With the new semester underway, my students from Texas Lutheran University gave a presentation on the Bulldog Investment Company internship process and performance. In doing so, they documented how they assess business models with competitive advantages, and then analyze and interpret financial statements in depth. Once they find a worthy candidate, they are incredibly patient while they wait for the right assessment.
Although few students enter the investment industry, this discipline will benefit them no matter where they go.
Concluding their presentation, they said that over the past 12 years, this discipline has allowed their $ 1.5 million portfolio to outperform the S&P 500 Index over the course of one year, three years, five years. , 10 years and since its creation. It has been quite impressive.
As they finished, they asked if there were any questions.
A hand went up on the back. He was a new teacher. He asked, “Why are we told that you cannot beat the market, when different groups of students in your program have done so repeatedly over the past twelve years?” “
This is an excellent and confusing question.
The professor added that the patron saint of “value” investing, Warren Buffett, often recommends that most people buy an index fund.
A student presenter, Luis, responded that Buffett said, “If you like spending six to eight hours a week working on investments, do it. If you don’t, then spend the average dollar in index funds.
As Luis smiled, he said the group of students spent more time studying and evaluating investment options than most other things. They are obviously passionate.
Another teacher asked the students, “Why do you think you have been so successful? “
Ellie replied that when the market offers them great opportunities, they are ready to refuel. As such, they had up to 15% of their portfolio in a single company.
Brandon added that there is discipline not just in how they search, but in what they ultimately seek. They don’t want to own 500 medium-sized businesses. On the contrary, Brandon referred to research by Hendrik Bessembinder at Arizona State University which concluded that over the past 30 years, positive returns have come from only 1.5% of companies.
Brandon said this helped the students focus on a very rare and select group of very profitable businesses. During the process, the students got to know succinctly what should not be in their portfolio and why. This knowledge has kept them from chasing after the scorching business of the day, companies mired in too much debt or other fatal flaws.
Esam, who is completing her Masters in Data Analytics, has been in the program for five years. He indicated that many people who hold index funds still perform below normal.
Esam pointed out that the average investor allows emotions to get the most out of it. Followers of index funds often forget that when the stock market drops 60%, that fund will follow the index until no lock-in. As such, they often irrationally enter and exit the market at the worst times. In doing so, even when investing in index funds, investors lag significantly behind the performance of the index.
This is well documented by DALBAR studies showing that the average investor underperforms stock indexes by more than 70% over long periods of time. This is in part due to fees and the performance of managers. However, investors are hurting themselves if they constantly come in and out. If you want the real long-term performance of the market, you have to stay invested constantly.
This brings up another good point about investing in general. A fundamental understanding of how to value assets and markets is very helpful. This is true whether it is for the purchase of a new car, a house or an index fund. You pay money to get something in return. Is it a good deal or not? How do you know?
Can an investor beat the indices? Yes. It is clear that it is done. However, it takes a lot of time, effort and discipline. It also takes a lot of reading, knowledge and judgment. And finally, any investor who wants to be successful needs to be emotionally stable and disciplined to hang in when the going gets tough.
Dave Sather is a Certified Financial Planner from Victoria and Owner of Sather Financial Group. His column, Money Matters, is published every two weeks.