Joel Chernoff's carefully balanced article about my work on the .400 hitters made for interesting reading (Pensions & Investments, Nov. 15, page 37). Nevertheless, I doubt whether he has succeeded in producing a fully persuasive explanation for why these investors have beaten the market by a margin so much greater than what they were able to achieve in the years before 1997. After considering the comments of the other authorities he cites, and after giving the matter further thought, I remain convinced that the phenomenon I discovered is more of a mystery than the cool explanations Mr. Chernoff provides.
If the big alphas of the top-performing groups are the result of wide dispersion in intramarket returns, as suggested by Robert Arnott and H. Russell Fogler, I can only repeat my question of why this phenomenon did not happen before. There are suggestions of an unusual spread in the pop-up in the top group's performance in 1991 and, where early data are available, in 1980 and 1981, but in no case is the outperformance of the top groups as sustained as in the years from 1998 to 2003.
In addition, consider this: Even though the spread between the top and bottom groups was wider after 1997 than before, the bottom group in both PIPER and TUCS managed to match S&P performance in the more recent period. That development was in many ways the strangest phenomenon in the whole business.
Finally, to emphasize the mystery, I return to the relevance of Warren Buffett's performance, which was strikingly different after 1997 from what it had been during the 15 years preceding 1997. No model of intramarket dispersion can explain this shift, as Mr. Buffett's strategy is about as far from chasing the hot stocks in the market as any investor is likely to get. But an identical shift in the character of outperformance is visible in the other universes in my article, however. Hence, I would respond to Messrs. Arnott and Fogler, as Hamlet observed to Horatio, "There are more things in heaven and earth … than are dreamt of in your philosophy."
Peter L. Bernstein