Last time we established that costs and behavior convert the market's winner's game into a loser's game for most investors. The author now exposes the grand illusion sustaining this self-sabotage: the widespread belief that investors can identify superior fund managers by analyzing past performance. This conviction persists despite overwhelming evidence that past results offer no predictive power for future success. Analyzing 355 equity mutual funds from 1970 to 1999, Bogle reveals that only 147 survived the full period, and merely 24 of those survivors outperformed the S&P 500 Index—a dismal 7% success rate that ignores the impossibility of knowing which funds would succeed in advance. Survivorship bias creates a misleading picture where failed funds disappear through mergers or closures while the industry aggressively markets its winners, perpetuating the illusion that superior selection is achievable. Fund rankings change dramatically between periods, with top-quartile performers showing essentially random distribution in subsequent periods due to reversion to the mean. The financial services industry profits handsomely from this illusion, encouraging investors to chase performance despite the fact that this behavior destroys value by causing them to buy high after strong performance and sell low after disappointments. Even professional institutional investors fall victim to this pattern, constantly hiring and firing managers based on recent results in a futile cycle that benefits only the industry itself. The psychological factors sustaining these illusions—human nature's tendency to believe in one's ability to identify winners and the industry's financial incentive to promote active management—keep investors trapped in costly patterns. The illusion becomes even more costly when taxes enter the equation, representing what the author identifies as a critical but frequently ignored drag on investor wealth. Actively managed funds with annual turnover rates often exceeding 100% generate substantial taxable distributions, including short-term capital gains taxed at ordinary income rates rather than the more favorable long-term rates. When combined with expense ratios averaging 1.5% and transaction costs, taxes can reduce gross returns by 2.5 percentage points or more annually for investors holding these funds in taxable accounts. This stands in stark contrast to index funds, which typically maintain turnover rates below 5% and generate minimal taxable distributions, allowing investors to defer capital gains taxes until they choose to sell. The tax efficiency of index funds stems directly from their buy-and-hold strategy, trading only when index composition changes or when managing cash flows. Bogle emphasizes that tax costs represent a permanent loss of capital that can never be recovered through compounding, illustrating how a $10,000 investment growing at 10% annually accumulates to vastly different amounts over decades depending on whether returns compound pre-tax or after-tax.