Foolish Four Portfolio
By
Today's lesson is a quick example of why it is so very, very important that investors understand one basic concept: measuring investment performance against the market.
Since 1976, it has been possible for small investors to share equally in the growth of the U.S. market by simply investing in an index fund. That was the year John Bogle started the Vanguard 500 Index Fund based on the idea that if you can't beat the market, match it! A mutual fund is perfect for matching the market because the pooled resources make it possible to actually buy all 500 companies that make up the S&P 500 index. With a tiny maintenance fee, fund investors can match the market's performance within a fraction of a percentage point. What a wonderful concept -- one that earned Mr. Bogle a place on the list of the century's Top 10 Money Managers, by the way.
Since we discuss stocks so much here at the Fool, people often lose track of the fact that our most basic advice is to invest in an index fund (or SPY's). In every book the Gardners have written as well as our online introduction to investing, the 13 Steps, we make it clear that you shouldn't move beyond an index fund until you are reasonably certain that you can beat it over the long run. If not, why in the world would anyone want to invest in anything else?
But the world is full of folks who want to tell you how to invest or who want to invest your money for you. Mutual funds and money managers make their money from investing OPM (Other People's Money). Newsletters and websites full of investing advice and hot stock tips abound, some free (like ours, although we don't do hot stock tips), some with a hefty annual fee. Since it's so easy and cheap to equal the performance of the market as a whole, before you let anyone make investing decisions for you or follow anyone's stock tips, you need to know how to evaluate their track record.
Strangely enough, some of those people who want charge you big bucks for investing advice don't appear able to match the market, much less beat it. There are lots of excuses for that (lower risk being my favorite, but that's another column), but if your goal is to equal or beat the market, do you know how to evaluate the claims of people who want to get their paws on your cash?
Let's take an example which arrived in my mailbox as an advertisement attached to one of our own Foolish e-mails this week:
John Dessauer's investing system has earned more than 900% gains over the last 19 years. FREE REPORT tells you more about it and reveals the 5 stocks he's buying now.
http://www.ppi-orders.com/index.htm?promo_code=43H208
Wow, 900% over the last 19 years. Sounds impressive, doesn't it? Whenever, you see a claim such as this, you need to ask yourself one thing: How does that compare with the market?
Turning to our ever friendly Statistics Center, we can get a rough idea: The Cumulative Returns page gives us cumulative returns for the Foolish Four (which we aren't even worried about at the moment) as well as the cumulative and average annual returns for the S&P 500 and Dow 30. We don't have a 19 year span listed, but we do see that over the last 20 years (1979--1998) the S&P 500 has had a cumulative total return of 2,526%. How does 900% over 19 years look now?
Just for the record, the S&P returned 2118% over the last 19 years, an average annual return of 17.72%. The system above returned approximately 13% per year compounded annually. That's right -- 4.7% below the market. To look at it another way, if you had invested $10,000 in Mr. Bogle's index fund 19 years ago, you would have approximately $215,000 today not counting taxes, although I did adjust for the fund's management fee by using 17.53% per year rather than 17.72% for the growth rate. (The annual management fee is 0.19%.) With Mr. Dressauer, your $10,000 would have grown to around $100,000. That four and a half per cent per year makes a rather big difference.
This, of course, brings up the somewhat sensitive issue of advertising. (So much for the short column. Sigh.) Readers from our early America Online days remember a Motley Fool unencumbered by ads, and we occasionally get letters from people wondering why we accept certain advertisements from the Wise. For the record, we have advertising standards and you won't see ads from people touting options, penny stocks, or currency trading schemes here.
But it is not possible, logistically or financially, to put some kind of Foolish Stamp of Approval on every ad or company we accept advertising from, nor would we want to. We provide a certain amount of education and a point of view, you make your own choices. There may very well be an excellent reason for reading the $149 per year newsletter I've used as my example. I can't think of one off the top of my head, but then I haven't looked into it much beyond the advertising claim. (I checked to make sure 900% wasn't a typo, for example. Frankly, my first thought was that someone had left off a zero! After all, the Foolish Four's return over the past 20 years is just over 8000%.)
Between the Internet, prime-time television, the radio, billboards, magazines and your mailbox, everyone is bombarded with financial advertising these days. Frankly, I am grateful for it. It pays my salary, such as it is, and makes the whole Motley Fool mission possible. Advertising is business's way of getting their message to the public. Hopefully, we can help you evaluate the messages that you chose to pay attention to.
As my friend Tim Thurman (TMF DrT) loves to say: Be careful. It's a Wise World out there.
Fool on and prosper!