In the book “Antifragile,” Nassim Taleb discusses an observation he had from his days working as a global currencies trader. He found that the least educated traders were the most successful. It reminded me of an old Polish proverb: “the dumbest farmer grows the biggest potatoes.”
Maybe nowhere does this adage apply better than investing. In an hugely competitive environment, where there are thousands of investors, competing for an edge, who have advanced degrees from elite universities, access to miles of academic studies and the worlds most powerful computers at their disposal, the evidence continues to show that it is the dumb (or simple) approach that gives most investors the best returns.
The dumb investor does the following:
- Determines their appropriate stock/bond/cash mix
- Funds the mix with simple index funds
- Keeps costs low through minimizing advice fees and mutual fund fees
- Doesn’t try to time the market – they buy and hold their long term investments.
Several years ago, in an interviewer with Yahoo News/Huffington Post, Warren Buffet was asked how he would advise the average investor. He said that investors shouldn’t listen to guys like him, they should just buy index funds and they should not dance in and out of stocks. He went on to say that when a farmer buys land he doesn’t continually value his purchase based on daily weather reports, rather he knows that the land will produce a positive yield over many years. Thus, like a farmer, investors shouldn’t worry about daily market fluctuations, rather focus on the expected long term return of the investments. He goes on to say the US market has generated a 10% long term return over the last 100 years and that most people would have earned that if they just bought an index fund of the US market and stayed the course.
Below is one of my all time favorite examples of the dumb strategy. It is an excerpt from Ben Carlson’s blog “A Wealth of Common Sense” from March of 2016. In the blog Ben compares college endowments performance to a 3 mutual fund portfolio that any investor could buy:
In the hierarchy of institutional investors you won’t find a more competitive group than college endowments. They’re in constant competition with not only trying to beat the market, but also beat each other. It’s almost like a bizarre finance version of a heated college football or basketball rivalry. Endowment funds are constantly looking for the best money managers — utilizing both the public and private markets — to find the best investment opportunities. They’re well-staffed and well-educated. They have access to the best and brightest minds in finance and are able to invest in funds that are reserved only for those with many millions of dollars. I decided to see how these endowment funds matched up with one of the simplest, low-cost portfolios out there today — the Vanguard Three Fund Portfolio. For a total cost of just 0.19% (even less if you used the ETF versions of these mutual funds) you can put together a broadly diversified portfolio the John Bogle way. This portfolio consists of 40% in the Vanguard Total U.S. Stock Market Index Fund, 20% in the Vanguard Total International Stock Market Fund and 40% in the Vanguard Total Bond Market Fund (basically a traditional 60/40 fund). Here’s how the Bogle portfolio stacks up against the endowment funds over the past 5 and 10 years (1 and 3 years returns are mostly noise):