Taleb Was Right. We’re Still Fooled by Randomness

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In his 2001 book “Fooled by Randomness,” author and fund manager Nassim Nicholas Taleb argued that chance plays a largely unacknowledged role in success, particularly in the finance industry. A new study of the returns generated by fund managers suggests that even the minority able to beat their benchmarks are lucky rather than good — and maybe not even that lucky.

Analysts at S&P Global examined the returns of more than 2,400 investors based in the U.S. Unsurprisingly to anyone who has followed the active-versus-passive debate in recent years, less than a third were able to beat their benchmarks in the three years to September 2015 on an annualized basis and once fees are taken into account.

More remarkably, even those that were able to initially deliver alpha failed to extend their winning streaks in the years after.

Even for U.S. portfolio managers investing in international equities — the most successful group, with almost half of them delivering market-beating performance during the initial three-year period — the luster quickly faded. Less than 1 percent of the winners were able to sustain those excess returns in the year to September 2018.

That’s even worse than the 12.5 percent of outperforming funds that S&P reckons chance alone would produce as persistent leaders in each of the subsequent three years. It seems in investing, luck runs out sooner rather than later.