Siren Song Capital

Oliver Thompson

October 21st, 2025

We’ve all heard the statistic that a high percentage of professional money managers fail to beat the index over long periods of time. This number seems to fluctuate depending on which study you read, but it seems to settle between 80-95%. This is true; I am not disputing the numerous studies that have repeatedly demonstrated this. What I do take issue with is the accepted line of thinking that has permeated classrooms and institutions alike that “neither can you.” I believe that a patient, disciplined, value investor with a repeatable process can absolutely beat market returns. Why, given all the academic studies and conventional wisdom suggesting otherwise, am I taking this position? It’s simple, really. I’m not playing the same game as professional investors. Allow me to explain the handful of reasons I think individual investors have an advantage over institutional money managers.

Career Risk

The vast majority of large money managers are required, or at least expected, to release quarterly reports showing results versus an index and their investment activity over that timeframe. Clients will demand activity and an “answer” for current market conditions, even if standing still will yield better long-term results. This invisible pressure pushes managers to chase momentum, increase turnover, and mirror whatever is “hot” that quarter. Compounding this pressure is the fact that annual bonuses are often tied to quarterly or yearly performance. No one gets fired for failing conventionally, so to protect their careers, managers will create portfolios that don’t deviate from the norm in meaningful ways.

This is what’s known as closet indexing: charging active management fees for what is effectively an indexed portfolio. This type of management is irresponsible and erodes returns. Managers are supposed to be stewards of others’ capital, yet they charge high fees for a product investors can now obtain virtually free. This behavior is questionable at best. The only way to generate alpha, or outperformance, is by purposely skewing a portfolio away from the diversified, conventional holdings in most funds. If a manager is essentially operating an index-like fund with a flashier name and charging 1-2% in fees (as opposed to the roughly 0.03% fee of an index), incentivized to increase turnover, chase returns regardless of fundamentals all while focusing on protecting their career, how can they possibly beat the market? The short answer is they can’t; it is an impossible task. This isn’t necessarily a knock on their investment skill, but the nature of fund management in general. It creates a herd mentality, which famed value investor Seth Klarman likens to a “short-term derby.” That this behavior is cited as proof that individuals can’t outperform is ironic. It strikes me as evidence of institutional dysfunction rather than market efficiency.

Constraints

Unlike individuals, professional investors are constrained by a variety of flaws embedded in their legal or company-specific structures. Even a highly skilled manager struggles to overcome the structural requirements of running a large fund. They must remain nearly fully invested at all times, even when market valuations become stretched and opportunity sets are limited. This forced buying, which looks productive to the layman, isn’t conducive to earning better-than-average returns. As we’ve seen with Berkshire Hathaway as it grew larger, size becomes the enemy of great returns. The more capital a manager controls, the fewer opportunities remain, especially in smaller companies due to liquidity. Thus, the fund is forced to search for value in the combed-over large- or mega cap areas.

Time horizon is another issue that a manager has to deal with. Judging a business or money manager in 90-day increments is absurd, yet that’s what the industry demands and what clients have come to expect. Even if the fund is invested in great companies with wide moats, strong brands, and competent management, the investors will begin to question why the manager isn’t in the latest AI or technology stock that has been rapidly increasing in value. It’s hard to take a truly long-term position in a great business that can compound internally for decades while being judged quarterly. Even when a compelling opportunity appears, diversification rules cap how much capital can be committed, effectively diluting conviction.

Furthering this difficulty is the self-imposed constraints managers place on themselves (or are forced into by their employer) of running a specific type of fund, say, large value, mid-cap growth, etc. Opportunities are hard to come by when playing the institutional game, and limiting oneself to a specific region of the market while adhering to all the legal and other constraints listed above only makes it harder. To top it all off, professional investors also have to manage their clients’ expectations and attempt to work with an ever-shifting supply of capital, which can change rapidly during a market correction. Imagine waiting years for the market to offer bargains, only to watch investors withdraw capital precisely when those opportunities arrive. The index is very much a worthy opponent, and beating it becomes exponentially more difficult when working as a professional investor.

Freedom of the Individual Investor

For the individual investor, none of those constraints apply. He or she is free to operate independently, guided only by judgment and patience. There is no career risk, no one to answer to, no diversification or style requirements, no forced buying or selling, and a virtually unlimited time horizon. This lack of imposition allows the individual investor to think independently of the crowd, be selective, and own only as many stocks as make sense at any given opportunity set. If markets are generally overvalued and bargains are hard to come by, there is no rule against holding Treasuries, continuing to research and value businesses, and quickly striking when an opportunity presents itself. The only true mandate of the individual investor is that they are temperamentally suited to value investing and are willing to feel wrong temporarily. Most investors fail not because markets are efficient and unbeatable, but because they lack a repeatable process or the psychological endurance a contrarian approach demands. Markets may continue to rise while you sit largely in cash. This is difficult to emotionally detach from and the urge to do something will be strong. Conversely, buying into a steep selloff requires conviction, mental fortitude, and the ability to dissociate from price movements. I view expensive markets as an ideal time to read annual reports, hone valuation skills, build a curated watchlist, and prepare yourself for the inevitable correction or bear market. The individual investor’s greatest weapon is the ability to remain rational and disciplined where others can’t or won’t. So, the next time someone cites that statistic, smile, nod, and keep compounding – in both knowledge and capital.