The Dunning-Kruger effect afflicts most of humanity. Statistically speaking, a big chunk of the human race is average to below average in ability. These people overestimate their abilities and underestimate the abilities of those who are truly skilled. Evidence that these people populate Wall Street and corporate C-suites is plentiful.
Studies of portfolio managers prove that the vast majority do not outperform benchmark indexes. Check out the SPIVA scorecards for actively managed funds. Their report titled "US Mid-Year 2013" reveals that most actively managed funds across all cap sizes underperformed their benchmarks during multiple time periods. There were a few exceptions for international small-cap funds and some fixed income funds. Investors who count on those exceptions to persist will be disappointed. Vanguard's "The case for index-fund investing" report from April 2013 shows the persistent cost and performance advantages of passive investing over the long term. The evidence against active money managers is overwhelming. Active money management is untenable as a credible profession.
Money managers are just plain dumb. I've met some of them at finance events. They talk to me just long enough to steal my ideas because they have no ideas of their own. These people have no business calling themselves skilled, highly qualified, superior, or any other such unearned term. They do so anyway and investors keep handing them money. Active portfolio managers are exemplars of the Dunning-Kruger effect. The ones at the top of mutual fund companies and hedge funds-of-funds are probably also exemplars of the Peter Principle. Analysts who made a few lucky calls one year on their favorite stocks don't necessarily have the broader perspective to manage a fund exposed to multiple sectors.
The record of managers in C-suites is just as bad as Wall Street's performance. Big-shot CEOs love the headlines they get when they gobble other companies in M&A transactions. They have no empirical justification for such pride. The HBR blog in March 2011 noted the very high failure rate of M&A deals. Knowledge@Wharton noted in March 2005 that M&A deals fail due to poor due diligence, post-merger integration problems, and other factors. Top executives are paid to understand these forces before they commit to deals. A lot of them obviously understand very little when they go hunting for acquisitions. I can just imagine a Peter Principle investment banker trolling CEOs for deal flow, promising glowing media coverage of their acquisition prowess.
I'll disclose that I haven't been able to outperform any broad benchmarks myself for several years. Outperformance isn't my objective given the immense price distortions central banks have generated in asset markets. My objective is to outlast the finance professionals who will eventually be ruined by their faith in any of the pumped asset markets. I also haven't acquired any companies, so I can't compete with the swinging dealmakers who throw money away on dumb buyouts. A lot of the C-suite people may be Dilbert Principle promotees who couldn't handle the company's basic work. How these people got promoted in finance and corporate life isn't up to me. I'm only concerned with staying away from them so their Dunning-Kruger overestimations don't harm my life.
Studies of portfolio managers prove that the vast majority do not outperform benchmark indexes. Check out the SPIVA scorecards for actively managed funds. Their report titled "US Mid-Year 2013" reveals that most actively managed funds across all cap sizes underperformed their benchmarks during multiple time periods. There were a few exceptions for international small-cap funds and some fixed income funds. Investors who count on those exceptions to persist will be disappointed. Vanguard's "The case for index-fund investing" report from April 2013 shows the persistent cost and performance advantages of passive investing over the long term. The evidence against active money managers is overwhelming. Active money management is untenable as a credible profession.
Money managers are just plain dumb. I've met some of them at finance events. They talk to me just long enough to steal my ideas because they have no ideas of their own. These people have no business calling themselves skilled, highly qualified, superior, or any other such unearned term. They do so anyway and investors keep handing them money. Active portfolio managers are exemplars of the Dunning-Kruger effect. The ones at the top of mutual fund companies and hedge funds-of-funds are probably also exemplars of the Peter Principle. Analysts who made a few lucky calls one year on their favorite stocks don't necessarily have the broader perspective to manage a fund exposed to multiple sectors.
The record of managers in C-suites is just as bad as Wall Street's performance. Big-shot CEOs love the headlines they get when they gobble other companies in M&A transactions. They have no empirical justification for such pride. The HBR blog in March 2011 noted the very high failure rate of M&A deals. Knowledge@Wharton noted in March 2005 that M&A deals fail due to poor due diligence, post-merger integration problems, and other factors. Top executives are paid to understand these forces before they commit to deals. A lot of them obviously understand very little when they go hunting for acquisitions. I can just imagine a Peter Principle investment banker trolling CEOs for deal flow, promising glowing media coverage of their acquisition prowess.
I'll disclose that I haven't been able to outperform any broad benchmarks myself for several years. Outperformance isn't my objective given the immense price distortions central banks have generated in asset markets. My objective is to outlast the finance professionals who will eventually be ruined by their faith in any of the pumped asset markets. I also haven't acquired any companies, so I can't compete with the swinging dealmakers who throw money away on dumb buyouts. A lot of the C-suite people may be Dilbert Principle promotees who couldn't handle the company's basic work. How these people got promoted in finance and corporate life isn't up to me. I'm only concerned with staying away from them so their Dunning-Kruger overestimations don't harm my life.
