But regardless, this is a very silly way to test whether or not active management can beat the market. It's crazy to think that anyone can beat the market over every successive 12-month period. This is short-term thinking at its worst. The only hope anyone has for beating the market in my view is investing for the long-term. Those who invest for the long term and ignore short term market fluctuations will undoubtedly underperform from time to time over short time spans.
... but this is what I always find so interesting. On the very surface, my intuition says that someone who spends all their time researching companies *should* be able to beat the blindfolded monkey throwing darts. How can knowing absolutely nothing beat knowing everything from free-cash flow to quarterly performance to economic trends?
History of course has shown us that the blindfolded monkey wins, but it still surprises me.
What really shocks me here though is that, simply by random chance, there should have been 2 or 3 that finished in the top quartile five years in a row (random odds are 9.8 per 10,000). But we get ZERO. Knowledge gets beaten by random luck. J. H. Christ.
What you're saying and what I'm saying are two different concepts. There's the Ben Graham quote where he says that in the short-term, the market is a voting machine, and in the long-term, it is a weighing machine. In the short run, stock prices are a function of supply and demand, but in the long run, they will move in accordance with the value of the business. The consequence of this is that in order to deliver higher paper returns over every single short term period of time, you need to be more than a great investor. In fact, being a great investor and being able to identify undervalued companies would have nothing to do with it. You need to be a great psychologist who can consistently predict the behavior of other people. Believing that a manager can accurately predict the behavior of other people is, to me, a far crazier belief than thinking a manager can identify winning businesses that are undervalued.
A good investor can, will, and should underperform over certain periods, because in order to do something great, you have to be doing something other than the consensus. Buffett has underperformed at times, the Sequoia fund has underperformed over times, Baupost Group has underperformed at times, and yet over long periods, these folks have done very well.