Is the stock market just random?
Sounds simplistic but lets be real. Fund performances as a whole are just a bell curve distribution around the market indices, and funds are managed by career professionals that have dedicated their lives to this. You can adjust risk, sure, and fatten the tails of the distribution, but at the end of the day, investing in portfolios managed by professionals would historically not bring you any more profits than the market. And before you bring up Warren Buffet, let me just remind you that the tail of the distribution allows for tremendous successes like him by sheer chance-- and for every Warren Buffet there's another highly educated investor with 'insight' that just keeps losing.
Yes I know you will be trying to refute me right now, cognitive dissonance hits hard when there's a whole cottage industry around the markets. But if you know anything about psychology, everyone has a tendency to explain away stuff: "ohhh that stock dropped because XXXirrelevantmadeupshitXXX, how could I have missed this!" when in reality, the statistics as a whole point to the efficient market hypothesis. Not even MIT-genius mathematical quant funds consistently beat the market over decisively over random chance. But please, if you have evidence that dedicating my career to Asset Management will allow me to outperform randomly investing in Starbucks because I like their lattes right now, I would love to hear that.
Of course fund performances are a distribution around the market indices - the performance of the market in aggregate is an amalgamation of the performance of all its participants. Every alpha generator requires an alpha donator because it's a zero sum game. That doesn't mean the market is random, and it doesn't mean an individual fund can't outperform consistently over time. The math of it just requires an underperformer on the other side to balance.
The stock market is definitely not a zero sum game. Look at the dow jones the past 20 years literally just been growing straight up, there's not necessarily a loser for every winner. It has been lucrative to invest, no doubt, I am just saying AM's haven't outperformed completely random portfolios.
Behold all the alpha in the Dow Jones!
Eugene Fama thinks it’s random.
If your entire argument against AM is that it's a normal distribution where the average investor / fund doesn't outperform, then I guess you shouldn't bother trying to do anything with your life because statistically, you're going to end up right at the top of the bell curve making $35k/year anyway
Having high income is correlated with next year's income though, and it's common for example to have above-average income for 20+ years but that's unheard of in beating the market, pointing towards complete randomness.
Not sure if you are trolling here or not, but Jim Simons (who is by all accounts a "MIT math genius") and RenTech have pretty much done this for years
Are the markets random? Yes, there is a lot of literature by academics that supports this.
Are fund performances random? I don't believe so, no. I think that there is a high enough sample size to determine that Bridgewater, RenTech, and other big name funds have, are, and will continue to beat the market.
The market is not random, even if you may reach that conclusion through statistics. It's just hard to understand and predict. This is because it is impacted by many variables and players constantly trading. And, in fact, the more long term you look at each individual stock, the less random it is.
The fact that the average active manager underperforms the market is not driven by randomness, but by the difficulty of investing in the right companies and managing your downside risk appropriately at the same time. Plus, that statistic is only a problem if you are average. Because if you're not, you can outperform for a long period of time. To do it every year is even harder, but you don't have to in order to be successful in this market. For example, almost all the PMs in my team have beaten their benchmark over the last 5 and 10 years. We're not at a commercial asset manager, so we don't show up in those stats.
If you can find the right niche and have a disciplined investment philosophy/process, you can outperform and cut through what others perceive as randomness.
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