Fred Wilson has written, emphasis mine:

About a year ago, we put a modest but non-trivial amount of cash into a Covestor account. We only invest with model managers in risk tiers 1 and 2 to keep our capital at lower risk. There were about five or six model managers in those tiers at that time so I put the minimum on all of them. I would check each month and slowly I left most of the managers.

This is a great example of survivorship bias. So five or six managers were sub-par, and one appears to be worth following. This sounds about right: 70-85% of any set of active managers, professionals at that, under-perform a passive market investment. The ones left standing, however, look like geniuses.

The real question is: how much out-performance of his favorite investor Robert has Fred Wilson captured? Sure, Robert may be an undiscovered Warren Buffet, but only 20% of Fred’s money was invested with Robert to begin with. And, how likely is it that Fred might continue to beat the market, now that all his eggs are in one basket (Robert’s)?

Why is Covestor Bad For You?  If you buy into its premise, you are:

1) Asserting that an amateur person can have better knowledge – consistently – than the combined knowledge of everyone in the market – a market where all participants have a vested interest in being right.

2) Asserting you are competent enough to figure out who this amateur person is.

3) Asserting that your investment objectives align perfectly with the person whose investments you are following.

4) Asserting that this person’s investment styles will continue to align with yours.

5) Asserting the tax implications and transaction costs of this person are correct for you.

Finally, notwithstanding all these caveats, and assuming an investor’s strategy is better-than-the-market, people will very quickly flock to this strategy and eliminate, going forward, any advantage it once had.

There is a whole lot of academic evidence for this. The net result is that the vast majority of participants in Covestor would be mistaken to use it.

Not to pick on Robert specifically, but let’s check out his full performance history against the S&P, from inception through February 2011, including the out-of-sample months since Fred’s post.

Inception June 12, 2007
S&P 500
Month to date (%) 0.75 -1.40
3 month (%) 4.42 12.05
1 year (%) 11.26 19.76
Annualized since inception (%) -2.41 0.67
Since inception (%) -8.76 n/a
Sharpe (annualized) -0.09 0.02
% of positive months 60.00 63.49

With apologies to Fred’s VC portfolio, a far better site for the average saver-investor would seem to be

I wonder if Fred still has money invested with Robert?

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