Forex

Champions and Challengers is a money collection system that
worked extremely well at Chase. Everyone knows how difficult it
can be to collect money from habitual debtors. Needless to say,
Chase, like any other creditor, wanted to see its money returned. To
accomplish this, they have set up the Champion and Challenger
system, which worked like this: Of all the defaulted accounts, 80
percent were turned over to the collection department that yieldedthe highest results in the previous year(s). This outperforming
department was obviously employing the best strategy for collecting
debt and, therefore, was known as the “champion.” The
remaining 20 percent of outstanding accounts were split evenly
between two other collection departments that utilized two different
collection strategies. They in turn were called “challenger I”
and “challenger II.” If by following a different (new) system, one of
the challengers performed better than the champion, this challenger
was promoted to the rank of the new champion until it was
outperformed by a different collection strategy. If this was the case,
this new top-performing challenger became the new champion and
so on. Thus, the collection system with the best track record always
became the new champion and retained its title until a different
collection system prevailed. This rotating system of champions and
challengers, which encourages competition and, consequently,
progress, has a wide range of application in the investing arena.
Can we apply this collection system to our investment needs?
Let’s examine a hypothetical situation: It is 1992 and our asset
management department was just entrusted with $1 million to
invest in equity-based mutual funds. There is only one conditional
stipulation from the people who have assigned to us this awesome
responsibility: Do not underperform the market, which for the sake
of comparison is the S&P 500 Index. It sounds easy. However, after
investigating and examining the performance of all mutual funds
out there, we found that 80 percent show a tendency to underperform
the S&P 500. The 20 percent that outperform the index during
any given year in most cases fail to fulfill this objective in the
following year. That is, research showed that mutual funds either
do worse than the market, or if they manage to beat the market,
they cannot sustain their momentum.