Last Updated May 3, 2010 1:41 PM EDT
Bob and I agree on so many aspects of the daunting challenges facing investors, so we'll both try to focus on specific differences and look for disagreements.
Start with Bob's view that the market is more efficient over the short run than over the long. My own view is that it doesn't really matter. The market is very efficient - certainly not always right, but always efficient - both long and short run.
The real question is this: Can individual investors reasonably expect to do better than the market in either the short run or long run? That's easy to answer. The data is in - and overwhelmingly documents the answer to both: No and No again. Investors have no reason to expect they can or will outperform the well-run, low-cost index fund and have lots of good reasons for not ever trying.
There's a huge difference between prospective and retrospective insights and I'll "tut tut" my friend Bob for citing his data that 30% of 500 stocks doubled over 40 years. Several reasons:
- The overall market rose a lot so it was not a normal time.
- Freedom to pick any 5-year period for each stock gives Bob's search a huge advantage. Those 500 stocks had 35 5-year time period, which means a total of 17,500 possibilities - not just 500. So when Bob says, "30% of the 500 stocks doubled," it would be much fairer to say, "Of the 17,500 opportunities for a stock to double in 5 years, only 0.85% "opportunities" saw it actually happen. Where 30% sounds pretty interesting, "less than 1%" does not.
- Now, let's get really serious. Why did almost 1% double in 5 years? Two major factors often get left out: Was the stock briefly too low at one point - because smart investors incorrectly thought so badly of it? And was it briefly overpriced at the peak as a result of transitory enthusiasm? Important, who would be so skillful and lucky to buy at the very low and sell at the very high? Make these realistic adjustments and we're soon talking about tiny "opportunities" - as in 1% of 1%!
Bob is sure right to focus on the lessons learned in studies of professional retirement fund executives. They fired managers who did better than the manager they hired. Why? They fired managers after they had troubles and hired managers after their successes. Why? Because they acted on the "data" - the misleading "data" that looks so convincing.
This sort of mistake is not unique to investing. Doctors look past symptoms to what's really going on. Scientists learn to watch out for "false positives."
Savvy investors, as Burt Malkiel and I say in our short book The Elements of Investing, learn that the best way to avoid the loser's game in investing is to stop trying to beat the market, concentrate on deciding the long-term investment portfolio to achieve each investor's important objectives, and use low-cost index funds. "If you can't beat 'em, join 'em" applies to investing.
Sure, some stocks will double - some will triple - but that's not the key question. The key question is: Do I have the ability - and time, interest and information - to pick the right ones at the right time?
Recasting Bob's facts into percent of possibilities, my own answer is clearly No!
- I don't have enough sufficiently special information - even though investing is my main activity and I'm lucky to know lots of stellar investors.
- I've got better things to do with my time.
- The mandatory "searching for a needle in a haystack" wouldn't interest me.
- I'm smart enough to know you don't win the Masters playing golf once a week and you don't beat the market unless you're brilliant, full-time, totally engaged and beautifully disciplined. I might like to be all those - as great investors must be - but I'm not. Nor am I 6'2" with blue eyes and a lovely singing voice.
Of course, he's right in abstract theory. And we can both cite a few great fund managers - in retrospect. But identifying such winners in advance is stunningly difficult.
I've noting against being lucky. I've had one of the luckiest lives around. But I'd never assume or expect that I'll always be so lucky as to pick the best stocks or funds - in advance - better than the competitive professionals who now dominate the market, have the best information and labor away every waking hour of every day.
At least one of the reasons Bob and I both - who doesn't? - admire Warren Buffett LINK TO JARVIS INTERVIEW is that his repetitive record of excellence is so deliberately created by investing excellence and improving companies in which he has invested. Even he has to use both hands and work all day every day. One of the great lessons Warren teaches all of us is this: If it's not extraordinarily difficult to be a great investor and thousands are sure trying, why oh why is there only one Warren Buffett?
Yes he's an exception - the exception that proves the rule!