Jan 13 2009
The Simple Facts About Investment Performance
In the process of cleaning off a book shelf to make room for more books, I came across a volume I read about a year ago and then forgot I had it. “The Big Investment Lie” by Michael Edesess contains information one should never forget. I decided to pull out some gems and blog about them over the next few days.
On page 88 of the Edessess book he lays out different principle about investing.
Step 1: “Obviously, the average performance of all investors will be equal to the market average, right?”
Edessess amplifies this statement. “Therefore, if you bundled together all the investments of all investors in the U.S. stock market and measured the performance of the aggregate, it would be substantially the same (before all costs and taxes) as the performance of, say, the Wilshire 5000 or the S&P 500.”
Does anyone disagree with this statement? If so, write your opinion in the comment section provided below.
Why does the average investor, who is part of the total market, and therefore part of the average performance of the total market, think they can outperform the market? Approximately 10% of all investments are indexed. The remaining 90% are actively managed. This translates into 90% of the investing public concluding they are smarter than the average investor and therefore able to outperform the market. What is missing in this argument? Could it be a 200 billion dollar/year business?
Lowell Herr
Photograph: Waterford, VA
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