Why Mutual Fund Managers and Financial Analysts Can't Beat the Market

Real Estate Agent with Coldwell Banker Select

Think about this.

Does it stand to reason that some companies within an industry are more successful than others? What about this, do you think some industries are more profitable than others? If you agree with either/both of these queries, why would you think simply buying an index of stocks is a good way to invest in the stock market? Well, the short answer is, it isn't. Yet, very few fund managers and financial analysts can consistently beat an index of stocks.

According to the book, "Strategy Beyond the Hockey Stick" and McKinsey analytics, if you divide companies within an industry into quintiles based on how they are doing, in a nutshell, the top quintile earn 90% of the profits, the middle three quintiles are treading water and the bottom quintile are losing money and are either on their way up into a different quintile or going out of business.

That seems simple enough, then why not just buy companies in the top of their industries? The answer is because a lot of these companies are very expensive, in fact a great midcap company can trade at a multiple of over a 100 times earnings. This makes real estate investing seem very reasonable, doesn't it? (hint, hint) I think many fund managers are inadvertently, in an attempt to look for value, picking stocks in the middle three quintiles.

I will leave you with a quote from the wizard of Omaha and let you draw your own conclusions. By the way, the book, "Strategy Beyond the Hockey Stick" is a great book, I highly recommend it, really opened my eyes. Martin Hirt, one of the authors, also has a Linkedin page with very good articles.


"Its far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Image Source: Insider Monkey



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