How easy is it to find a winning manager? Some experts may advise investors to "just follow the alpha." Mark and Tom advise against this strategy by showing the alpha of various funds (Weitz Partners III, Sequoia, and Hennessy Focus 30) over different time periods. These charts illustrate the average alpha, standard deviation of alpha, and the number of years needed to show statistical significance of alpha. This number goes as high as 156, meaning 156 years are needed to show that a manager's performance over a designated benchmark is due to skill, not luck.
See Yahoo Finance article discussed in this show.
See the charts from this show here.
Weitz Partners III Opportunity Investor's Alpha was compared to Russell 1000 Index in the chart shown in this show.
The formula to calculate the number of years needed to determine if an alpha is statistically significant can be found here.
Also see Brad Steiman's two articles on statistical significance, What's the Significance? and Paradox of Skill.