No more hero investor?

As of 1/2012, Bill Miller is stepping down after big recent losses. Buffett's last 3 year performance is so lousy that he should be ashamed and should not show his handsome face in public. Gross, the king of bonds, made serious mistakes, so is Whitney on muni bonds. It is same for a famous shorter of Netflix with convincing arguments. Their arguments are correct but the timing is not. The fund manager of the decade in Morningstar advocated bank stocks and he was burned badly.

There are many examples of heroes turning into disgrace in the past. Recently the Boston Globe has an article on top fund managers and they all have turned into big losers. Even Professor Irvin Fisher, the father of Wall Street, could not predict the 1929 crash and lost a bundle including most of his life-long gains.

Recently Barron's had a round table discussion on 2012 with the experts. They also listed the recommended stocks from same experts a year ago and their performances. Guess what? Their average does not beat Dow. Am I stupid enough to follow their 2012's recommendations?


What do we learn:

- Retire at your peak like Peter Lynch - you can call him a coward but he has a good sleep and laughs all the way to the bank. With his fame, it is easy to sell some books and lives nicely.

- Do not invest on your losing horse like Miller. Doubling on the way down is a fool's game.

- Need specialty advice on banks, bio drugs and mines. Their financial statements do not tell the whole story.

- Do not believe you're always right and put all eggs on a basket. Market is irrational. The black swan could kill you unexpectedly.

- Even the genius could not be right all the time. It only took one big loss to wipe out your entire saving.

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Why we, the retail investor, can beat the professional fund managers?

The fund managers usually are 10 times smarter than I, have 10 times more research than I, have 10 times more computer power than I, but they do not beat me, the usual, casual retail investor. It could be:

- Most likely their good performance could be due to 1. taking risky stocks and 2. leverage. When the market is good or the specific bets are good, they make more, but the vice versa kills their performances.

It is like a thousand monkeys banging on the keyboard to find stocks. At least one can find a winning stock.

However, they do not want to take risk. If they do not perform within a certain range of a benchmark, they get canned.

- They cannot beat the market all the time. When they do, money flows in and vice versa. It is very hard for them to perform with extra or lack of fund.

- They cannot play market timing and they have to satisfy all the rules.

- By my estimate, they have about 1,000 stocks (about 600 for most larger funds) to deal with and I as a retail investor have about 3,000 stocks. Their stocks have been fully evaluated by analysts and newsletters/subscriptions like ValueLine. Hence, they do not gain any advantages but follow the herd.

- Their performance as a group is not real. Some bad mutual funds close and their bad performances are not added to the performance of all mutual funds. It is termed as survivorship bias.

- They are so big that they're the market.

The hedge funds perform even far worse. Hence why you pay them 2% plus 20% on the profit?

(c) TonyP4 2011. Written in 11/18/11. Updated 02/06/12.

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Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.