Sorry Greg. If you could beat the market in two hours a day, why wouldn’t the mutual fund managers who spend ALL day on it be able to? [February 4, 1999]

Mike Fitzgerald: “This comment from an investment guy? That would mean you shouldn’t be picking stocks, which I know you do. Seems like I’ve read that 80%-90% of the mutual funds underperform the market (let’s say the S&P 500). Given that, I think the odds are very good on beating the market – even in the long run.”

No, the odds of beating the mutual funds are fairly good — especially those that charge the highest loads and fees. But the odds of beating the index funds, which have almost no drag from sales fees and annual expense charges, are not good. For more on this, see February 9.

“The reason the mutual fund managers have such a hard time beating the market [Mike continues] is that they have such huge amounts of money to invest that they in essence become the market.”

Well, there’s a lot of truth to that. But that would more or less just put them even with the market, not behind it. And there are lots of funds with “only” a few billion to invest — and these days, you could easily spread a few billion over just a handful of stocks if you wanted to, albeit the larger ones. It’s the sales and expense fees that pull mutual fund performance down below the market.

“But for us small guys all we need to do is latch onto a couple of extraordinary stocks during our life time and hold for a decent amount of time. If you would have invested a few thousand dollars in Microsoft, Cisco, Amazon, Dell, AOL, etc. at the right time you would be rich in a few years. Yes, you have to be willing to take the risk, but that’s what it’s all about. The risk in investing in a mutual fund is also high (below average returns), so why not try to beat the market? And you don’t have to be a genius and spend all of your time doing so and you don’t have to be stupid either (risking it all on penny stocks). Anyway, I’ll continue to try to beat the pros and I’m confident I will.”

And I hope you do. What are tomorrow’s Microsofts/AOLs/Ciscos? Let us know your list and your reasons for choosing them. The floor is yours.

(But remember, “the market” includes today’s huge winners — indeed, the names you mention account for a huge portion of “the market’s” recent sizzling performance. So “the market” has owned those winners along with the rest, and benefited from them. To beat the market, you need not only be smart enough to own some of the future winners, but to own a disproportionate share of the future winners, and be underweighted with those that fail to pan out. That’s the part of the trick few manage to pull off over the long run. But some do, and you could be one of them.)

Tomorrow, more thoughts on the same theme.

Coming soon: Why These Stupid One-Cent Stamps?


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