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Originally Posted by pelagius
Yes you can find managers that have outperformed for long periods of time. I have never argued against that general idea. In fact Jay really wasn't making that argument either but I agree his original post suggested that he was in fact making that argument. 20% is too large but that hardly is an important part of your point.
I assume economists are in the 80% but I am not sure I know how that rule applies to economists. Or maybe you mean only 20% of economists make any sense. That might actually be true.
I don't think that's a bad strategy. Empirically on average a strategy for choosing funds with that heurisitic does fine. Also such a heuristic can be perfectly consistent with portfolio theory. So in that sense your heuristic is probably a good one. It gives you a fund that probably in the end gives you a portfolio that is close to optimal in a portfolio theory sense but you are able to get to a near optimal portfolio without much hassle.
The implications of portfolio theory are hard to escape: once you tell me your care about the return and standard deviation of your portfolio, its really just math. Economics is flawed often enough, but math isn't.
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This is truly a question I will have to trust you will give me an unbias answer too. I don't know the answer. When we go back to long term capital, even though those guys were not using portfolio theory, they were using some sort of mathmatical theory to come up with all there conclusions on how to invest weren't they? I thought they were Nobel Economics winners from Stanford. Someone told me they were actually MIT.
While math isn't flawed, couldn't how you use the math and conclusions you come from in using the math be flawed?
The old joke about what is 2 plus 2 and the guy answers 4. No the answer is 22.