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

MUTUAL FUNDS
*
 VS. THE MARKET INDEX
20 years to December 31,
2009
Russell 3000 Index
8.42%
Average Equity Fund
7.53
Index Advantage (percentage
points)
0.89

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Sources: Lipper and Vanguard.
In addition to the scientific evidence that has been
accumulated, several less formal tests have verified this
finding. For example, in the early 1990s, the 
Wall Street
Journal
started a dartboard contest in which each month the
selections of four experts were pitted against the selections of
four darts. The 
Journal
kindly let me throw the darts for the
first contest. By the early 2000s, the experts appeared to be
somewhat ahead of the darts. If, however, the performance of
the experts was measured from the day their selections and
their attendant publicity was announced in the 
Journal
(rather than from the preceding day), the darts were actually
slightly ahead. Does this mean that the wrist is mightier than
the brain? Perhaps not, but I think 
Forbes
magazine raised a
very valid question when one journalist concluded, “It would
seem that a combination of luck and sloth beats brains.”
How can this be? Every year one can read the performance
rankings of mutual funds. These always show many funds
beating the averages—some by significant amounts. The
problem is that there is no consistency to performance. Just
as past earnings growth cannot predict future earnings,

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neither can past fund performance predict future results.
Fund managements are also subject to random events: They
may grow fat, become lazy, or break up. An investment
approach that works very well for one period can easily turn
sour the next. One is tempted to conclude that a very
important factor in determining performance ranking is our
old friend Lady Luck.
This conclusion is not a recent one. It has held throughout
the past forty years, a period of great change in the market
and in the percentage of the general public holding stocks.
Again and again yesterday’s star fund has proven to be
today’s disaster. During the late 1960s, the go-go funds with
their youthful gunslingers turned in spectacular results, and
their fund managers were written up like sports celebrities.
But when the next bear market hit from 1969 through 1976, it
was fly now, pay later. The top funds of 1968 had a
perfectly disastrous subsequent performance.
The Mates Fund, for example, was number one in 1968.
At the end of 1974, the fund had lost 93 percent of its 1968
value, and Fred Mates finally threw in the towel. He left the
investment community to start a singles’ bar in New York
City appropriately named Mates. Indeed, most of the top-

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performing funds of the late 1960s were out of business by
the mid-1970s.
The illustration from the late 1960s appeared in the first
edition of this book. Similar results continue to hold. The
following table presents the 1980 to 1990 performance for
the twenty top funds of the 1970–80 period. Again, there is
no consistency. Many of the top funds of the 1970s ranked
close to the bottom during the 1980s. There was, however,
one striking exception. The Magellan Fund, managed by Peter
Lynch, was a superior performer in both the 1970s and
1980s. But Lynch retired in 1990 at the ripe old age of forty-
six, and we will never know if he would have continued to
beat the Street.