Wall Street is a physical place in Lower Manhattan, of course; but it is also synonymous with the marketing machine used to persuade investors that there is a magic formula (which they will gladly sell via some expensive packaged product) for "beating the market." Sure, there have been investment managers who have done just that, but is this attributable to skill or is it just luck? Further still, is there any way to identify who these "winners" are in advance of their winning?

It is easy to mistake luck for skill. If you toss a quarter in the air 20 times, you might toss 15 heads. Does this mean you have coin tossing skill? No, it is luck or chance, and the 50/50 odds of heads and tails will eventually show forth. However, many investors fall for this random luck and label it "skill". Active managers (those that pick stocks and/or time the market) might beat the market for a while, but this performance rarely (about 3% of the time after costs) persists. So, investors in actively managed funds have about a 1 in 33 chance of winning...yet most investors still follow this "pied piper path".

Costs are a major stumbling block for active managers.

Not only are their trading costs much higher than their passive counterparts (because they trade often), but their marketing costs (sales commissions to the pretend "advisors") are usually multiples of passive funds. The end result is a cost structure that simply can't be overcome by occasional out-performance. Professor Ken French of Dartmouth has estimated that active fund investors transfer about $80 billion annually from their wallets into the pockets of brokers, banks and managers who peddle these investments.