Upon reading an advanced copy of The Little Book of Common Sense Investing by John Bogle, Mr. Bogle bashes everything that is not an index fund.Â
He backs up his view with an unlimited amount of data and quotes from the Gods of investing. He even has a chapter entitled "What Would Benjamin Graham Have Thought about Indexing?". He quotes an interview in which Graham says that even in the 1970's, it is much harder to find undervalued stocks than when he began in the 1920's. As is well known, Bogle shows that fees and taxes diminish a fund's return over time. He also obviated that the average manager is average.
In his speech given to the CFA Society of Los Angeles, he told of having just visited Warren Buffett in Omaha and having steak at Gorat’s, which he called “overrated”. Bogle asked Buffett what he thought Ben Graham would think of index funds of today. Buffett replied that Graham had told him his view shortly before he died in the 1970’s. His view was that the indexes are difficult to outperform and that the average investor could probably not outperform an index fund.Â
After hearing his speech, it reminded me that we as individual stock pickers need to do something quite different from an index fund to earn our keep. We must either: identify the next big growth story, be really good at finding out of favor companies, concentrate on fewer stocks, or be different than the overall market.
Also, fees play a big part into the calculation. Hedge funds are basically saying that they can outperform the averages by 4% after their fees. That’s a pretty tall order. One can buy Marty Whitman’s Third Avenue Fund and pay 1.1% a year or Bruce Berkowitz’s Fairholme Fund and pay 1%. These guys are about the best there is and I’d rather be in one of their portfolios in a bear market than and index fund full of blue chips. The stocks they buy so out of favor that they have a margin of safety when things get tough.Â
You will find that the few managers who make the Guru Focus list continually do one of these things. It is not easy to make this list, as Bogle is quick to note. One thing that Bogle did say is that if you are going to go with a fund run by a manager, make sure they "... are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging". Though I am not a Bogle fan, he did sum up something that most of the managers on the Guru list do have in common. The majority of managers on the Guru list own their own firm or are principals, run a portfolio completely different than the indexes, have concentrated or super concentrated portfolios, or are really good at picking blue chips like Bill Miller and Bill Nygren.Â
I asked Bogle before the speech how Vanguard was formed and if he owned any. He said that he wished he had held 1% but that it was a mutual company owned by the shareholders. Bogle said that if he had held 1%, he would have flown the group from Los Angeles to Pennsylvania to hear him speak.
It’s tough to outperform but to quote General George Patton, “America loves a winner, and will not tolerate a loser.” I think if General Patton were a portfolio manager, he would be a stock picker and not an indexer and he would shoot to be above average.
He backs up his view with an unlimited amount of data and quotes from the Gods of investing. He even has a chapter entitled "What Would Benjamin Graham Have Thought about Indexing?". He quotes an interview in which Graham says that even in the 1970's, it is much harder to find undervalued stocks than when he began in the 1920's. As is well known, Bogle shows that fees and taxes diminish a fund's return over time. He also obviated that the average manager is average.
In his speech given to the CFA Society of Los Angeles, he told of having just visited Warren Buffett in Omaha and having steak at Gorat’s, which he called “overrated”. Bogle asked Buffett what he thought Ben Graham would think of index funds of today. Buffett replied that Graham had told him his view shortly before he died in the 1970’s. His view was that the indexes are difficult to outperform and that the average investor could probably not outperform an index fund.Â
After hearing his speech, it reminded me that we as individual stock pickers need to do something quite different from an index fund to earn our keep. We must either: identify the next big growth story, be really good at finding out of favor companies, concentrate on fewer stocks, or be different than the overall market.
Also, fees play a big part into the calculation. Hedge funds are basically saying that they can outperform the averages by 4% after their fees. That’s a pretty tall order. One can buy Marty Whitman’s Third Avenue Fund and pay 1.1% a year or Bruce Berkowitz’s Fairholme Fund and pay 1%. These guys are about the best there is and I’d rather be in one of their portfolios in a bear market than and index fund full of blue chips. The stocks they buy so out of favor that they have a margin of safety when things get tough.Â
You will find that the few managers who make the Guru Focus list continually do one of these things. It is not easy to make this list, as Bogle is quick to note. One thing that Bogle did say is that if you are going to go with a fund run by a manager, make sure they "... are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging". Though I am not a Bogle fan, he did sum up something that most of the managers on the Guru list do have in common. The majority of managers on the Guru list own their own firm or are principals, run a portfolio completely different than the indexes, have concentrated or super concentrated portfolios, or are really good at picking blue chips like Bill Miller and Bill Nygren.Â
I asked Bogle before the speech how Vanguard was formed and if he owned any. He said that he wished he had held 1% but that it was a mutual company owned by the shareholders. Bogle said that if he had held 1%, he would have flown the group from Los Angeles to Pennsylvania to hear him speak.
It’s tough to outperform but to quote General George Patton, “America loves a winner, and will not tolerate a loser.” I think if General Patton were a portfolio manager, he would be a stock picker and not an indexer and he would shoot to be above average.
