Beating the Market Doesn’t Add to My Confidence

Ten years ago I figured I could beat the market.

Full of optimism and naivety, I used the formulas espoused in a number of Robert Hagstrom’s Buffett books

As well as the Buffett “systems” espoused by Mary Buffett and David Clarke:

Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett The Worlds Most Famous Investor 

Brian McNiven: A Wonderful Company At A Fair Price  – (& reviewed by the Australian Investors Association)  

Timothy Vick:  How to Pick Stocks Like Warren Buffett: Profiting from the Bargain Hunting Strategies of the World’s Greatest Value Investor

Not to mention Lawrence Cunningham’s compilation of Buffett letters: The Essays of Warren Buffett: Lessons for Corporate America

Beating the market would be easy, I figured.

My investment returns then reinforced what I thought—beating the market was doable. I was doing it.

Publishing an article in MoneySense magazine, in 2002, I wrote about how to invest like Buffett. And I was supremely confident. What added to my confidence was the stock list I put together of “Buffett-like buys” as well as recommended entry level prices. I laugh at the “exactness” of it now, but anyone following the advice would have done reasonably well a handful of years after I penned the piece, Patience, patience. 

The investment club that I run would have solidified my belief (at least you’d think it would) that I had some kind of talent.

With 100% equities, we’ve beaten the S&P 500 by more than 5% annually since 1999, despite, at one point, losing an entire 12% of our portfolio through a stupid private venture that I convinced the club to make, discussed in my post: I’ll Show You Mine if You Show Me Yours! 

And even that year, we beat the market, despite having a 12% deficit, no thanks to my stupidity.

Via email, I bombarded MoneySense Magazine’s founding editor, Ian McGugan, with every trade I was making for years, until he asked me to take the story public. …read the article

If we beat the S&P 500 this year, it will be the eighth year of doing so in a row.

Checking our 12 month return (as of today) also has us ahead of the S&P 500 index. This full equity portfolio is up 16.4% from June 2, 2009 to June 2, 2010, compared to 14.4% for Vanguard’s S&P 500 index. 


 IRR

 Portfolio Value

 Maniacle Members of the Mausoleum

 16.4%

488,009.88

 Vanguard 500 Index Fund (VFINX)

 14.4%

 479,956.33

 (Using prices from market close for 06/01/2010) IRR Portfolio – The dollar for dollar tracking is courtesy of the online service at: bivio.com.)

I’ve put my own money in the same holdings as the club, but because I can take advantage of my bond allocation, I’ve beaten the investment club’s returns, as I’ve sold bonds during downturns to buy cheap stocks. Having 40% of my money in a bond index hasn’t hurt. (Note—all of my international equity exposure is indexed)

Now I’m going to tell you what I really think of this:

LUCK

OK—I believe that the markets are mostly efficient, and that some really bright and lucky people can beat the markets if they keep their costs down, but there are also people with long, market-beating track records who can thank lady luck, rather than their stock-picking ability.

I’m one of those guys.

And every year, I view myself as less “gifted” in the area than I thought I was the year before. Success is supposed to breed confidence, right? Then why aren’t I confident? What do I know that I don’t know I know? (Now that sounded like Gertrude Stein, didn’t it?)

And what about you?

How do you personally feel about beating the market? Is it really doable over the long term?

 






Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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9 Responses

  1. DIY Investor says:

    Very interesting. Here's my story. I retired in 2000, took a lump sum on my pension, rolled over my 401(k) and happily set off to do my own investing after investing for pension funds, college endowments, insurance companies etc. for 20 years.

    I was involved with a number of side things and didn't really have enough time to do research so I put the bulk of my money in Fannie Mae bonds – a quasi government agency with 10 year bonds paying over 7%. This turned out to be a great investment – the dot.com bust came along, interest rates dropped and a couple of years later my bonds were priced at 120. I had received interest at 7.25% and had a nice capital gain to boot – sweet!

    This produced a return that most people would see as bordering on genius. What they don't see is that I came within a whisker of making a major buy of Enron. I had spent considerable effort in studying the company and felt, like a lot of observers, that they had the "new world" business model. In actuality they were very bright quants who were extremely talented in creating insurance products to match just about every uncertainty imaginable. I of course had no clue on the games Mr. Fastow (and I believe Skilling) were playing behind the scenes.

    The point is that luck does play an important role. If I had made the Enron investment a good record could easily have turned into a disaster.

  2. Lady luck does have a part but we can also be diligent with our diversification. I really like how you (Andrew) have a lot of bonds and wait to buy cheap stock. Most people aren't patient and want it all now.

    I think beating the market is possible. Patience is a key ingredient. I am not sure that when you start investing though, that you can beat the market right away. It takes time to setup the stage I would say. While I build a dividend portfolio, I tend to evaluate my success based on my dividend returns to avoid evaluating my picks based on market value as it tends to fluctuate. I do look for opportunity but I don't have enough cash on hand.

    Well done Andrew with your investments.

  3. The more you learn, the more you become humble… I think you have just acquired wisdom and experience over the years, Andrew. An less-wise person would not appreciate the role that luck and other exogenous factors can play. Good job, so far!

  4. Jenn T says:

    @DIY Investor

    DIY Investor:

    Man! You must have felt pretty strange when Enron went south? Elated? Ill?

    Most of us have a similar story, but it usually relates to just part of our investment portfolio. That would have been a disaster if you flipped heads instead of tails. I'm glad you flipped heads. Otherwise, you might have said, "screw this!" and perhaps you wouldn't have let yourself continue your research and investing.

  5. @The Passive Income Earner

    Passive Income Earner:

    I started investing in 1990 with baskets of Investors Group mutual funds that essentially went nowhere in history's biggest bull market. So, although I was a great saver early on, I sucked as an investor.

    I think your strategy is a great one. I was talking to my wife last night about potentially buying some real estate: perhaps a triplex or a quad in Oregon or Florida. I was wanting multiple sources of revenue. And I think that your philosophy with stocks works for real estate also. I told her that I wanted net cash flow, after all expenses, and that I didn't care where the property value went after we bought it, as long as it was (as the Australians term it) positively geared after ALL expenses.

    Your stock strategy, based on cashflow, is similar. It's real. That's why I think your investment strategy is so good.

  6. @Kevin@InvestItWisely

    Thanks for that Kevin,

    Something does make me smile. I'm reading Michael Lewis' book, "The Big Short", and despite it being a huge seller, (and despite loving the story-weaving within the book) I don't understand the financial instruments that he explains at all.

    So I'm definitely not that smart!

  7. @DIY Investor

    DIY Investor:

    Have you read "Blink", by Malcolm Gladwell? He talks about a gut instinct that helps us make quick decisions—and that generally, when we weigh up two options as clearly as we can, our gut can lead us to the right one. If that's the case, you might have had some kind of sixth sense with Enron. It's a somewhat romantic idea. But I like it!

  8. DIY Investor says:

    @Jenn T

    I felt relieved – like I had dodged a bullet! Rule result: never put more than 5% in a single name.

  9. DIY Investor says:

    @Andrew Hallam

    Actually I have thought about it a lot and am not sure why I didn't make the purchase. I think at the time the stock wasn't going up and other stocks were gaping higher and that puzzled me. Then they came out and announced a push into dot.com and I thought this would definitely get it to take off. But still the stock was flat. So, thankfully, I procrastinated and then questions started to come out from analysts et. al.

    I am a huge fan of Gladwell's ( "Outliers" the best I believe) and maybe you can term it all a "sixth sense".

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