From a Legg Mason article on trading and investing:
A trader, or investor, can put on a positive expectation bet (correct process) and
still have poor results (outcome) for some period of time due solely to randomness. But many
investors attribute bad outcomes to bad processes, which leads to substantial error. As insidious
is attributing good outcomes to a good process. A thoughtful investor must carefully consider
process and recognize long-term outcomes will follow.
Here are some data to substantiate the point. The first is a study by The Brandes Institute called
“Death, Taxes, and Short-Term Underperformance.” 18 The researchers screened for largecapitalization,
actively-managed funds that had a 10-year track record through 2006. This yielded
591 funds. They then ranked the funds by decile based on annualized gains.
The top-decile group had returns in excess of 10.9 percent, and all of them delivered better
returns than the S&P 500 index. The researchers posed two questions: Did these funds have
periods of relative underperformance? If so, by how much?
The answer to the first question is a resounding yes. In fact, all 59 of the funds in the top decile
underperformed for at least one year. In its worst one-year period, the average top-decile fund
underperformed the index by 1,950 basis points, with a range of negative 650 to 4,410 basis
points.
Over a three-year period, the average underperformance was still 810 basis points, with a range
of positive 250 to negative 2,240 basis points. The one- and three-year numbers of these good long-term
funds clearly show the limitations of relying on short-term results to decipher the ultimate outcomes.
leggmason.com |
