A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THE 
SURVIVORSHIP 
BIAS
EFFECT
*

---

When all mutual funds sold to the public are considered,
the original thesis propounded by the first edition of 
A
Random Walk Down Wall Street
in 1973 holds up remarkably
well. Over the entire period since the first edition of this
book, about two-thirds of the funds proved inferior to the
market as a whole. The same result also holds for
professional pension-fund managers, and even for highly
compensated hedge-fund managers. Most equity investment
managers could have substantially improved their
performance by casting their lot with the efficient-market
theory and not trying to outguess the market. Indeed, if the
S&P Index were an athlete, we would probably be testing it

---

for steroids.
Managed funds are regularly outperformed by a broad
index fund with equivalent risk. Moreover, as was
demonstrated in chapter 8, those funds that do appear to
produce excess returns in one period are not likely to do so in
the next. There is no dependable persistence in performance
when one considers all mutual funds, not simply the
survivors. Recall that it was the hot funds of the late 1990s
that failed so miserably in the early 2000s. Over the long run,
even when considering only surviving funds, the results are
more devastating to active managers. One can count on the
fingers of one hand the number of professional portfolio
managers who have managed to beat the market by any
significant amount, as is shown in the following chart. And
you can be sure the nonsurviving funds did even worse. The
record of professionals does not suggest that sufficient
predictability exists in the stock market or that there are
enough recognizable irrationalities to produce exploitable
opportunities to earn excess returns over the market average.