Except no one has ever found any evidence that this is true. Its been studied to death and the results consistently show an inconsistency in the top performers. We all want it to be otherwise. The whole industry is based on that notion. But the manager who consistently delivers "above-index-returns" is like Big Foot and the Loch Ness Monster. People believe desperately they exist, even if no one has ever been able to prove it.
I have mostly stayed out of this thread, since I think I have argued my points before. However, what you say simply isn't true.
What has been studied to death is the performance of mutual funds and to a much lesser extent the performance of individual investors in the aggregate.
I have yet to see any academic study which measures the performance of top money managers as opposed to mutual funds over long period of times. The most recent studies such as this
one, in fact show that the top 10% of individual investor earn an average of 8% per year more than the bottom 10%. The author's attribute this to individual investor being skillful at identifying and exploiting market inefficiencies rather than just lucky.
As far professional managers go, Warren Buffett himself showed pretty convincing data that he and other students of Ben Graham were able to out perform the market over long periods of time. The story is told well in the Buffett biography
Snowball.
The difference between studying the long term performance of actively managed mutual fund vs passive funds and the individuals who manage them is important.
By way of analogy think of a sport team with athletes instead of stocks. It is almost as easy to find the star companies such as Google, Apple, Goldman Sachs, Southwest Airlines as it is to identify star athletes like A Rod, Kobe Bryant, and Brett Farve. The tough task when assembling a team/portfolio is to figure out which athletes/stocks are under priced relative to their potential contribution.
Now imagine academics decide to study pro sports franchise. The first thing the academics would find is that on average sport franchise win 50% of their games, although because survivor bias it slightly higher for existing teams
. However, they would surprise many people when they showed that in all of pro sports there are only three franchises (Yankees, Lakers, Celtics) who have a statistically significant winning records. (Disclaimer, I researched this a few years ago I am no sports authority but I believe this is correct.). The academics might recommend that owners can save money by minimizing management expenses. For example fire the scouts and use pooled scouting reports, don't hire expensive coaches or general manager etc. Now these recommendations would make sense based on simply studying the records of the average sports team/mutual fund.
Of course these recommendations would be meet with derision and laughter. Because what the academics neglected to study was the records of individual coaches. If they had looked at coaches records that would find scores of coaches who had lifetime winning records over 70% (and much of the success of teams like Lakers is because of coaches like Phil Jackson). Now it is possible that some academics might argue that like a million monkey, some coach statistically are going to be able to win 70 or 75% of their. However, after a bit of study I suspect that most academics would acknowledge that these winning coaches "outperform the index", add alpha, and collect championship rings based more on skill than luck.
Now the analogy breaks down a bit because a coach has two jobs, buying and selling talent, and then using that talent to win games. Where as the money manager job is simply buying and selling stocks. But few would argue that great coaches aren't very skilled in valuing talent, (e.g. Madden was famous for signing old athletes for small salaries to get one or two more years out of the, much the same way Ben Graham/Buffett would buy out of favor stocks on the cheap, "finding cigar butts is Buffett's expression) .
However, where I think the analogy is valuable is this. We should NOT generalize the admittedly poor performance of actively managed mutual funds, and conclude that individuals managers can't deliver "above-index-returns. If you are looking for the Loch Ness monster by monitoring similar lakes but never actually watch the Loch Ness lake you haven't proved anything. I think common sense says that stock picking is a skill and some people are better at than others.
Now how one goes about figuring who is truly skilled at managing money, and who is just lucky, is a huge problem.
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