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

THE SUBSTITUTE-PLAYER STEP:
HIRING A PROFESSIONAL WALL
STREET WALKER
There’s an easier way to gamble in your investment walk:
Instead of trying to pick the individual winners (stocks), pick
the best coaches (investment managers). These “coaches”
come in the form of active mutual-fund managers, and there
are thousands of them for you to pick from.
In previous editions of this book, I provided the names of
several investment managers who had enjoyed long-term
records of successful portfolio management as well as brief
biographies explaining their investment styles. These
managers were among the very few who had shown an ability
to beat the market over long periods of time. I have
abandoned that practice in the current edition for two
reasons.
First, with the exception of Warren Buffett, those
managers have now retired from active portfolio management,
and Buffett himself was well above retirement age in 2010.
Second, I have become increasingly convinced that the past
records of mutual-fund managers are essentially worthless in

---

predicting future success. The few examples of consistently
superior performance occur no more frequently than can be
expected by chance.
Assuming that you prefer to invest in an actively managed
equity mutual fund, is it really possible to select a fund that
will be a top performer? One plausible method, favored by
many financial planners and editors, is to choose funds with
the best recent performance records. The financial pages of
newspapers and magazines are filled with fund
advertisements claiming that a particular fund is number one
in performance. There are at least two problems with this
approach. First, many fund advertisements are quite
misleading. The number one ranking is typically for a self-
selected specific time period and compared with a particular
(usually small) group of common-stock funds. For example,
one fund advertised itself as: “Now Ranked #1 for
Performance. The Fund That’s Performed Through Booms,
Busts and 11 Presidential Elections.” It is implied that this
fund was a top performer over a period of forty-four years.
The truth of the matter, revealed in a small footnote
referenced by the asterisk, was that the fund was number one
only during one specific three-month period and only

---

compared with a specific category of funds with asset values
between $250 million and $500 million.
The more important reason to be skeptical of past
performance records is that, as I have mentioned earlier, there
is no consistent long-run relationship between performance in
one period and investment results in the next. I have studied
the persistence of mutual-fund performance over more than
forty years and conclude that it is simply impossible for
investors to guarantee themselves above-average returns by
purchasing those funds with the best recent records.
Although there have been a few examples (such as Buffett’s
Berkshire Hathaway) of fairly consistent long-run superb
performance, the general result is that there is no dependable
long-term persistence. You can’t assure yourself of superior
performance by buying mutual funds that may have beaten
the market in some past period. Once again, the past does not
predict the future.
I have tested a strategy whereby at the start of each year
investors would rank all general equity funds on the basis of
the funds’ records over the past twelve months. In alternative
strategies, I have assumed that the investor buys the top ten
funds, the top twenty funds, and so on. There is no way to

---

beat the market consistently by purchasing the mutual funds
that have performed best in the past.
I also tested a strategy of purchasing the “best” funds as
ranked by the leading financial magazines. The clear
implication of these tests in the laboratory of fund
performance, as well as the academic work reported in Part
Two of this book, is that you cannot depend on an excellent
record continuing persistently in the future. Indeed, it’s often
the case that the hot performers of one period are the dogs of
the next.