The Oracle debunks the fantasy of stock picking

Why is it so tempting to believe the fantasy that an individual can outperform the market, when the evidence shows the exact opposite is true? Apparently not even Warren Buffett can convince some pension fund operators to take the simple, scientifically proven route of capturing the returns of the market rather than wasting higher fees on what he calls "hyperactive" managers who convince them they can do better.

Buffett made a bet with some hedge fund managers who said they could outperform the S&P 500. So far they're losing by a three-to-one margin. The behaviour Buffett describes in some professional stock pickers is almost comical:

"No consultant in the world is going to tell you 'just buy an S&P index fund and sit for the next 50 years,'" he says. "You don’t get to be a consultant that way. And you certainly don’t get an annual fee that way.

"So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks,’ or ‘this manager is particularly good on the short side,’ and so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in the American business without cost. And then those consultants, after they get their fees, they in turn recommend to you other people who charge fees, which… cumulatively eat up capital like crazy.”

Don't fall into the trap that Buffet so poignantly describes: being convinced by a sales-oriented broker that you can do better than the market. He doesn't believe it's possible. You shouldn't either.

By: Mark Sutcliffe | 0 comments