Trying to pick winners is a losers’ game

One dark evening in October 1994, I was standing in a small meeting room that faced on to Fleet Street, waiting for my last interview before I could escape into the rainy streets. Then a young trader strode in and asked me an unforgettably difficult question: why should Goldman Sachs — for that is where I had applied for a job — bother to spend money training a raw graduate like me to become an investment analyst when it could probably make better returns with a trading programme run by a computer?

In light of the awful performance of the investment management industry over the last year and a half, that question has particular pertinence today. It has been debated among finance professionals and academics for many years. Is it worth taking an active approach to investing and trying to beat the market? Or is it better to take a back seat and be content with the returns it provides?

The outlook for equity markets has recently improved, with both UK and US indices rising substantially since March. This move out of the financial doldrums has tempted investors to dip a toe in the waters. But the recovery is fragile and there remain huge doubts about the economic outlook. So those investors who are prepared to invest are going back to basics. And that means re-visiting tough questions like the one I was asked in that small office so many years ago.

For retail investors, the safest active approach to managing your pension or savings is to spread your money around a number of fund managers, rather than trying to pick the stocks yourself. But advocates of passive investing say that it is not even worth trying to pick the right fund managers: it’s better simply to invest in the equities market through a fund that tracks the index.