Salient to Investors:

Mark Hulbert writes:

The small number of advisers who outperform the market rarely keep doing so, so choosing a recent market beater does not increase your odds of future success. Of the 51 advisers out of more than 200 tracked who beat the Wilshire 5000 Total Market index, including reinvested dividends, in the decade that ended April 30, 2012, only 11 have outperformed the market since – no better than the percentage of all advisers, regardless of past performance. Over the past year, on average, the group has lagged the Wilshire index by 6.2 percent.

Lawrence Tint at Quantal Intl says:

Before computer-dominated trading, it was slightly easier to identify winning advisers in advance, because you could more easily understand and evaluate what they were doing. The average reader of The Wall Street Journal won’t be able to identify market-beating advisers, and repeated studies have shown that even the best institutional investors have been unable to identify them in advance, though there is an above-average chance that an awful adviser will continue to perform terribly, so avoid these.

Another reason it is hard for top-performing advisers to beat the index over the long-term is that they attract lots of new money which dilutes their ability to continue performing well.

Computers are ill-suited to thinking outside the box and devising new strategies to beat the market in the future.

Terrance Odean at University of California said the other side of the trade used to be a human but is now a supercomputer, so individual investors will almost certainly lose. Odean says academic studies over the past decade found that the average stock that traders sell outperforms the average stock they buy.

Traders are general unable to assess complex data – they look at the same data on different occasions and reach different conclusions, and unwittingly let their emotions dominate their intellect.

Daniel Kahneman at Princeton says humans consistently lose out to machines from medicine to economics to business to psychology to predicting the winners of US football games and judging the quality of Bordeaux wine – in each the accuracy of experts was matched or exceeded by a simple algorithm.

Bill Miller at Legg Mason says it is mathematically true that there is a portfolio size beyond which it is difficult, if not impossible, to beat the market. Miller says the primary cause of losing his hot hand at Legg Mason Value Trust was simply bad decision-making. Miller says Warren Buffett will have a more difficult time in the future picking stocks that will perform better than an index fund, and that much of the value that Berkshire Hathaway has added in recent years has not been from Buffett’s stock-picking skills but from his negotiating skills and Berkshires huge cash.

Individual fixed-come and equity investors should not trade. Short-term trading is now so dominated by computers that individuals and professional managers almost certainly will lose over time. Better to buy and hold diversified index funds with very low expenses.

Brad Barber at the University of California said computers either cannot, or do not do well, determine which patterns that emerge from data crunching makes sense.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.