Thursday, August 07, 2008

Index Investing: Refusing to Believe in Magic

…building a portfolio around index funds isn’t really settling for average. It’s just refusing to believe in magic.
~Fortune, 1999

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund…
~Warren Buffett

No matter where we look, the message of history is clear. Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.
~John Bogle, Founder of Vanguard

Economists, when faced with a conflict between theory and evidence, discard the theory. Stockbrokers discard the evidence.
~Andrew Smithers and Stephen Wright, authors of "Valuing Wall Street"

I own last year’s top performing funds. Unfortunately, I bought them this year.
~Anonymous

After taking risk into account, do more managers than you’d see by chance outperform with persistence? Virtually every economist who studied this question answers with a resounding “no.”
~Eugene Fama, Professor at University of Chicago

Why does indexing outmaneuver the best minds on Wall Street? Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient. When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another. Active managers who frequently shift from security to security actually detract from performance (vs. an index fund) by incurring transaction costs.
~Burton Malkiel, Professor, Princeton

It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.
~Paul Samuelson, Nobel Prize Winning Economist

You'll find more quotes here or here from Brendan at Ross Asset Advisors.

8 Comments:

At 8/07/2008 7:54 AM, Anonymous Anonymous said...

Unrelated but pay attention to this

 
At 8/07/2008 8:50 AM, Blogger K T Cat said...

My favorite: I own last year’s top performing funds. Unfortunately, I bought them this year.

Hahaha!

 
At 8/07/2008 9:40 AM, Anonymous Anonymous said...

So true and yet so many want to believe in the "magic elixir" of active management.

 
At 8/07/2008 10:45 AM, Blogger Unknown said...

Hedge and index funds are a compensation scheme masquerading as an asset class.

 
At 8/07/2008 11:38 AM, Anonymous Anonymous said...

Well, investing on my own I'm up 14% on the year compared to the S&P500 YTD performance of -12.8%. I do believe in efficient market theory, but since I'm a young guy I figure I can afford to take some early risks. I'm glad I didn't start index investing this year.

 
At 8/07/2008 3:52 PM, Blogger Dan Carroll said...

Indexes may not always be an appropriate investment for every investor.

Regarding market efficiency, there are strategies that outperform over time but are rarely implemented and even more rarely studied by academics.

Institutional inefficiency: the inability (and unwillingness) by market participants to implement (or academics to study) rational long term investment strategies that contradict established beliefs or ways of operating.

For instance, does not the atrocious fees of hedge funds imply market inefficiency? If markets were efficient, would we expect a high or low level of market volatility? Does the lack of outperformance by professional managers prove market efficiency or just market unpredictability (or does it prove certain aspects of human nature)?

 
At 8/07/2008 4:29 PM, Anonymous Anonymous said...

I once heard that a handful of monkeys throwing darts at a newspaper could outperform most hedge funds, or experts.

Maybe we should let monkeys run the hedge funds? They'll work for bananas and, well golly, there just so cute!

HA!

 
At 8/07/2008 10:40 PM, Anonymous Anonymous said...

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.

~Warren Buffett, zero-sum theorist, chronic decade-long market underperformer (1990s) and billion dollar loser in currency trading. World’s richest hypocrite (death tax).

 

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