POST OF THE DAY
Berkshire Hathaway
Don't Worry, Be Happy

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By rclosch
December 31, 2002

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

CharlesBroadway says:

As we can see, being neither a mutual fund manager, an individual investor, or a club investor gives you any greater advantage on average than if you chose to invest in an index fund. It is also important to note that turnover is what killed the individual investors which we can be aware of if we choose to be stockpickers.

Sobering stuff.
Sobering? Why?

If what you say is true, and I suspect that it is, why is it sobering? It should make you feel better.

If I wanted to outperform the market the last thing that I would want to do is manage a mutual fund. Mutual funds under perform because their structure requires it. They have too much money, they own too many stocks; and the money is always flowing the wrong way.

I also think it is likely that investment clubs under perform. Again, this is not a structure that I would select if out-performance was my goal.

Individual investors as a class under perform because everyone can not be above average, but if all of the above is true, then there has to be another side to the equation. This is a closed system subject [to] mathematical rules so if there are a lot losers, there has to be many winners. We know all the money in mutual funds under perform and that the extent of that under-performance is considerably greater that the frictional costs. So somewhere there has to be winners, and with the amount of money that we can see on the losing side, there has to be either a few very big winners or lots of small winners.

Because the only two big winners we know about are Buffett and Soros then I suspect there are lots of small winners out there. I f they exist they exist in areas not penetrated by the radar of the media, because we do not know who they are. But just because the media cannot find them does not mean that they do not exist. Mutual Funds are large and highly regulated, so they are easy to track. So everyone knows what they do.

Where to Look

If I [were] looking for the winners I would look for:

1. People managing small sums. It is much easier to manage 10 million that 100 million.

2. People with patience. This is not rocket science, patience and discipline are much more important that High IQ. I think that most of the people that post here have adequate mental aptitude to beat the market.

3. People with discipline. It takes time, you have to do the homework. Buffett has said that back in fifties he would sit down and go through the Moody's Manual page by page to get ideas.

4. People who follow the principles discussed here. Berkshire's annual meeting is the best seminar there is on investing. I agree with the poster who said that many people here are likely to beat the market.

5. People with experience. If you were in the market in the seventies it was not difficult to avoid the problems that existed in March of 2000. In this connection reading may help, but being there and experiencing the pain has a much bigger impact. Investing is one area in life were you definitely get better as you get older.

For the young people on this board I say that participation in this market will teach you more that you can learn at any University studying anything about markets. Consider your losses tuition, and understand that what you learn from this market will be with you the rest of your life.

6. My final and most important criteria for seeking investment advice is: Never buy anything from anyone working for a commission. The commission constructs a conflict that will always work against the interest of a purchaser.

I agree with the people here that say that it is difficult to get good investment advice, there is certainly a lot more bad advice out there than there is good advice, and the biggest single reason is commissions.

But with all those losers there has to be a lot of winners. The bottom line is statistics do not lie and with all of that big money locked into institutional under performance, and another big chunk locked into indexing it should make it a lot easier for those of us crazy enough to try to beat the market.


Become a Complete Fool
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.