There are a lot of investment gems buried in academic papers. Unfortunately, you probably don’t have access to these publications. Even if you did, you would find them so dry and technical that gleaning actionable advice would be challenging.

I recently came across one such academic paper. It was authored by Jonathan B. Berk, an associate professor of management philosophy and values at the prestigious Hass School of Business at the University of California at Berkeley.

The paper is entitled: Five Myths of Active Portfolio Management. Here’s a summary of the author’s conclusions:

1. Even if you could find a fund manager with the skill to consistently “beat the market”, “…the manager will have so much money under management she will not be able to deliver superior performance.”
2. Regardless of prior performance or skill level, “…all managers’ expected returns going forward are the same – the benchmark expected return.”
3. Using past performance to predict future expected returns, ignores the fact that “there is no persistence in returns.”
4. Skilled managers who add value are rewarded with higher fees. Investors in their funds derive little, if any, benefit from the excess returns generated by these managers because they are siphoned off by fees.

These observations lead to this inescapable conclusion: Buying actively managed mutual funds makes no sense.

Nobel Laureate Eugene Fama recently summarized his views on this subject as follows: Being good at active management, that’s a human-capital skill. That person is going to charge high enough fees to absorb the rents that she’s creating. Investors are always going to be just as well-off buying passive, even if they can identify who the good active managers are.

You don’t need to scour technical papers to be a good investor. Start by avoiding actively managed mutual funds.

Resource of the Week

Check out this summary of Eugene Fama's views on investing.  It’s non-technical and very easy to understand…and implement.

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