The odd paradox of picking a good mutual fund manager has been eating at me recently. The reason why I think people should dollar cost average into an index fund and reinvest the dividends is that it puts you on autopilot, and allows you to benefit from investing in the U.S. However, there are, and always will be, people who excel at analyzing businesses, and as a result will be great stock pickers. The problem with finding these managers is that if you can find them, you are probably in the arena of people who can and do pick great stocks.
People are always talking about finding the next Warren Buffett or Peter Lynch and investing their money with them so that they will retire millionaires. The problem is finding these people. If you analyze these folks, you are going to find certain similarities such as a great degree of mastery over accounting, and the discipline to stick to their guns on what they invest in. Seems simple enough right? All you have to do is search for managers who have these qualities, right? That is what all of those articles on all those investing websites seem to mention in their stories on these people. Well here is the paradox, if you can analyze the stock holdings these folks bought, and can determine that they are good holdings, you have just proven that you can choose your own stocks and have no need to pay a management fee to somebody else to pick your stocks for you.
Of course that is ignoring how if somebody stays in business long enough, word will get out about their skill, and then you can invest right alongside these people. Well, the problems you have to deal with there are that some managers such as those at Tweedy and Brown closed shop a few times to new investors so as to protect long term shareholders. (Full Disclosure: I fully support a move like that. If somebody is willing to put their money with you for decades your responsibility should be primarily to them.) Another problem is that once word gets out, tons of people rush in, and the sheer bulk of managing all that money inevitably limits future returns as it is harder to earn 20% on a nine billion dollar portfolio than to do so with a fifty million dollar portfolio. As always though, there are exceptions to this. Look at Warren Buffett at Berkshire Hathaway. Even though his returns will be lower than in the past, he is still an exceptional allocator of money, and if you buy Berkshire at a cheap enough price relative to the S&P you may well end up beating the index anyway.
All of this has lead me to believe that if you dollar cost average into an index fund, and reinvest the dividends you will have an infinitely more enjoyable life. You will be able to go through life working on the things that you want to rather than spending hundreds of hours a year during your life trying to sort through thousands of managers in an attempt to identify those few who will be able to beat the index. If you happen to be invested in a fund that does have one of these managers, congratulations, and have fun in Maui when you retire much sooner than you had previously thought you would have.