The Motley Fool: The Fribble, Beardstown Redux, by David Charney

Tuesday, March 24, 1998

Beardstown Redux
By David Charney ([email protected])

In my mind, I see the townfolk gathering outside Beardstown, Illinois, pitchforks and torches in hand. "By gum," cry the Indignant Masses, "they said they achieved market-beating returns when in reality their returns trailed the S&P 500 badly!" "Cheats!" "Frauds!" "Liars!" "Burn the witches!" The recent clatter in the media about the misbegotten Beardstown Ladies only made me smile.

When I started reading my copy of their book in 1995, I noticed the following paragraph printed on the page with the publishing information:

"NOTE: Investment clubs commonly compute their annual 'return' by calculating the increase in their total club balance over a period of time. since this increase includes the dues that the members pay regularly, this 'return' may be different from the return that might be calculated for a mutual fund or bank. Since the regular contributions are an important part of the club philosophy, the Ladies' returns described in this book are based on this common club calculation."

What a strange concept, I thought. This means that their described returns are going to be higher than the true return on investment. How much higher, I had no idea, but higher nonetheless. I mentally shrugged and read on. Did this fact mean that the concepts they espoused in the book made no sense? Was the approach of steady investment, educating themselves on general concepts of financial planning and specific concepts of stock investment, and investing in companies you understand completely wrong?

Of course not. The true Fool knows that these concepts are part of appropriate investment strategy. I think this whole episode only reinforces quite a bit of Foolish wisdom:

1. Don't believe everything you hear or read. Just because the front of the book says "23.8% return" doesn't mean it's true. The same thing goes for advertisements in the newspapers for mutual funds, recommendations from a broker, or a hot tip from Aunt Tilly. They are all in this to make money (except Aunt Tilly, who really means well), and will bend the facts to further this cause. If they only wanted to increase your bank account, they could just send you a check (which maybe a reasonable suggestion for Aunt Tilly the next time she has a hot tip).

2. Read the fine print. Whether it is a prospectus, advertisement, annual report, or Aunt Tilly's Christmas letter, the proof is in the details. Remember, all those guys at the CIA who predicted the next Premier of the USSR based on who stood where during the May Day parade? (OK, they weren't always right, but neither are we.)

3. Information comes from many sources. The reason the book sold ("Beat the Market!") may not be what you get out of it (solid advice to novices on a sensible approach to systematic investment). An article on why a particular company is a poor investment may state the exact reason why another person would buy the stock. Keep your eyes and ears open.

4. Maybe the Wise ain't so wise. What the heck took so long for someone to notice the problems with the Ladies' stated returns? The information was out there in black and white for a long time before any of the Wise picked up on it.

5. Maybe a Fool ain't so foolish. Have faith in your own interpretation if something doesn't smell quite right. Just because nobody else has noticed the Emperor is naked doesn't mean he isn't.

[Editor's note: The disclaimer quoted above was not in their earliest books, nor was their entire investment history, so the actual returns were impossible to verify. It wasn't until the unusual disclaimer began appearing in subsequent printings and new titles that someone questioned the accuracy of their returns. Despite their disclaimer to the contrary, it's not standard investment club practice to consider regular cash deposits as part of the portfolio's returns.]