I was recently reading Nassim Taleb’s wonderful book “Antifragile.” In it, he discusses an observation he had from working as a global currencies trader. He observed that the least educated traders were the most successful. It reminded me of a saying that I once heard from a wise old Polish woman: “the dumbest farmer grows the biggest potatoes.”
Maybe nowhere does this adage apply better than investing. In an environment where there are thousands of people competing for an investment edge who have advance degrees, access to miles of academic studies and the worlds most powerful computers, the evidence continues to show that it is the dumb (or simple) approach that gives most investors the best probability of success.
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. I wish I could link the video but it has been taken down. So, to paraphrase, 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 value his purchase on daily weather reports, rather he knows that the land will produce some yield over many years. He goes on to say the US market has generated a 10% long term return over the last 100 years. By buying and holding the market and ignoring the daily market performance, the simple/dumb investor will reap the long term gains from public companies. Most people would be happy with 10% long term returns.
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):