Last week, Maddy called me up, sounding as if a squadron of seagulls had dumped on her car.

“Andrew, the stock markets keep rising—I’m hating that!”

I was so happy that I could have kissed her.

Maddy gets it.  An American in her mid 30s, she views the stock markets the way a young person should.

  • Rising stock market = Bad
  • Falling stock market = Good

As Buffett suggests, anyone who plans to be a net purchaser in the stock market (for at least the next five years) should think like that.  But it’s really tough to convince most people.

Maddy, however, understands it fully and has applied the tenets of sound investing beautifully.

The Beginning of her journey—when Maddy met Dan

When Maddy started investing in her early 20s, she used Dan’s services, a financial advisor through H&R Block.  He bought her actively managed mutual funds—which tend to generate higher taxes and lower returns than index funds.  And he charged her a 1% annual fee on top of Maddy’s mutual fund expenses.

But that wasn’t the only damage that “Dan” caused her.  The biggest damage of all was the mindset he was creating in this smart young American woman.  He keenly chased funds that had “strong track records” and he taught Maddy that a rising stock market was good for her.  The combination of what Dan bought her, coupled with the philosophy he instilled could have killed Maddy’s hopes of an early retirement.

Maddy Fires Dan

Maddy has a PhD, so she’s no stranger to reading.  She launched herself into a slew of classic investment books, including  Burton Malkiel’s  A Random Walk Down Wall Street,  along with Lawrence Cunningham’s The Essays of Warren Buffett.  None of what she read aligned itself with Dan’s philosophy.  He was a salesman, after all, with an intravenous drip from Maddy’s investment account to his own.

Maddy had no choice.  If she wanted early financial freedom, she had to expunge the source of her hemorrhaging.  So she fired Dan.

Evidence Based Investing Only

Opening an account with Vanguard. Maddy divided her money three ways:

Sailing over volatile waters

Remembering a story that Benjamin Graham (Warren Buffett’s friend and teacher) told about a man named “Mr. Market”, Maddy employed the strategies that Graham espoused.

You can’t get influenced by Mr. Market.  He’s irrational.  Learn to take advantage of him when he’s irrational, but don’t fall under his spell.

When the markets plummeted in 2008 / 2009, SmartMoney  magazine had a cover story headline that most people wanted to see.  It had a photo of a stack of bills with a lock draped over them, and it espoused the best bonds to buy.  Needing to sell magazines, SmartMoney was giving dumb advice—by condescending itself to people’s fears.

Warren Buffett suggests that falling markets are good for young investors.  And he says that they should be greedy when others are fearful.

So when the markets were down, and when Maddy had fresh money to add to her account, she shunned bonds and bought her stock market indexes.

For Maddy, the whole process was a bit like stealing candy from babies.  Stocks are safe when they’re cheap.  And her account benefited from her dispassionate choice to turn away from the lemmings who sold their stocks in 2008/2009.  Instead, she bought stocks.

When Maddy’s bonds rise faster than her stock indexes, she buys stock indexes.  When her stock indexes rise faster than her bond indexes, she buys bond indexes.

Her results speak volumes

The stock market is currently lower than it was when Maddy opened her Vanguard account in November, 2007.  In fact, the S&P 500 and the DOW Jones Industrials are roughly 30% lower today than they were three years ago.  Look below to see where the market was near the end of 2007—and then look to see how much lower it is today. See the comparison here.

An astute investor would have a much higher account today than they had at the end of 2007, if they followed Maddy’s tenets:

  1. Keep costs low with diversified indexes
  2. Rebalance your account when your stock and bond allocation gets out of alignment
  3. With fresh money, add to the lagging index and shun the rising one.

Maddy has also bought a few individual stocks to compliment her portfolio:  Berkshire Hathaway, Coca Cola and Pfizer.  Did she buy them when they were cheap?  Of course she did.

Overall, Maddy’s account has gained (in profits) $27,864.57.  One of the beauties of Vanguard is that you can always see exactly what you have deposited and then what the account is currently worth.  Loads of financial advisors hide that from their clients.

Below, pasted directly off Maddy’s account, you can see that she has deposited $239,400 since November, 2007.  And today the account is worth $267,264.57.

Activity summary

Total value as of 11/01/2007

$0.00

Purchases and withdrawals

The amount of money coming into or going out of your fund or account for up to 5 years, resulting from custodial fees, purchases, exchanges, redemptions, asset transfers, rollovers, loan repayments, or employer contributions to employer-sponsored plans. It does not include reinvested dividends (income, earnings, dividends, capital gains). Only dividends swept to a different fund, account, or bank may be considered cash flow.

$239,400.00

Investment return

The increase or decrease in value.

$27,864.57

Total value as of 10/08/2010

$267,264.57

What else does Maddy love about Vanguard?

Anytime she wants to withdraw money from her non IRA investment account, she can do so without generating a fee.

On two occasions during the past two years, Maddy has needed money: once for a family emergency and once for a home purchase.

She was able to do that quickly, and nobody hit her up with a fee.

If you’re curious about seeing all of Maddy’s deposits, withdrawals and investment returns, I’ve pasted them below.

Maddy’s proud of her account.

And she’s hoping for another stock market crash sometime soon.  

Month-by-month activity

Month

Beginning Balance

Purchases/Withdrawals

Investment Return

Ending Balance

Oct’10

$263,214.83

$0.00

$4,049.74 

$267,264.57

Sep’10

$247,711.28

$1,800.00 

$13,703.55 

$263,214.83

Aug’10

$246,786.20

$1,800.00 

–$874.92

$247,711.28

Jul’10

$232,739.05

$1,800.00

$12,247.15

$246,786.20

Jun’10

$250,012.56

–$18,200.00

$926.49

$232,739.05

May’10

$263,288.53

$1,800.00

–$15,075.97

$250,012.56

Apr’10

$262,866.51

$1,800.00

–$1,377.98

$263,288.53

Mar’10

$274,045.75

–$19,200.00

$8,020.76

$262,866.51

Feb’10

$246,825.24

$21,800.00

$5,420.51

$274,045.75

Jan’10

$242,313.49

$1,800.00

$2,711.75

$246,825.24

Dec’09

$239,927.17

$1,800.00

$586.32

$242,313.49

Nov’09

$220,394.15

$11,800.00

$7,733.02

$239,927.17

Oct’09

$220,781.59

$1,800.00

–$2,187.44

$220,394.15

Sep’09

$202,937.91

$11,800.00

$6,043.68

$220,781.59

Aug’09

$195,780.54

$1,800.00

$5,357.37

$202,937.91

Jul’09

$157,545.97

$26,800.00

$11,434.57

$195,780.54

Jun’09

$156,714.12

$1,800.00

–$968.15

$157,545.97

May’09

$148,825.62

$1,800.00

$6,088.50

$156,714.12

Apr’09

$137,301.09

$1,800.00

$9,724.53

$148,825.62

Mar’09

$126,174.57

$1,800.00

$9,326.52

$137,301.09

Feb’09

$136,922.54

$1,800.00

–$12,547.97

$126,174.57

Jan’09

$132,027.69

$14,800.00

–$9,905.15

$136,922.54

Dec’08

$113,989.02

$16,800.00

$1,238.67

$132,027.69

Nov’08

$109,157.94

$9,800.00

–$4,968.92

$113,989.02

Oct’08

$123,724.91

$1,800.00

–$16,366.97

$109,157.94

Sep’08

$116,178.86

$11,800.00

–$4,253.95

$123,724.91

Aug’08

$114,759.69

$1,800.00

–$380.83

$116,178.86

Jul’08

$114,832.00

$1,800.00

–$1,872.31

$114,759.69

Jun’08

$112,471.78

$9,800.00

–$7,439.78

$114,832.00

May’08

$94,040.56

$16,800.00

$1,631.22

$112,471.78

Apr’08

$88,929.17

$1,800.00

$3,311.39

$94,040.56

Mar’08

$87,437.26

$1,800.00

–$308.09

$88,929.17

Feb’08

$71,426.31

$16,800.00

–$789.05

$87,437.26

Jan’08

$72,776.64

$1,800.00

–$3,150.33

$71,426.31

Dec’07

$73,412.71

$0.00

–$636.07

$72,776.64

Nov’07

$0.00

$72,000.00

$1,412.71

$73,412.71

Total


$239,400.00

$27,864.57