Why Money Managers Underperform the Indexs

Warren Buffett's Five Reasons why most active Money Managers Underperform the Indexes

1) Group Decision Making
2) Tendency to conform portfolio & policies to what other large, well-regarded institiution are doing
3) (Most Important) Asymmetry of risk & reward - rewards for straying too far from the path are not enough to offset the risks - "long headline risk"
4) Over-diversification
5) Inertia - once these things are in place they are hard to take out

[from OID - May 20,2008]