We all dream of finding the next Warren Buffet. But even Warren Buffet is having trouble finding the next Warren Buffet. And, he’s not the only one having trouble. Out of over 11,000 mutual funds, almost 70% have replaced their managers in the last 5 years. That’s a pretty high failure rate. The scarcity of investment talent is the perhaps the single biggest reason why there are so few mutual funds that I found worth recommending as a core holding.  Click here for the list

Actually, there is a good reason why there are so few great investors. When it comes to investing,  mistakes can cost thousands of dollars. Since everyone is bound to make mistakes when they are getting started, it is hard to get enough practice to become a great investor without going broke in the process. If the same was true of golf, there would be just as few great golfers as there are great investors.

The truth is that beginning investors should be just as cautious about trading with real money as a beginning pilot would be about his first solo flight. That is why I recommend that investors practice with a model portfolio before putting their real money at risk. To start now, click here. More than 100,000 people have set up a model portfolio at Marketocracy. And, over 30,000 have track records that are now more than 5 years old. We have signed research contracts with about 500 of them. This is the talent pool from which we choose our m100 team.

The reason so few core funds even exist is because no single investor has the expertise to do well in every industry. Consequently, in order to provide diversification and still have a chance to outperform the S&P 500, you need more than just one skilled investor, you need a team. That’s why I would rather have the m100 as my team instead of just hiring the one person with the best track record. Because we have so many skilled investors under contract with us, we are better able to run a core fund than almost any other firm.

If a fund could beat the S&P 500 every day, month, quarter, and year, it would be  easy to recommend it as a core holding. Of course, no one can promise that but it is a goal all core fund managers should strive for.  To measure our progress towards this goal, we use a metric we call the success ratio — the percentage of all of the days over a period of time when the m100 beat the S&P 500 after a specified holding period. For the last 3 years, here are the m100’s success ratios for various holding periods.

Holding Period     Success Ratio
1 month                59%
1 Quarter              67%
1 Year                73%
2 Years                96%

Since 2005, the m100 had a 59% chance of beating the S&P 500 after a holding period of just 1 month. With a holding period of 1 quarter there was a 67% chance of beating the S&P 500. The longer the holding period, the more likely it was that the m100 did better than an S&P 500 index fund. I would never recommend that anyone with a time horizon of 1 month, or even 1 quarter, invest in stocks. But for those with an investment horizon of at least 2 years, I think the m100 is a great team for a core portfolio.

Keep in mind that these statistics are for the m100 not the Masters 100 Fund. Even if the m100 does well, I am the Fund’s manager and I could still screw it up. However, over the weekend, Morningstar upgraded our Fund to 4 stars overall, and 5 stars for the past 3 years. So, I haven’t screwed things up too badly — at least not in the last 3 years!

Tags: Marketocracy