Just an exercise in mental doodling here:
Let’s compare small cap mutual funds vs. NFL teams.
The fund has stocks; the team has players. The fund has managers, the team has managers (or coaches.) Each has analysts (of scouts) analyzing the players. Theoretically, each has access to the same information and the same players. In most cases, the fund manager is using the same data as everybody else; and the scouts are using the same tape or Combine results as everybody else.
Actually the NFL is probably more ‘efficient’, in that NFL teams have a salary cap. Some mutual funds have more money and can hire analysts from bigger-name schools.
Now … some funds will ‘outperform’ the benchmark, and some NFL teams will outperform their benchmark – let’s call that 8-8. When a fund or a team outperform the benchmark, it is because of some combination of luck or skill. In sports, this is usually ascribed to skill or smarts; personally I think that luck is often the difference between 10-6 and 6-10, but I wouldn’t really know how to quantify that.
Moving on to the big question, let’s say we were investing in small caps or NFL teams. With each, we’re going to start our research by studing track record and management to predict the future.
Now, here’s the question. Would you rather have the benchmark or try to pick a winner. Over the next five years, would you rather try to find a fund that will outperform the market, or an NFL team that will ‘outperform’ the indez, in this case being 8-8 (or 40-40 over 5 years.
We know there is a debate about this on funds – and I am not really trying to revisit that just having fun with this – but I bet most of us would say that we could pick an NFL team that could outperform the market. That leads to the queston: how many NFL teams would you need to diversify your bet. Three, five, … is 10 too many.
Now, let’s handicap the picker – let’s say that because of fees (vigorish) you’re going to have to pick a team or teams that wins 9 games, not just eight games, to break even. Can we do that?

For my part, I started this by thinking that yes, I feel consident that I could pick the NFL winners and the small cap winners. But the more I think about it, the less confident I would be, especially with a fee to handicap me and also considering my ignorance of small cap funds. Like most American males, I know more about the Pittsburgh Steelers than I do Fidelity or Vanguard!
With small caps, I would have to investigate the fund manager, analyze all the funds and do quite a bit of homework. Do I have the time or ability to do that? Probably not.
What if I didn’t know anything about the NFL, and I was basing my decisions on a) an article I read about Tom Brady, and b) something I read on a chat board about the Steelers, or c) the fact that the PR guy from the Dolphins took me to lunch and sang the praises of their new players!