![Coin being flipped](https://i0.wp.com/intentional-investor.com/wp-content/uploads/2015/10/9886126_orig.jpg?resize=377%2C318&ssl=1)
Does the idea of buying a smart penny sound silly to you? I hope so, but many of you already bought one, you just don’t call it that. How much is it worth to have an expert mutual fund manager make stock picks for you? Presumably the manager should do better than if he chose at random. Unfortunately active mutual fund managers aren’t as good as random on the average. Does this mean the guys who get it right are the smart ones? No, because 1) there are fewer successes than coin flipping would produce, so whatever the schemes are, they don’t tend to be very good, and 2) this year’s “smart guy” is more than likely going to be next year’s dolt. See On Persistence in Mutual Fund Performance by Carhart.
What about the few guys who have a good track record compared to the index? By definition, aren’t they the guys to go with?
- Can you identify the “smart guys” ahead of time? No.
- Are the tiny odds of getting a “smart guy” worth it? No.
- Do the “smart guys” stay smart? No
- If we flipped coins, the coins would do better than the “smart guys”, so do “smart guys” exist? No.
- Do the “smart guys” charge you for their worse than random guesses? Yes!
So, anyone want to buy my smart penny?