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You want to diversify. But how? Harry Markowitz won a Nobel Prize in economics for solving this problem. But when Markowitz made his own investments for his retirement, he did not use his Nobel Prize-winning method. Instead, he employed a simple rule of thumb called 1/N: Allocate your money equally to each of N funds.” – Risk Savvy: How to Make Good Decisions, Gerd Gigerenzer

 

CC By - SA Image: 090712_GWArsenal16_clover Courtesy of Flickr user miahalf

CC By – SA Image: 090712_GWArsenal16_clover Courtesy of Flickr user miahalf

Skilled fund managers should easily identify stocks as too cheap or expensive, or so you might think. They don’t, as the New York Times article entitled, “Who Routinely Trounces the Stock Market? Try 2 Out of 2,862 Funds,” points out. Is the failure rate for active stock funds really so high? If so, what are the implications for how you invest?

On the failure question, it depends on how you define failure.

Performance Envy Diminished by the Right Benchmark and Other Factors

Jason Zweig’s recent Wall Street Journal article “Give Yourself an Investing Makeover,” discussing the transformation of Guy Spier’s investing habits, piqued my interest. Along with money manager Mohnish Pabrai, Spier was the winning bidder of a charity auction lunch with Warren Buffett in 2008, and his Aquamarine fund has enjoyed superb performance.

Curious, I did a little digging.

Inappropriate Benchmarks Deceive

Eddie and Chloe

Eddie                                    Chloe

Between Eddie, our Beagle-German Shepard mix, and Chloe, our Catahoula Leopard mix, it is Eddie—despite his sweet disposition and a 20-pound weight disadvantage—who is the alpha.

So if Eddie and Chloe were investment advisors, you might choose Eddie. After all, as the leader of the pack he must get dibs on all the good stuff, right? Yes, he does—but he’s also not fond of sharing and isn’t afraid to throw his weight around in order to keep what’s his. This bravado and every-dog-for himself attitude is not what you want in an investment advisor.

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