I have a friend who taught high school math. She’d give multiple choice tests where there’s four answer choices to each question. So you’d think that a 25% is about the worst you could do even if you were a passive monkey selecting answers at random. And yet every once in a while some poor soul would score a 15/100. The teacher would show me the result exclaiming, “This guy did worse than monkey!” That’s neither very nice to say nor does it flatter her teaching ability; but it is a little bit true and a little bit funny. The active student did worse than the passive monkey!
Let’s Play a Game
Pick a card, no cheating:
Did you pick the Yellow Card #3? If so, congratulations you win!
But if you picked anything else, you’re worse than monkey.
Active Investing: Worse Than Monkey
I apologize for so much preamble, but if you’d rather pick an active fund than take the market return of a passive fund, you’re exactly playing the game above. I looked at the SPIVA U.S. Scorecard for 2017 and chose the percentage of all active US Domestic Funds that were outperformed by their passive benchmarks over the prior 3 year period. For your reference, here’s a copy of the first report from that study:
Pick an active fund and you have a 83.40% chance of losing to the passive monkey. Your chances of picking the wrong card in the card game above were 83.33%. And there’s nothing special about my choice of passive investment: pick any category you like, foreign or domestic, and you’ll see the same under performance of actively managed funds. They might have a good year here and there, but in anything resembling the long run they are objectively Worse Than Monkey.
But I’m Different
With all due respect, yes you are different but no you’re not better. Harvard’s Endowment stands right around $40 billion. They’ve routinely paid $50 million a year for the top active money managers to beat the market; and they’ve failed to do so. Do you have more time and money and expertise than the folks running Harvard’s Endowment? The card game above isn’t winnable in the long term, and neither is the search for alpha in your investment plan.
Passive Investing Wins
The passive monkey doesn’t have to spend a lot of time doing research and second guessing his choices. He keeps his expenses (and his emotions) low and takes the guaranteed return of the market. He does better than the majority of investors, and he does better than the Harvard Endowment. That’s a smart monkey.