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FA Center: Why mutual fund managers on a hot streak may be too good for your money

“Hot hands” — in sports, business, and investing — don’t last forever. But why? One explanation is that it’s not because outstanding money managers lose their touch (though, of course, that sometimes happens). Instead, the hot hands of even the best investors must eventually cool because their success attracts too much money and eventually overwhelms their market-beating abilities.

The key to finding a market-beating investment adviser, therefore, is to find someone after they’ve played their hot hand but before they’ve attracted too much money. That’s easier said than done.

Bill Miller, former manager of the Legg Mason Value Trust LMVTX, -0.31% , (now ClearBridge Value Trust) is the investment arena’s poster child of an adviser whose incredibly hot hand suddenly became as cold as ice.

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