Successful
Investing
Strategy
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SUCCESSFUL
INVESTING is all about
common sense…….
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Simple arithmetic suggests, and
history confirms, that the
winning strategy is to own all of
the nation's publicly held
businesses at very low cost
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The best way to implement this
strategy is indeed simple:
Buying a fund that holds this market
portfolio, and holding it forever.
Such a fund is called an index fund.
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The relentless rules of
humble arithmetic
As investors, all of us as a
group earn the stock
market's return
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The relentless rules of
humble arithmetic
As a group we
are average!
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The relentless rules of
humble arithmetic
Each extra return that one of
us earns means that another
of our fellow investors suffers
a return shortfall of precisely
the same dimension.
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Before the deduction of
the costs of investing,
beating the stock
market is a zero-sum
game
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The costs of playing the
investment game both
reduce the gains of the
winners and increases the
losses of the losers
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So
who
wins?
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You know
who wins…..
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The man in the middle (actually,
the men and women in the
middle, the brokers, the
investment bankers, the money
managers, the marketers, the
lawyers) is the only sure winner
in the game of investing.
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Our financial
croupiers always
win……
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After the deduction of the
costs of investing, beating
the stock market is
a loser's game
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“The investment business is a giant scam.
Most people think they can find managers
who can outperform, but most people are
wrong. I will say that 85 to 90 percent of
managers fail to match their benchmarks.
Because managers have fees and incur
transaction costs, you know that in the value.”
Jack R. Meyer, former president of Harvard
Management Company, the remarkably successful
wizard who tripled the Harvard endowment fund
from $8 billion to $27 billion.
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All investors as a group must
necessarily earn precisely the
market return, but only before
the costs of investing are
deducted
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In a market that returns 10
percent, we investors together
earn a gross return of 10 percent.
But after we pay our financial
intermediaries, we pocket only
what remains. (And we pay them
whether our returns are positive or
negative!)
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Let's assume the stock market
generates a total return
averaging 8 percent per year
over a half century
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Now let's assume that the costs of
the average mutual fund continue at
their present rate of at least 2.5
percent per year.
Result: a net annual return of just
5.5 percent for the average fund.
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Invested for
50 years
Annual gain
$ 100,000,-
8 % per year
=
?
$ 100,000,-
5,5 % per year
=
?
(5,5%  8 % – 2,5 %;
2,5 % = the costs of the
average mutual fund)
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The value of the $100,000
investment in 50 years
Annual
Gain 8 %
$ 4,690,000,-
Annual
Gain 5,5%
$ 1,450,400,-
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Where did that
$ 3,230,600 go?
$ 4,690,000 - $ 1,450,400 =
$ 3,230,600
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What you see here is that over
the long term, the miracle of
compounding returns is
overwhelmed by the
tyranny
of compounding costs
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Where returns are concerned,
time is your friend.
But where costs are concerned,
time is your enemy.
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So
what
to do
now?
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You know the
answer
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