06/21/2011 09:15 pm ET Updated Aug 21, 2011

Stock Pickers Are Picking Your Pockets

The top three ranked tennis players in the world are Rafael Nadal, Novak Djokovic and Roger Federer. This is no small achievement. The rankings are done based on a complex system that requires them to compete in a number of Grand Slam and other tournaments. They are awarded points based on their performance.

If you have seen any matches involving these players (and others on the professional tour), you can only marvel at their skill, endurance and athleticism. Achieving a ranking in the top three among this elite group is remarkable.

Let me ask you this question: How likely is it that any one of these stellar players will lose in the first round of every tournament they enter in the next six months? Let's push the envelope further. How likely is it that all three of these world class athletes will lose in the first round of every tournament they enter in the next six months? Statistically almost impossible you would say, and you would be right.

The reason this is not going to happen is because these players have a long record of demonstrating skill superior to their opponents. Maybe there will be an upset here or there, but not for any sustained period of time.

If the ATP was ranking stock pickers, Bruce Berkowitz, Kenneth Heebner and Bill Miller would be at the very top of their list. Berkowitz was the 2009 Domestic Stock Fund Manager of the Year and was named as Domestic-Stock Fund Manager of the Decade by Morningstar. Very impressive.

Kenneth Heebner is a widely followed stock guru. Fortune Magazine called him "the best mutual fund manager around", in a 2008 article. Fortune noted that Heebner's stock picks represented "...the most dazzling run of stock picking in mutual fund history", providing a 24% annualized return in the preceding decade.

Bill Miller is no stock picking slouch. He was named by Money Magazine as "The Greatest Money Manager of the 1990's" and was selected by Morningstar as "Fund Manager of the Decade." His near deity status was confirmed when BusinessWeek called him one of the "Heroes of Value Investing." His greatest achievement was a fifteen year track record of beating the S&P 500 index.

Given these impressive credentials, it may seem surprising to read a story in InvestmentNews with this headline: "Berkowitz, Heebner and Miller in tight battle -- for last place."

The article noted that funds run by these stock picking rock stars were the three worst performers among large diversified U.S. mutual funds in 2011 to date, based on Morningstar data. Their funds lost 11%-12% through June 9, 2011. The S&P 500 index was up 3.4%. Apparently, Berkowitz and Miller bet big on financial stocks. Heebner placed a big bet on automakers. Those sectors were the worst performers out of 24 groups measured. That's akin to the top three tennis players losing in the first round of every tournament over a six month period.

If you understand the data, this is not as surprising as it may seem at first blush. The success of stock pickers can be attributed to luck. There is no demonstrated skill in this exercise. They can have a lucky streak, but it always comes to an end. While they are doing well, they are anointed by their peers as "gurus" and given the kinds of accolades received by this trio.

The future price of stocks is determined by tomorrow's news. Stock pickers tend to select stocks based on their recent performance, which is a poor predictor of future performance. The future price of stocks is random and unpredictable.

The financial media and the securities industry work together to designate "hot" managers. They know that money will flow into the funds they manage, until their lucky streak runs out. When it does, the cycle repeats itself, with different managers who investors are supposed to believe have the power to predict the unpredictable.

Through this insidious process, investors are distracted, confused and often disappointed. Many don't understand that market returns are theirs for the taking, and those returns are vastly superior to the returns earned by the average fund investor, who is paying attention to awards bestowed on those who confuse luck with skill.

Stock pickers do have one discernible expertise: They are able to pick your pockets by persuading you they have a skill that doesn't exist.

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