The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [98]
Some interesting facts can be gathered from this table. First, we find that the overall results of these ten funds for 1961–1970 were not appreciably different from those of the Standard & Poor’s 500-stock composite average (or the S & P 425-industrial stock average). But they were definitely better than those of the DJIA. (This raises the intriguing question as to why the 30 giants in the DJIA did worse than the much more numerous and apparently rather miscellaneous list used by Standard & Poor’s.)* A second point is that the funds’ aggregate performance as against the S & P index has improved somewhat in the last five years, compared with the preceding five. The funds’ gain ran a little lower than S & P’s in 1961–1965 and a little higher than S & P’s in 1966–1970. The third point is that a wide difference exists between the results of the individual funds.
We do not think the mutual-fund industry can be criticized for doing no better than the market as a whole. Their managers and their professional competitors administer so large a portion of all marketable common stocks that what happens to the market as a whole must necessarily happen (approximately) to the sum of their funds. (Note that the trust assets of insured commercial banks included $181 billion of common stocks at the end of 1969; if we add to this the common stocks in accounts handled by investment advisers, plus the $56 billion of mutual and similar funds, we must conclude that the combined decisions of these professionals pretty well determine the movements of the stock averages, and that the movement of the stock averages pretty well determines the funds’ aggregate results.)
Are there better than average funds and can the investor select these so as to obtain superior results for himself? Obviously all investors could not do this, since in that case we would soon be back where we started, with no one doing better than anyone else. Let us consider the question first in a simplified fashion. Why shouldn’t the investor find out what fund has made the best showing of the lot over a period of sufficient years in the past, assume from this that its management is the most capable and will therefore do better than average in the future, and put his money in that fund? This idea appears the more practicable because, in the case of the mutual funds, he could obtain this “most capable management” without paying any special premium for it as against the other funds. (By contrast, among noninvestment corporations the best-managed companies sell at correspondingly high prices in relation to their current earnings and assets.)
The evidence on this point has been conflicting over the years. But our Table 9-1 covering the ten largest funds indicates that the results shown by the top five performers of 1961–1965 carried over on the whole through 1966–1970, even though two of this set did not do as well as two of the other five. Our studies indicate that the investor in mutual-fund shares may properly consider comparative performance over a period of years in the past, say at least five, provided the data do not represent a large net upward movement of the market as a whole. In the latter case spectacularly favorable results may be achieved in unorthodox ways—as will be demonstrated in our following section on “performance” funds. Such results in themselves may indicate only that the fund managers are taking undue speculative risks, and getting away with same for the time being.
“Performance” Funds
One of the new phenomena of recent years was