12/17/2013 07:49 pm ET Updated Feb 16, 2014

What a Difference a Headline Makes

I have to assume that Saturday, December 7, was a good day for Robert A. Olstein, the fund manager of the Olstein All Cap Value Fund (OFAFX). An article in the Business section of The New York Times featured a picture of a smiling Mr. Olstein. The headline was: "Beating the Market, as a Reachable Goal."

Mr. Olstein was fed up with all the talk about index funds. He was quoted as follows: "It's saying a guy like me can't beat the market -- that he shouldn't even bother trying. That's wrong! It really ticks me off. I can beat the market. I have beaten the market." As support for his market-beating prowess, the article noted that Mr. Olstein's fund had beaten the market "over the long run" from its inception in September 1995 through November 2013, returning 10.7 percent annualized, "more than 2.4 percentage points better than the Standard & Poor's 500-stock index, and substantially better than comparable small-cap indexes."

Sounds pretty impressive. Does Mr. Olstein have the secret sauce? Unfortunately, most investors don't have access to the data that would permit them to evaluate his stock-picking prowess in context. Here are some headlines that could have replaced the one in the original article:

Olstein All Cap Value Fund: The Lost Decade

My colleague Larry Swedroe took a close look at the performance of the Olstein fund in this blog post. He found that, over the past decade, the fund underperformed the Vanguard 500 Index Fund (VFINX), the Vanguard Value Index Fund (VIVAX), the Vanguard Small Cap Value Index Fund (VISVX) and the weighted-average returns of a portfolio that is 50 percent VIVAX and 50 percent VISVX.

While it's technically accurate to report the 15-year outperformance of the Olstein fund, it is grossly misleading if you don't note that all of the outperformance took place in the first five years of that period. Mr. Olstein may believe beating the market is a "reachable goal." The reality is that his fund did not "reach it" over the past decade.

Olstein All Cap Value Fund: It's a Crapshoot

A responsible article on the performance of this fund would have noted that investors in the Olstein All Cap Value Fund who believe in Mr. Olstein's ability to "beat the market" may be in for a rocky ride. His record was stellar from 1996 through 2003, which no doubt burnished his credentials as someone with stock-picking expertise. However, an analysis of the performance of his fund to the benchmark assigned to it by Morningstar starting in 2003 paints a far different picture. The fund underperformed its benchmark from 2004-2008, outperformed in 2009 and 2010 (by .08 percent), and underperformed in 2011-2012.

Since 1996, the Olstein fund beat its benchmark in nine years and underperformed in eight years. That track record is about what you would expect from random chance. Do you have confidence the fund will outperform in 2014 and beyond?

Olstein All Cap Fund Manager: A Unique Definition of "Mediocrity"

Mr. Olstein was quoted as deriding index funds, noting: "It's like saying mediocrity is O.K." A close look at the data makes you wonder how he defines "mediocrity." As noted in this blog post, 60 percent of mutual fund managers underperform over a random 12-month period. This increases to 70 percent over 10 years and 80 percent over 20 years. If anything, it is the performance of actively managed funds over the long term that deserves to be described as "mediocre" -- or worse.

Those who buck the odds and attempt to "beat the markets" by choosing an actively managed fund are confronted with another issue. The same blog post notes that "the stock managers who underperform do so by roughly twice as much as the 'outperforming' funds beat their chosen benchmarks. Thus, the risk-adjusted odds of outperformance become more daunting."

I reached out to Mr. Olstein in an effort to get his side of the story. I received a response from his public relations firm declining my request for an interview, stating: "This is not something they would like to do at this time." I tried a second time by referencing the above blog post that questioned Olstein's stock-picking expertise. I was again advised that Mr. Ostein had "no interest" in commenting.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.