“Management fees reduce alpha, to be sure, but the primary reason is that stock picking is simply difficult, regardless of the market.”

Let’s critically consider this statement.

If the main reason for the majority of active fund managers underperforming the index were indeed the “difficulty” in analyzing stocks, then why would a static, broad collection of arbitrarily chosen stocks (aka the benchmark or index) consistently outperform the curated lists selected by investment management professionals?

Under the author’s logic, this phenomenon would require an extraordinary explanation!

Nay, the real reason for underperformance is much simpler:

Real portfolios have friction costs (management fees, trading commissions, withholding taxes, market impact costs, implementation delays) that imaginary portfolios do not.