The Financial Mirage: Why Most Active Fund Managers Can't Beat the Market (as we do) part 1

The investment landscape is a tricky terrain with mirages that often lead to disappointment. Imagine you are an investor, and the oasis you seek is superior performance. Now, would you rather traverse this terrain yourself, picking your stocks, or hire a guide, an active fund manager? The answer might not be as straightforward as it seems.

According to extensive research, a staggering 94% of active fund managers do not beat the market. It's an inconvenient truth that even financial titans like Warren Buffett's Berkshire have now underperformed the S&P 500 over a 20-year period. But why is this so?

The Stock Picking Dilemma

Contrary to popular belief, the odds of picking a winning stock are far from a 50/50 gamble. Shockingly, 80% of all stocks have historically generated a 0% return. Yes, the remaining 20% of stocks are responsible for all the gains. If you pick a stock at random, your chance of making a profit drops to a lowly 20%.

Furthermore, the grim reality extends to large-cap stocks as well. A meager 26% of the stocks in the S&P 500 outperform the index returns, with only 5% generating multi-bagger returns. So, in essence, even if you have a nose for potential winners, the odds are stacked heavily against you.

Remember!! Every time you fail picking an investment in a project and you fill like shit: this is part of the game. Michael Jordan won 6 NBA rings. But he played 15 leagues. That means he lost 9. He only won 6/15!!

The Dominance of Tech and the Irony of Performance

The tech industry has indisputably dominated the last two decades. Still, a glance at the top ten performers in the S&P 500 from 2000 to 2020 reveals an intriguing fact. Only two of these frontrunners hailed from the tech industry.

Of course, we should consider Bitcoin and ETH in this study, but their perfomrance is out of this rank ;-)

Consider UnitedHealth, the second best-performing stock from 2000 to 2020 with a staggering ~5,000% return. Even with such solid fundamentals and impressive growth, it experienced annual drawdowns between -5% and -36%. Imagine holding such a volatile stock through these drawdowns, questioning your investment while the market soars.

Despite this amount of Drawdowns, take a look at this performance:

Does it sund familiar to you? Take a look into the downdraws of Bitcoin in this graph:

Similar scenarios unfolded with giants like Meta. Despite impressive financial metrics, the stock plummeted by 55% in 2022, only to rocket by 200% later. Such volatility tests the patience of fund managers, who often buckle under the pressure.

will continue...

Yours in Crypto and AI