I’ve talked about the story of Bill Miller before but now that some time has passed, it seems even more instructive. The lesson is not really that Bill Miller lost his “magic touch,” but really it is a story of active management risk and whether or not it is worth taking.
Miller did great for over a decade and then lost over 50% of his fund in a very short time. The craziest part of the story is that most of the investors in the fund for the BIG decline were not there for the good years.
How did that happen? This is a classic Behavior Gap Tale:
- Small, relatively unknown manager starts a fund
- Small fund does well
- After a decade of good performance, manager starts to get press (“New Superstar Manager Beats S&P for 10 Straight Years” is a great headline!)
- People learn about new superstar
- Investors flock to fund
- Fund does poorly (even on a relative basis)
Too bad we can’t find a superstar mutual fund manager BEFORE they are good. As it is, the system is set up to find investments AFTER they have done better than average and just in time for them to do worse than average.
Better just to stick with average, and control the things we can: cost, taxable events, and, most importantly, our behavior.
