August 2024
IN THIS ISSUE
Do valuations still matter?
Contradiction!
Warren Buffett’s selling concerns investors
Mind the Gap
The mantas are ingrained in us starting at an early age: Work hard to get ahead. Practice makes perfect. Study more to get higher grades.
In virtually every context that comes to mind, dedicating more time and energy to a pursuit leads to better outcomes…
…except, um, investing???
Morningstar recently released Mind the Gap, their latest research on the gap in investment returns that result from a few pervasive performance-sapping behaviors. Morningstar’s research shows that investors who make too many active decisions systematically underperform a standard buy-and-hold strategy.
Fund investors earned a 6.3% per year dollar-weighted return (“investor return”) over the 10 years ended Dec. 31, 2023, while their fund holdings earned about 7.3% per year (“total return”).
They go on to explain the “investor return” vs “total return” gap:
A fund’s total return assumes an initial lump-sum purchase that’s held until the end. But that’s not how you invested. You made an initial purchase, added to it, withdrew a chunk, sold a bit more, then made a final buy. Thus, your return won’t be the same as the buy-and-hold return. It’ll be whatever your average dollar earned, given the timing and amount of those buys and sells. If you buy high and sell low, your return will lag the buy-and-hold return. That’s why your return fell short.
All those active buy and sell decisions sapped their performance. More trading caused lower returns - the opposite of those life mantras of working hard to get ahead. Less is more.
Our annual “Mind the Gap” study finds that investors captured a large chunk of their funds’ total return over the 10 years ended Dec. 31, 2023, but not all of it. The 1.1% annual gap is significant, amounting to around 15% of the total return funds’ generated in aggregate over this span. Investors could capture more of their funds’ total returns by holding the line on transactions, perhaps by opting for widely diversified, all-in-one options like allocation funds that automate certain tasks while avoiding narrower, volatile strategies that are harder to handle.
Outsmarting the market is tempting. But as Charlie Munger advised, if you want to be rich, don't try to outsmart the stock market — and stick to a 'not stupid' investing strategy instead . Just like the lottery, the unfavorable odds of stock picking will eventually catch up with you.
As investors become more active, trying to make decisions that will outperform boring old passive indexing, those investors systematically increase their Likelyhood of underperformance.
But stock-picking hedge funds will keep trying: Hedge funds post mediocre first-half performance with some big names only up single digits
ONE MORE THING…
Do valuations still matter? "For CAPE to get back to its long-run average, there would have to be the mother of all crashes. A more likely explanation for CAPE’s levels: stocks have moved to higher valuations over the past century as mutual funds and ETFs made it easier and cheaper to buy equities, wealth increased and, since 1980, after-inflation interest rates tumbled." The Stock Market is Way Out of Line With Reality, According to These Measures - WSJ
Contradiction! Their article is absolutely correct - increasingly large numbers of active stock pickers lag the VOO S&P 500 index fund ETF as time passes. But then Motley Fool pitches their stock picking service at the end??? You Can Outperform 88% of Professional Fund Managers by Using This Simple Investment Strategy | The Motley Fool
Warren Buffett’s selling concerns investors. Warren Buffett's decision to sell stocks and raise record cash before sell-off sends wake-up call
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