April 14, 1998
The Fool on the Beardstown Ladies
Searching for Value
in the Beardstown Blunder
by Tom Gardner (TomGardner@aol.com)
In early March, Shane Tristch -- the managing editor at Chicago Magazine -- published an article raising doubts about the stated performance of the Beardstown Ladies Investment Club. It turns out that he was right to be skeptical. After Tritsch's article hit the stands, the Ladies agreed to submit their portfolio to a public audit by Big Six accountant, Price Waterhouse. The firm's review yielded unhappy results for the club. Their investment returns from 1984-1993 rang up a disappointing 9.1% per year versus the 14.9% annual return from the S&P 500 index over the same period.
Even worse, that 9.1% yearly growth fell dramatically short of the 23.4% annualized returns that the club had promoted. It turns out that that 23.4% growth was a statement of returns for their 1991-1992 performance, not for the full decade. Their publisher, having splattered the spectacular performance numbers of the club all over their marketing material, punched out the sale of 800,000 copies of the Beardstown Ladies' Common Sense Investment Guide. All of this when it turns out that for a decade, they'd been roundly thumped by the market and hadn't championed the availability of the index fund. One wonders what D.I.C. Films, the subsidiary of The Walt Disney Company that has a movie deal with the Beardstown Ladies, is planning to do now.
And... to no one's surprise, the financial press jumped all over the blunder, in delight. Their conclusions? One, the market is perfectly efficient. Two, the market can't be beaten by individual investors. Three, the Ladies should be jailed (so ran the sensationalist headline in Time Magazine). Apparently, the press feels quite comfortable picking up stones to throw.
But before any Fool lifts her fiery staff to participate in stake-burning the Beardstown Ladies, consider a couple lessons that can be drawn from all this. The careful mind can always learn more.
First, there's a little more context that the financial pages didn't offer. True, the Beardstowners racked up 9.1% gains versus 14.9% growth for the S&P 500 between 1984-1993. But the Beardstown Club actually has been in existence longer than the 10 years reported by most media organizations. Price Waterhouse's report included that, over the 14-year period of their existence, the Beardstown Ladies Club's compounded annual growth was 15.3% versus 17.2% for the S&P 500. Not better than an index fund, but not bad.
Second, even though the Beardstown Ladies did measurably underperform the market between 1984 and 1993, their total savings rate showed annualized growth much higher than that. No, the total growth rate doesn't reflect the return on invested capital... but it does speak to the accumulation of wealth -- the larger aim of most investors. As anyone who comes to this forum knows, adding new savings to your investment portfolio every week, month, or year can have dramatic effects on a patient plan to build wealth.
Third, hey, when do we audit the businesses that make enormous amounts of money off the individual investor, now that we've put the Beardstown Ladies through the ringer? There has never been a public audit of the performance of full-service brokers in America, even as they generate a few billion dollars more business than the Beardstown Ladies each year. If your financial advisor, planner, broker, consultant, or swami can't provide you with your annual rates of return -- after deducting all fees, costs, expenses, commissions, production credits, whatever -- and if that consultant is unwilling to then compare your returns to market average for you, you're not being served.
Fourth, mutual funds are required to publicly state audited returns in America. And, over the past five years, 91% of them have underperformed the S&P 500 -- before even factoring in the biting tax costs from the high turnover ratio at most funds. Likewise, more than 75% of this trillion-dollar industry underperformed the market during the 14-year history of the Beardstown Ladies Investment Club; certainly more than half did worse than the Ladies after subtracting out fees and taxes. (The Ladies buy and hold.)
Fifth, as we've been saying since our company's inception, if you can't beat the index fund or S&P 500 Spiders, join 'em. There's nothing wrong with market-average returns mixed together with new savings each year. Always compare your yearly returns to the S&P 500. If your investment club can't beat it, begin allocating more money to the index fund. If your broker can't beat it, do the same. And the same goes for managed mutual funds. The same also goes for the Market-Tipster Hot Email Service. If they all can't beat the market average for you, you might as well step-up and get themarket average.
Finally, since so many in the financial press came back with the argument that individuals can't beat the market, I'll repeat that the strain of the Foolish Four Dow dividend approach espoused by the Motley Fool compounded 22.9% versus the market's 13.3% between 1971 and 1996, and has beaten the market over the past 36 months as well. Historically, there have been a number of models and disciplines that have beaten the market's returns. Some by a wide margin. Whether you're buying large consumer franchises and holding them for decades, whether you're searching the universe of small-cap stocks that has historically beaten the S&P 500 this century, whether you're using the Dow approach or some other strategy, you can beat the market if that's your aim. Remember that at most financial houses, the primary aim is something other than beating the market for their clients (something about the firm's productivity). And that's an inefficiency that gives you opportunity.
Yes, investors who have no interest in learning more about public businesses should just buy an index fund or Spiders (and they can also skip the hefty payments for an MBA degree from the University of Chicago). Conversely, investors interested in trying to beat the market should bring their brains, their humility, wit, and patience to the playing field. As in all subjects, good fortune favors the prepared mind.
To close, hey, I'm the first guy to share some disappointment about this mistake by the Beardstown Ladies. And I'd love to see them commit a portion of their earnings to furthering financial education in our schools. Since a mistake led to some of their great fortune as writers, they should consider investing some of that fortune into helping others.
But there's so much more to this story than a discovery about the real performance of an investment club in Illinois.
While our largest financial institutions are regulated, their performance hasn't really been scrutinized by the financial press yet. A Fool wonders, for example, why the mainstream media hasn't brought the same imagination and zeal exhibited in their coverage of the Beardstowners ("Jail the Beardstown Ladies!") to even just a very general review of our nation's big-money institutions. America would learn some great lessons if the press regularly just scratched the surface on the performance of credit cards, financial planners, mutual funds, home equity loans, whole-life insurance, et cetera.
The financial press didn't hesitate to closely scrutinize rural Illinois. So, how about Manhattan?