Suppose we have 10,000 people flipping coins together. All flip at the same time. If someone flips heads, he advances to the next round. If someone flips tails, he’s eliminated from the game. What happens?
After the first round, about 5,000 people have flipped heads, so they’re still in the game. After the next round, only about 2,500 are left.
Fast forward ten rounds or so, and we’re left with just a couple lucky flippers who have gotten heads every single time.
If you want, you can call them expert coin flippers. But if we were to play again, would you expect those same guys to make it to end again?
Of course not. Their apparent ability to flip coins was an illusion, entirely due to luck. We’d give them the same chances as anyone else in the next game.
In other words, it’s far more likely that they’ll perform around the average next time than it is that they’ll do even better than their exceptional performance the first time. Because their performance was based on luck alone, they will revert to the mean.
The same theroy applies to MF. Out of 1000 MF schemes, at any given time 10 are bound to give exceptional return. Don't get fooled by Randomness
Re: Randomness
by Raj on Dec 13, 2012 03:32 PM
Poor analogy. Heads vs. Tails has a 50% probability to swing in either direction. It's NEVER in your CONTROL.
Luck, or the lack of it, is about CONTROL.
You can choose 10,000 different coins, and you will not have control.
Stock performance is based largely on the performance of the company, and partially on the market sentiment (luck).
Choosing a robust company, or a mutual fund that is an aggregate of robust companies, provides a lot more control than a random mutual fund.
Top performing funds are NOT about randomness.
Look at the 5 year timeline for these funds, and compare them to the 5 year timeline of the average / bad MFs, and you'll see that MFs that have done well have been because the companies picked, and their CEOs, didn't believe in flipping coins or theories on randomness.
Running a publicly listed company takes guts and brains. Flipping coins does not.
Re: Re: Randomness
by kal jayi on Dec 14, 2012 12:51 PM
Both you guys , Amol and Raj are intelligent. After a long time I have seen some sensible people writing stuff here on board, instead of abuses and nonsense leg pullings...........
Amol, I dont agree with you.For example, MFs like those of banks follow certain guidelines, like ICICI , HDFC , AXIS...... their funds with good fund managers will always give consistent returns over a long period.So its not just based on Luck for most of them, as they are professionals. It might be based on luck for smaller AMCs like JM Financial.
There is no information in this article. It is waste reading it. Writer is eather a beginer or he doesn't want to reveal the actual facts to consider before buying a MF.
What has the Author attempted to Convey ? During the Bull run between 2003 to 2008 every fund house launched new schemes but only those that saw the Ups & Downs of the Market since the Mid 90's gave returns consistently , the rest simply made the Investor to wait for Seven to Ten years for a simple 7 % returns.. Off course a fw proven funds have failed to sustain the momentum but a track record verification is absolutely essential for the poor Investor..
Full agree with the author. In my opinion the since inception returns are the best indicator for choosing a scheme, as that shows it has delivered avarage year to year returns and not just 1, 3, 5 tears returns which most of the rating agencies give out day in and day out.
