Why you should buy the S&P 500 and go fishing

edited December 2017 in General Questions
Trying to beat the market averages is a complete waste of time. For those who like to gamble on sports, well you might enjoy betting on stocks..But, like sports betting, you better have a day job.

I tried to beat the market from 1966 to 1982. Finally, I gave up in 1982, and put almost everything in an SP500 fund. One dollar invested in the SP500 in 1982 with reinvested dividends is now $48. Very few mutual funds have equaled this record over the time period. Just using pure statistics, I calculate there is room for 110 Peter Lynch’s among 5,000 large cap mutual funds. Just take the standard deviation of the SP500 and look at Lynch’s record. As I recall 17% a year for 15 years or so. Trouble is past performance is no guarantee of future performance.

There are many examples of fund managers with hot hands, but as soon as you go with them they have mediocre returns. It is exactly like trying to pick who is best at flipping heads on a coini.

John Bogle in his latest book calculates that only 20% of fund managers have beaten the SP500 over any 20 year period. These are the smartest guys in the room.



  • edited December 2017
    I agree ....like if you have a lot in life savings go all in on the S&P500.... >:)

    ...I mean...what possibly could go wrong:

  • Probably not the correct timing to go into SP 500. However if your holding period is 50 years, I guess it wont matter that much.
  • Investor77,

    In 2000 and in 2008 the SP500 went down about 50%. One day in the late 80,s it went down 25% in ONE day. Although these drops were severe, they were a lot less then the 90% drops in many individual stocks. Lot easier to sit out a 50% drop then a 90% drop. Funny thing is the dividend hardly changed at all after these falls.

    An interesting statistic from Vanguard...in 2008 fall, only one in seven equity investors sold substatioal amounts of stock. Six out of seven did what I did, stayed the course.

    For diversification I do have 50% of my assets in rental real estate..
  • edited December 2017
    I agree that indexing is the "best" realistic option...and I would go that way...IF and only IF you do it like when you are young and buying every month with a fraction of your disposable income for a very long term period....
  • edited December 2017
    You mean indexing is a good strategy for the long term, but won’t work in the short term? Makes no sense...

    I have told clients, who have the animal instinct to gamble, to just do it with 10% of their equity. 100% have been glad they limited their exposure.
  • Quote:"You mean indexing is a good strategy for the long term, but won’t work in the short term? Makes no sense..." No...I mean what I have written...
  • If you are not young, what is a better strategy?
  • ...if you are not young and you have relative big savings you have a problem with no easy solution at the moment.
  • @normgrib

    Lynch generated a CAGR of 29.2% over 13 years, not 17% over 15 years.

    You are right that most investors including the vast proportion of fund managers under-perform the index, if one cannot implement a proven strategy and apply it consistently over a prolonged period indexing is the way forward. What you didn't mention in your post is the fact that a small number of investors who have diligently applied the value investing framework have out-performed the market.

    The empirical data of their records proves that the EMH is a flawed concept, it fails to take into a key component, namely investor psychology.

    As Ben Graham observed 'In the short run the market is a voting machine, in the long run it is a weighing machine'

    In the short term market prices fluctuate above and below a security's intrinsic value as fear and greed distorts rational pricing but in the long run the market recognises value for what it is, specifically the value of assets and their earnings power.

    Value investors outperform the market by taking advantage of the noise which is present in the short-term, this presents opportunities to purchase securities which are being mispriced by the market. Their record is not an accident or blind chance, it is based upon a rational and consitently applied method.

    Take a look at Buffett's presentation on the performance of value investors;


    Here's a research paper from Tweedy Browne detailing value investing methods which have outperformed the market;


    There are a number of mechanical value strategies which are proven by empirical data to out-perfrom the market. I suggest employing one of these if you wish to improve upon the aggregate market return.



  • edited December 2017
    Nice presentation David. I agree EMT is seen more easily in the long term than the short term. I don’t think there is anything in EMT that says you can’t take advantage of short term movements. EMT is only true when markets are deep and wide. Than by definition there would be no short term advantage. In the real world markets are not infinitely deep and wide.

    I am wondering if there is a qualitative approach to finding stocks which out perform the averages, then why don’t mutual fund managers use it? Can you point me to a mutual fund using the value method that has outperformed the averages over s 20 year period? Statistically there could be a 100 out of the 5,000 that outperform over 20 years just by statistical chance. I remember Bill Miller. Everyone pointed to him as proof you could beat the averages over a long period. That is until he under performed the market by 50% one year.
  • edited December 2017

    Very good question.

    There are a number of reasons;

    1. The mutual fund strucuture is not conducive with value investing (Buffett selected the holding company strucutre partly for this reason), retail investors are fickle and subject to all sorts of cognitive biases (as are most fund managers). They will withdraw capital when a manager under-performs and reinvest it with a manager who is out-performing. Reversion to the mean takes place and the manager who was under-performing has a good streak and the manager that was flying high enters a poor streak. They rinse and repeat whilst under-performing the index. Most retail investors are driven by fear and greed and do not approach investment in a rational manner

    2. There is a disincentive for fund managers to pursue the value investing approach as it is contrarian in nature. Most follow the safety in numbers rule and simply buy what everyone else is buying. When they under-perform they can say, it's not just me. It takes courage and commitment to buy the stocks everyone else is selling and to not get caught up in the euphoria (Dot.com springs to mind).

    As Munger has remarked 'Mimicking the herd invites regression to the mean'

    3. Either you get Value investing or you don't. Buffett, Klarman and others have observed this. To a select few the simple and logical approach of value investing is self evident. For many, who are often led by irrationality, the concept is lost on them.

    The old hermetic adage 'The lips of wisdom are closed except to the ears of understanding' springs to mind.

    4. There is a genetic component to investing which is engrained from birth. For some value investing comes naturally but for others they are drawn to momentum. Unfortunately for the latter, the former vastly out-performs the market over the long term.

    5. There are a whole host of other cognitive biases which distort the though processes of investors. By employing a logical and proven strategy value investors protect themselves from their own faulty thinking.

    For more on this I suggest listening to 'The psychology of human misjudgement' by Charlie Munger;

    One final thing, Value will underperform the market some of the time. In fact it has for around the last several years now. Over the long term it does however vastly outperform the market. One should remember Investing is a marathon, not a sprint. When I look at the greatest investors they virtually all follow some form of value investing;

    Warren Buffett
    Sir John Templeton
    Shelby Davis
    Joel Greenblatt
    Seth Klarman
    Irving Kahn
    Walter Schloss
    Ben Graham
    Bill Ruane
    Peter Cundill
    Tom Knapp
    Rick Guerin
    Charlie Munger
    Peter Lynch


  • edited December 2017
    David, That was a very thoughtful defense of value investing. Can I ask you, as an advocate of value investing, how you have done using the method? Have you outperformed the SP500? Over how long a period?

    Here is a great site that shows you how your favorite guru is really doing


    As an example Seth Klarman has under performed the SP500 by 100% over the past five years. You can check on each one for yourself. I see Ray Dalio has underperformed by 50% the last five years...Joel Greenblatt underperformed 24% last five years, Irving Kahn 23% underperformance last five years.

    When you look at their real long term results they all did great..if they hadn’t done great, you would not have heard of them.
  • I am kind of surprised that no one wants to discuss this topic, which comes so close to the main premise of the investors podcast.
  • It is not that nobody want to discuss you said :"When you look at their real long term results they all did great..if they hadn’t done great, you would not have heard of them." ...

    Exactly what's the question?
    I think there is nothing to argue either about the fact the majority of value investor has underperformed the market in the last 5-8 years...

    The fact too that on average fund managers net of fees underperform the market is true and nothing to discuss there...

    And yes there are lot of people that use value investing and underperform also in the long period...
  • @normgrib

    Apologies for the slow reply.

    I was not intending my previous post to be a defense of Value Investing per se, I was merely outlining the empirical data which speaks for itself. If your time horizon for investing is 1-5 years then Value Investing is likely not a suitable method for you. If you are, however, focused on long-term perfomance then Value Investing is clearly the most successful method to employ as evidenced by a large body of empirical evidence.

    With regards to myself, I have only been investing for around 3 years. I outperformed the market in the 1st year and have under-perfromed it the past 2. This is not an issue for me since I anticipated this scenario occuring and my time horizon is in terms of decades, not a couple of years. I am buying undervalued companies which are disliked by the market, not Facebook, Tesla, Twitter, Amazon, Netflx or Google. As a point of interest much of the recent market gains in the S&P 500 have been driven by these stocks and several other tech stocks. It's all well and good riding the momentum and making a gain but if you are paying a premium you are likely to suffer a significant draw-down when the next bear market comes around.

    We have been on one of the longest bull runs in market history and value investing genreally under-performs in such market runs. It more than makes up for this under-performance in bear markets when it out-performs other strategies. The reasons for this are;

    1. Value investors are buying under-valued securities which tend to fall much less in a bear market since their price is already depressed

    2. Since Value Investors buy under-valued securities with a margin of safety, the potential upside is much greater

    3. Reversion to the mean. The fortunes of stocks which have under-performed tend to improve in general and those of the high-flying companies tend to reverse, again in general.

    These quotes sum up the merit of the Value Investing approach

    "I must remind you that value investing is not designed to outperform in a bull market. In a bull market, anyone, with any investment strategy or none at all, can do well, often better than value investors. It is only in a bear market that the value investing discipline becomes especially important because value investing, virtually alone among strategies, gives you exposure to the upside with limited downside risk. In a stormy market, the value investing discipline becomes crucial, because it helps you find your bearings when reassuring landmarks are no longer visible. In a market downturn, momentum investors cannot find momentum, growth investors worry about a slowdown, an technical analysts dont like their charts. But the value investing discipline tells you exactly what to analyze, price versus value, and then what to do, buy at a considerable discount and sell near full value. And, because you cannot tell what the market is going to do, a value investment discipline is important because it is the only approach that produces consistently good investment results over a complete market cycle" Seth Klarman

    "The probabilities, the odds, the very laws of nature are tilted in favour of the value school. Some three dozen published academic studies have shown that, indeed, over long periods, value investors, culling from the bottom of the list, have tended to outperform growth investors" Ralph Wanger

    “Markets behave in ways, sometimes for a long stretch, that are not linked to value. Value, sooner or later, counts” Frank Martin



  • edited December 2017
    Fascinating conversation..


    When I go to your link to tipranks.com and look up Joel Greenblatt the info says he made an 84.7% gain since 2013, but maybe I'm missing something?

    I think both approaches to investing are valid- value and passive.
    In the Intelligent Investor I believe Graham described these as enterprising and defensive, though I don't believe index funds were very common or even existed when he wrote II.

    Graham said there's merit in both approaches and one could expect good "overall" returns being a smart "defensive" or passive investors.
    He advised that to get more than that "average return" requires a lot of effort, time, thought, etc. and if approached incorrectly these efforts could actually be a handicap to getting a satisfactory return. If done correctly an enterprising investor could hope to increase his returns by around 5% from the overall market returns. (not exactly the 10 baggers Lynch talks about..haha)

    To buy the S&P right now, with it's very high P/E, eliminates a margin of safety since it seems overpriced. If the general market price wasn't so high I'd be more inclined to buy into it more- and go fishing! With that said I do dollar cost average a portion of my funds into it because I have limited time to research new companies and opportunities. I'm also just starting to really get into investing, so I'm on a learning curve. Diversifying between an S&P index and my own stock picks allows me to "spread my bets".

  • edited December 2017
    Thank you for all the great feed back. A lot of good points made.

    One problem with buying and selling in general, if it is done outside
    a retirement account, is that there are taxes of 15/20 % to be paid each time you
    make a trade. With short term gains, the situation is worse. This is a real drag on performance.

    So are commissions, although
    now they are a fraction of what they used to be.

    But, the hardest part of doing what you are trying to do, is knowing when to buy and when to sell. There is a saying on Wall Street that there are zero members in the Market Timers Hall of Fame.

    BTW, Rosenblatt trailed the SP500 index by 24% over past five years.

    Does anyone out there know of a web site where you
    can get long term performance data for these

    Enjoying the conversation. thanks,..
  • Smets, Spreading your risk, diversification, it is the only free lunch that I know of.
    It is a statistical fact that once you get 25-35 different equities, you have a 95+% chance
    of getting market teturns in any event. Index funds are just a way to minimize expenses while maximizing diversification.
  • edited December 2017

    Boy, when you said value stocks have underperformed in recent years, you weren’t kidding.

    Here is a site that tracks SP500 growth stocks, and SP500 value stocks. Over the past 10 years, SPXPG the SP500 growth stocks have gone up at a rate of 10.57% per year. SVX, the SP500 value stocks, have increased at a rate of just 3.54% per year.


    The total SP500 has increased at an annual rate of 8.11% for the past ten years.
  • 139 people have viewed this thread. But, only 3 have any comment?
    Kind of surprising to me.
  • What do you think about Howard Mark's memo on passive investing? Some excerpt:

    Passive investing is done in vehicles that make no judgments about the soundness of companies and the fairness of prices. More than $1 billion is flowing daily to “passive managers” (there’s an oxymoron for you) who buy regardless of price. I’ve always viewed index funds as “freeloaders” who make use of the consensus decisions of active investors for free. How comfortable can investors be these days, now that fewer and fewer active decisions are being made?
  • I have heard fears that if everyone indexed, the index would become the market. Most of the people saying this are people earning salaries and commissions from trading. The more transactions, the more money for them. As an individual investor, I wouldn’t be too concerned.
  • edited December 2017
    I have a neighbor, who is a Columbia university economics professor. He is retired. In a conservation, he told me he did not know Benjamin Graham, but he did know Dodd, he than went on to tell me he tried to use the value model for virtually his entire investing life. He then confided, he would have been far more successful, if he had just invested in the S&P 500. This is a man worth listening to.
  • Recognize some of these investors....
    Here are quotes...

    American Association of Individual Investors: "It should come as no surprise that behavioral finance research makes a strong case for buying and holding low-cost, broadly diversified index funds."

    Mark Balasa, CPA, CFP: "That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolio that most people have at brokerage firms. There is a certain elegance in the simplicity of it."

    Christine Benz, Morningstar Director of Personal Finance: "By buying total-market index funds--one for U.S. stocks, one for foreign stocks, and one for bonds--investors can gain exposure to a huge swath of securities in three highly economical packages."

    Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."

    Jack Bogle, Vanguard founder: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

    Warren Buffett, famed investor: “I’d rather be certain of a good return than hopeful of a great one. -- Most investors are better off putting their money in low-cost index funds."

    Scott Burns, financial columnist: "The odd are really, really poor than any of us will do better than a low-cost broad index fund."

    Jonathan Burton, MarketWatch: "There are plenty of ways to complicate investing, and plenty of people who stand to make money from you as a result. So just think of a three-fund strategy as something you won't have to think about too much."

    Andrew Clarke, co-author of Wealth of Experience: "If your stock portfolio looks very different from the broad stock market, you're assuming additional risk that may, or may not, pay off."

    Jonathan Clements, author and Wall Street Journal columnist: "Using broad-based index funds to match the market is, I believe, brilliant in its simplicity.

    John Cochrane, President American Finance Association: "The market in aggregate always gets the allocation of capital right."

    Consumer Reports Money Book: "Simply buy the market as a whole."

    Laura Dugu, Ambassador and co-author of The Bogleheads' Guide to Retirement Planning: "With only these three funds in your investment portfolio you can benefit from low costs and broad diversification and still have a portfolio that is easy to manage."

    Charles Ellis, author of Winning the Loser's Game: "The stock market is clearly too efficient for most of us to do better."

    Eugene Fama, Nobel Laureate: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

    Paul Farrell, author of The Lazy Person's Guide to Investing: "Where does Fama invest his retirement money? 'In index funds. Mostly the Wilshire 5000.' "

    Rick Ferri, Forbes columnist and author of six investment books: "The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It's simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy."

    Graham/Zweig, authors of The Intelligent Investor: "The single best choice for a lifelong holding is a total stock-market index fund."

    Alan Greenspan, former Chairman of the Federal Reserve: "Prices in the marketplace are by definition the right price."

    Mark Hebner, author of Index Funds: “A diversified portfolio which captures the right blend of market indexes reaps the benefit of carrying the systematic risk of the entire market while minimizing exposure to the unsystematic and concentrated risk associated with individual stocks and bonds, countries, industries, or sectors.”

    Hulbert Financial Digest: "Buying and holding a broad-market index fund remains the best course of action for most investors."

    Sheldon Jacobs, author of No-Load Fund Investing: "The best index fund for almost everyone is the Total Stock Market Index Fund.--The fund can only go wrong if the market goes down and never comes back again, which is not going to happen."

    Kiplinger's Retirement Report: "You'll beat most investors with just three funds that cover the vast majority of global stock and bond markets: Vanguard Total Stock Market; Vanguard Total International Stock Index and Vanguard Total Bond Market Index."

    Lawrence Kudlow, CNBC: "I like the concept of the Wilshire 5000, which essentially gives you a piece of the rock of all actively traded companies."

    Prof. Burton Malkiel, author of Random Walk Down Wall Street: "I recommend a total-maket index fund--one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks."

    Harry Markowitz, Nobel Laureate: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

    Bill Miller, famed fund manager: "With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me."

    E.F.Moody, author of No Nonsense Finance: "I am increasingly convinced that the best investment advice for both individual and institutional equity investors is to buy a low-cost broad-based index fund that holds all the stocks comprising the market portfolio."

    Motley Fools: "Invest your long-term moolah in index mutual funds that are designed to track the performance of a broad market index."

    John Norstad, academic: "For total-market investors, the three disciplines of history, arithmetic, and reason all say that they will succeed in the end."

    Suzy Orman: "One of my favorite index funds, Vanguard Total Stock Market (VTSAX), has a total expense ratio of 0.06%"

    Anna Pryor Wall Street Journal writer: "A simple portfolio of 3 funds. It may sound counter-intuitive, but for the average individual investor, less is actually more."

    Jane Bryant Quinn, syndicated columnist and author of Making the Most of Your Money: "The dependable great investment returns come from index funds which invest in the stock market as a whole."

    Pat Regnier, former Morningstar analyst: "We should just forget about choosing fund managers and settle for index funds to mimic the market."

    Ron Ross, author of The Unbeatable Market: "Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind."

    Paul Samuelson, Nobel Laureate: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

    Gus Sauter, former Vanguard chief investment officer: "I think a very good way to gain exposure to the stock market is through the Total Stock Market Portfolio on the domestic side."

    Bill Schultheis, author of The Coffee House Investor: The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock

    William Sharpe, Nobel Laureate: "You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it."

    Robert Shiller, Nobel Laureate: "A portfolio approximating the market may be the most important portfolio

    Warren Buffett, famed investor: "There seems to be some perverse human characteristic that likes to make easy things difficult."
  • If you are still not convinced, here are more quote...

    Prof. Jeremy Siegel, author of Stocks For The Long Run: "For most of us, trying to beat the market leads to disastrous results."

    Dan Solin, author of The Smartest Portfolio You'll Ever Own: "You can get as simple or as complicated as you'd like. You can keep it very simple by owning just three mutual funds that invests in domestic stocks, foreign stocks, and bonds. That's precisely what I recommend in my model portfolios."

    William Spitz, author of Get Rich Slowly: "Few are able to beat a simple strategy of buying and holding the securities that comprise the market."

    Prof. Meir Statman, author of What Investors Really Want: "It makes sense to have those three funds. What makes it hard is that it seems too simple to actually be a winner."

    Stein & DeMuth, authors of The Affluent Investor: "Buying and holding a few broad market index funds is perhaps the most important move ordinary investors can make to supercharge their portfolios."

    "Robert Stovall, investment manager: It's just not true that you can't beat the market. Every year about one-third do it. Of course, each year it is a different group."

    Larry Swedroe, author of 17 financial books: "Over the last 75-years, investors who simply invested passively in the total U.S. stock Market would have doubled their investment approximately every seven years."

    Peter D. Teresa, Morningstar Sr. Analyst: My recommendation: "A fund that indexes the entire market, such as Vanguard Total Stock Market Index."

    Wilshire Research: "The market portfolio offers the best ratio of return to risk."

    John Woerth, Vanguard director of public relations: "We would agree that this three-fund approach offers most investors a prudent, well-balanced, diversified portfolio at a low cost."

    Jason Zweig, Wall Street Journal columnist and author of Your Money and Your Brain: "I think a total stock market index fund is not only the simplest, but the very best core investment for most people."
  • Preston and Steig,
    I know you are reading my posts.

    What I don’t understand is why don’t you have a comment?
  • because everyone is indexing, more than at anytime before and the US makes up 50% of the worlds market cap at the moment.... the strategy is screwed...
  • if the Japanese had vanguard in 1989.. "lets just index the Nikkei with all our money....why try and beat the market?"
  • Thomas,

    As the great economist George Maynard Keynes said , “In the end, we will all be dead.”.
  • As the great Economist Thomas said “what’s that got to do with everyone piling into S&P etfs?”
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