We now know that stock and time picking are strategies that do not work for investors. Manager picking is also a worthless endeavor; however, there are still investors out there who think they can select an all-star manager or financial guru who can beat the odds. There are many managers who are willing to try to beat the odds for their clients or mutual fund shareholders for a hefty fee. Like all speculators, these managers do win occasionally, attracting lots of media attention and new clients. The great majority of expenses and fees in the investment industry are paid to money managers who gamble with other people’s money. It would behoove the investing public if these managers answered the following questions:
1) Do you have skill or were you just lucky?
2) Were you the beneficiary of the market’s random walk, or did you really know tomorrow’s news and how it would affect the investments you picked for your clients?
3) Is there persistence in your performance?
4) Is a three to five-year time period long enough to judge your success?
5) Statisticians say we need twenty years of data. How many managers manage a mutual fund for twenty years or more?
"Star money managers" attract about seventy-five percent of new mutual fund investors. Today's top ten mutual funds often fall from the sky within three years. Susan Dziubinski, University editor with Morningstar.com, says in Five Lies about Fund Manager Talent, “Former Oakmark Fund manager Bob Sanborn, Yackman Fund’s Don Yackman, and former internet fund manager Ryan Jacob; these once-revered fund managers have fallen to earth.”
What usually happens is that investors first invest in a “star” fund when they read about the “latest and greatest funds.” Then they sell their investments within a few years when they become disenchanted by the mutual fund's descent. This trend supports the findings of a Dalbar study that shows investors hold mutual funds for an average of 2.6 years, buying at the highs and selling at the lows. This results in the average investor greatly underperforming a market.