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Do Winners Repeat?

Investors seem to want to purchase mutual funds with good past performance. This involves two issues. Do investors really chase winners, and is that a successful strategy? In other words, do past winners repeat as future winners? The issue of chasing winners is addressed in a later section. Here, I examine whether or not the winners of the past turn out to be winners of the future. The evidence is quite mixed.

If a mutual fund concentrates its investments in several types of stocks or industries, it is more likely to have a spectacular return. Of course, it could be spectacularly good or spectacularly bad. Most of the mutual funds that showed great performance in 2001 (or in any year) were underdiversified in some way. Are these winner mutual funds successful because of their superior skills in picking the right industries, or were they lucky (see Chapter 3, “Patterns and Predictions”)? There are probably some that are skillful and some that are lucky in every group of winners. How can we tell which is which? One way to tell is to look at the returns after they are labeled as winners. However, the answer may depend on your definition of a winner.


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