If you believe that good research can turn public information into profitable private knowledge—that not every stock is efficiently priced at all times—there is a strategy that promises at least a chance of providing superior performance.
First put the bulk of your common stock fixed income holdings into a core portfolio that will track the market averages. Then put the remainder into a package that will be intensively managed.
The equity portion of the core portfolio will return the historical nine per cent adjusted for inflation, provided the level of market risk is roughly that of the market indexes. Total risk can be reduced to a tolerable level by adding fixed income securities in the appropriate proportion.
The core holdings won’t need a manager, nor will they generate transactions costs. Although some investors have feared that core funds would prove hard to construct and expensive to manage, mounting experience with these funds suggests that the fears are unjustified.
The intensively managed package is small enough to be closely followed and crisply maneuvered. It is small enough to trade in securities of companies with smaller capitalizations—securities less likely to be priced efficiently by the market. Nor do you need to worry about diversification within this package; confining its holdings to current opportunities, it will take maximum advantage of the contribution of superior management.