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

DO SECURITY ANALYSTS PICK
WINNERS?—THE PERFORMANCE
OF THE MUTUAL FUNDS
I can almost hear the chorus in the background as I write
these words. It goes something like this: The real test of the
analyst lies in the performance of the stocks he recommends.
Maybe “Sloppy Louie,” the copper analyst, did mess up his
earnings forecast with a misplaced decimal point, but if the
stocks he recommended made money for his clients, his lack
of attention to detail can surely be forgiven. “Analyze
investment performance,” the chorus is saying, “not earnings
forecasts.”

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Fortunately, the records of one group of professionals—
the mutual funds—are publicly available. Better still for my
argument, the men and women at the funds are some of the
best analysts and portfolio managers in the business. As one
investment manager recently put it, “It will take many years
before the general level of competence rises enough to
overshadow the startling advantage of today’s aggressive
investment manager.”
Statements like these were just too tempting to the lofty-
minded in the academic world. Given the wealth of available
data, the time available to conduct such research, and the
overwhelming desire to prove academic superiority in such
matters, it was only natural that academia would zero in on
mutual-fund performance.
Again, the evidence from several studies is remarkably
uniform. Investors have done no better with the average
mutual fund than they could have done by purchasing and
holding an unmanaged broad stock index. In other words, over
long periods of time, mutual-fund portfolios have not
outperformed randomly selected groups of stocks. Although
funds may have very good records for certain short time
periods, superior performance is not consistent, and there is

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no way to predict how funds will perform in any given future
period.
The table below shows the returns from the average equity
mutual fund over a twenty-year period to December 31,
2009. As a comparison, the Russell 3000 Index is used to
represent the broad market. Similar results have been found
for different time periods and for pension-fund managers as
well as mutual-fund managers. Simply buying and holding the
stocks in a broad market index is a strategy that is very hard
for the professional portfolio manager to beat.