The investment markets are all about what have you done for me lately. Make money for years but fall behind for a couple of quarters, and there will be someone calling for your head and others saying you are a friggin’ muppet who just lucked out in the past. (Fortunately, it works the other way too—you can lead a giant hedge fund over the cliff and still be regarded as brilliant so long as you are making money now.)
Bill Miller beat the S&P for 15 years running but this year is down 10% and way off his pace. So of course people are saying his past performance was just good fortune. More specifically, they are saying that if you had a bunch of monkeys managing money you’d expect at least one would do about as well as Miller.
Wrong, says Paul Kedrosky.
The math is easy: Assuming data independence (i.e., bad years don't influence managers the following year), then fifteen years of market-beating performance at a 0.5 likelihood per year gives us a probability for Miller's performance of 0.003%. Darn unlikely, in other words.But that's not enough, of course. We need to know how many portfolio managers were running active money back in 1990 when Miller began his beat-down of the S&P. According to data I found elsewhere, there were almost 700 such funds back then (and there are probably twenty times as many now). Given that number of funds, and given the above-mentioned probability, we would expect around 0.02 fund managers to have turned in a Miller-like performance by now given the cohort size from fifteen years ago.
Trouble is, 0.02 of a portfolio manager isn't a very effective portfolio manager (even if it's cheaper), so we can reasonably say that Mr. Miller's performance is highly unlikely, especially if he is really a coin-flipping monkey. Of course, it's not inconceivable that it happened by chance -- and back at the nine-year mark it was perfectly likely -- but a 15-year streak would still have been unusual.
[Note: You can read what DealBreaker's Joe Weisenthal had to say on the subject earlier by clicking here!]
Is Bill Miller a Monkey? [Infectious Greed]
