After yesterday’s review of the latest entry into the piggyback investing game (read what piggyback investing is and why it’s important), alphaCLONE, I came across a chart that I felt needed to be shared.
The chart below is the chart of a fabled value investor, Bill Miller, of Legg Mason. It was part of a write-up in today’s WSJ. I recommend reading it here.
from the wsj.com
Guru investors can have years, perhaps even decades, of outperformance. At some point, most of them fall back to the mean and either end up tracking the greater market or even trailing it. In this case, Miller has essentially given back all his gains over the S&P 500 throughout his storied career.
Investors should be aware of this tendency to revert back to the mean. It happens to the greatest of investors. Very few people have outperformed the markets for a significant amount of time.
Investors utilizing piggybacking strategies always need to decide if the manager is in a temporary or permanent slump.
Check out our interview with John Reese of Validea who has been tracking certain guru strategies (like Ken Fisher and Warren Buffett) over a multi-year period. He’s found that while they occasionally lag the market, they typically make up the loses and ultimately outperform.
