"Some people are comfortable making their own investing decisions, and some people just aren't."
When I read that statement in an article about investing in ETFs recently, something clicked.
The long-term results of the stock market are just phenomenal -- roughly 11% annual returns, or somewhere around 6.5% to 7% real returns after subtracting for inflation. And yet very, very few people end up pocketing anything close to those results.
This is because people in this country generally rely on the advice of brokers to pick mutual funds for them when they're investing. The combination of the fees the brokers pay themselves and the ones they pay the mutual fund managers means that investors, over time, get far less than half of the market's returns. You can look it up.
Based on all evidence -- data that has been thoroughly accumulated and that no objective observer would dispute -- what should make people truly uncomfortable is being exposed to the average returns that are produced by advisor-sold mutual funds.
Why people aren't comfortable
One of the reasons many people aren't comfortable making their own investment choices is that a disproportionate amount of time and effort in the media is spent covering companies that not only have business models unlikely to be easily understood by the new investor, but have extreme levels of volatility in their prices. Doing a quick screen for companies that are today priced at less than 20% of their 10-year highs, yet continue to be very viable enterprises with $5 billion or more in current market capitalization, uncovers well-known companies such as Rambus (Nasdaq: RMBS ) , Agilent Technologies (NYSE: A ) , Nortel Networks (NYSE: NT ) , Akamai Technologies (Nasdaq: AKAM ) , and Sirius Satellite Radio (Nasdaq: SIRI ) .
Each one of these companies, despite being widely followed, demonstrating phenomenal growth at points along the way, and having important contributions through their product lines, has been a wealth destroyer for tens of thousands. That kind of thing causes stress. Fear of experiencing such losses understandably drives investors into the hands of those who profess to know how to avoid them.
A different course
So let me offer the words of Christopher Browne, who wrote The Little Book of Value Investing, and whom I had the pleasure of interviewing recently about his philosophy. He stated that value investing was the "stress-free route" to successful investing.
"The point of value investing is that you have got value behind the price you paid for the stock, as opposed to owning JDSU (Nasdaq: JDSU ) at $163. You aren't going to see that price again, but in value investing, you aren't worried about it. If you own Johnson & Johnson (NYSE: JNJ ) at $70, it drops to $40. It's not like it's going to go out of business. It will eventually get back to $60 or $70 and go on from there. So that's the point about it being stress-free -- you're not focused on the short-term price fluctuations; you're focused on the long-term price fluctuations."
And the long-term price fluctuations for value investing are outstanding. Dozens of studies show that value investing, when properly applied, beats the market's average returns. And remember -- the market's average returns are about double what mutual fund investors pocket.
If you're already choosing your own stocks, great. You may not be beating the market yet, but chances are you're beating the average owner of managed mutual funds. If you're looking to find more stress-free ideas and to beat the market as well, join us by taking a free 30-day trial of our source for value investment thinking, Motley Fool Inside Value.
Bill Barker does not own shares in any of the companies mentioned in this article. Johnson & Johnson is an Income Investor recommendation. Akamai is a Rule Breakers pick. The Fool has a disclosure policy.