Why Choosing an Investment Style is Like Picking a Spouse Choosing the Best Trading Time Frame

Choosing Mutual Fund Managers Based on History

If 1% of the mutual fund managers were able to beat the market (before taxes), isn't that evidence that a small minority of active managers are genuinely skillful? Not necessarily. The number of active managers who outperformed the market is no greater than one would expect by chance. Suppose a football stadium were filled with 50,000 coin tossers, and after every flip only those tossing "heads" kept their seats. Since the odds of heads on a given toss are 50%, we should expect 25,000 people to remain after the first toss, 12,500 after the second, and so on. After ten flips probability predicts there will still be 49 people who have flipped heads ten consecutive times. Some of them might write books or appear on television shows touting their coin-flipping ability, but there is no reason to expect similar success in future contests. Likewise, we should expect a certain number of money managers to achieve superior results in any time period purely by chance. Choosing future winning coin flippers or money managers by studying track records is apt to produce disappointment and unsatisfactory results since it is impossible to distinguish between luck and skill.
Source: http://www.investorguide.com/igu-article-995-stock-strategies-active-versus-passive-management.html