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>> I liked the analogy Bernstein used about outstanding advisors who can "call the market." Have a hundred people flip a coin. Heads stay in the game; tails leave. On average half will flip heads. So the 50 left flip. On average, 25 stay in the game. And so on. So the few left in the game are said to be "good" at coin flipping, but statistically, they are just the lucky, inevitable few left. <<

This was a pretty good example to show how it's possible for a few managers to consistently "beat the market" even if it may not be at least partially attributable to skill.

Having said that, beating the market isn't specifically a coin toss which is indisputably a random event. We can't conclude that there *is* no skill for "beating the market." All we can conclude, statistically, is that there is no evidence that anyone can.

If there were a statistically significant number of managers who "beat the market" above and beyond what you'd expect in a binomial distribution,you might be able to conclude that such skill truly exists above and beyond dumb luck. For example, assuming "beating the market" were a 50/50 proposition (i.e. nothing but luck that can be matched by a monkey throwing darts), you'd expect one manager out of 1,024 to beat the market for ten straight years. If significantly more than one out of 1,000 managers beat the market for ten straight years, then maybe we could say with a reasonable confidence (usually 95% for statistics of this sort) that "skill" exists.

But since that's not the case, looking at mutual fund histories (especially when considering survivorship bias), we can't draw any conclusion that there is truly a "stock picking skill" among money managers (relative to the market overall).

Personally, I tend to believe that there may be a few people with a gift for picking stocks, but that (a) such people will be identified to the point where they receive more money than they can invest in good ideas and hamper their returns, and (b) these people are so rare and not easy to identify that I'd rather perform consistently inline with indexes than risk significant underperformance.

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