Kenneth Heebner.  He ranked as America’s No. 1 stock picker before losing his touch and most of his main fund’s assets. The 71-year-old manager is now skidding along the bottom of his peer group for the fourth year in five, trailing 96% of peer funds.

What we perceive as superior stock picking talent often fades, or worse, reverses itself. The difficulty of continuing a winning streak for active managers suggests that it takes at least as much luck as talent. Which is why we index.

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