In Praise Of Street Wizards

They are the Lords of Wall Street: Julian H. Robertson Jr., the famed stock-picker and head of hedge fund Tiger Management Corp. Mario J. Gabelli, who practically printed money during the 1980s takeover boom. Jeffrey N. Vinik, head of Fidelity Investment's $55 billion Magellan Fund, the world's largest mutual fund. Yet these money managers have all stumbled in recent years.

Trying to beat the market is an age-old game, yet only a few manage to outperform it consistently over extended periods. For instance, from 1986 to 1995, the Standard & Poor's 500-stock index had a total return of almost 15%, yet only 14% of all diversified equity mutual funds did better. Last year, when the S&P 500 had a total return of nearly 38%, a mere 8% of mutual-fund managers were able to beat the market.

What's more, the competition is getting stiffer. Once, hedge funds such as Robertson's Tiger were among the few willing to bet that stocks would decline. But "short selling" is now so familiar in the U.S. that its allure is fading. For a time, George Soros ruled the arcane world of global bond and currency investing. Now the field is crowded, and lush returns are harder to come by. In the global capital market, many more savvy money managers, research analysts, and investors than ever before are searching for scraps of information that will give them an investment edge. That may make life tougher for stock-pickers, but it's better for the economy.

Savvy investors uncover vital information, financial markets quickly spread the knowledge, and capital gets allocated where it's needed. Meanwhile, the bolder money managers are forced into frontier markets. For a while, these pioneers earn outsize rewards. Then the process starts again: The knowledge spreads, more investors join the fray, and investment returns get smaller. Wall Street's wizards may not always deliver the best returns to their investors, but they are more than mere gunslingers. It's their risk-taking that helps makes it possible for new technologies, new businesses, and new markets to develop.

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