Nassim Nicholas Taleb was right - we're still “Fooled by Randomness”
by Mark Gilbert, Bloomberg Opinion, March 5, 2019
In his 2001 book Fooled by Randomness, author and fund
manager Nassim Nicholas Taleb argued that chance plays a largely unacknowledged
role in success, particularly in the finance industry.
A new study of the returns generated by fund managers
suggests that even the minority able to beat their benchmarks are lucky rather
than good - and maybe not even that lucky.
Analysts at S&P Global examined the returns of more than
2400 investors based in the US.
Unsurprisingly to anyone who has followed the
active-versus-passive debate in recent years, less than a third were able to
beat their benchmarks in the three years to September 2015 on an annualized
basis and once fees are taken into account.
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| Nassim Nicholas Taleb says chance plays a largely unacknowledged role in success, particularly in the finance industry. |
More remarkably, even those that were able to initially
deliver alpha failed to extend their winning streaks in the years after.
Even for US portfolio managers investing in international
equities - the most successful group, with almost half of them delivering
market-beating performance during the initial three-year period - the lustre
quickly faded.
Less than 1 per cent of the winners were able to sustain
those excess returns in the year to September 2018.
That's even worse than the 12.5 per cent of outperforming
funds that S&P reckons chance alone would produce as persistent leaders in
each of the subsequent three years.
It seems in investing, luck runs out sooner rather than
later. Nassim Nicholas Taleb says chance plays a largely
unacknowledged role in success, particularly in the finance industry.
The S&P analysts were worried that "cyclical market
conditions" might have skewed their results, which were based on a single
point in time, so they redid the calculations using a rolling quarterly average
for the time periods. Guess what?
While the picture improves for the first year, by 2018 the
number of consistently winning investors drops dramatically once again -
suggesting the problem is with the investment managers, not the mathematics.
The health warnings that regulators insist are part of the
small print in the marketing materials for the investment industry admit that
past performance is no guarantee of future returns.
The brochures then typically proceed to stress just how
wonderfully the fund in question has performed against some carefully chosen
benchmark over whatever time period is the most flattering for its returns.
As the S&P analysts say with masterly understatement:
"Market participants may want to reconsider chasing 'hot hands' or picking
managers based on past performance."
This article can be viewed here. Mark Gilbert is a Bloomberg Opinion columnist covering asset
management. He is also the author of Complicit: How Greed and Collusion Made
the Credit Crisis Unstoppable.
