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Monday, January 31, 2011

3 Quotes to Understand

How to Lie with StatisticsWhen I give presentations, and even when I talk with potential clients, I like to start off with quotes. The reason is simple. Numbers and graphs can easily be manipulated. I learned this years ago when I picked up a copy of "How to Lie With Statistics" by Huff. Instead of the numbers, I like to start by bringing  the experienced, wise people right to the table and discussion.

Warren Buffett: "Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees.  Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."

Notice that he is talking about institutions as well as individuals. He is not just talking about you and me using index funds; he is also talking about the huge state pension funds like CALPERS and the state of New York fund, the large union funds, and so forth. Think about this:  these funds have staffs comprised of Harvard and Wharton Business School graduates. They are paid big bucks. And Buffett is saying that still these institutions should use index funds. And they do!

I don't know about you, but this tells me a lot.

Benjamin Graham, coauthor of Security Analysis : "If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."

Security Analysis: The Classic 1934 EditionThe first thing that jumps out here is the "...60 years..." This is a lot of years watching the stock market. Appreciate that Security Analysis is considered a bible by value stock investors, and Graham himself was Buffett's mentor. His statement boils down to this:  if your advisor is trotting out all kinds of fancy charts and talking about getting into and out of the market on the basis of an economic forecast, he/she will not likely earn better than the market return. Graham doesn't say it, but you can take this to the bank:  they will charge you a lot for making the attempt and leave you with a smaller nest egg in the bargain.

Jack Meyer, head of Harvard University's endowment fund: "The investment business is a giant scam.  Most people think they can find fund managers who can outperform, but most people are wrong.  You should simply hold index funds. No doubt about it."

Meyer doesn't mince words. He is heading up one of the institutions Buffett was talking about. Imagine the investment managers who have made presentations about their investment approach to him over the years. Why is the business a scam? Simply, it over-promises and under-delivers.


  1. Indexing works since it takes emotion out of investing and emotions are an investor's worst enemy.

    I remember when I started investing, I wouldn't sell a stock because I got emotionally attached to it.

  2. @MoneyCone Good point. Emotions are a problem - both on the upside and downside. When the market is on fire investors pile in. They love to buy after prices have gone up a lot.

  3. @Andrew Thanks for the compliment!

  4. Short and to the point. Retirement savings should be fully indexed. While you're not going to be filthy rich with this approach, chances are you will avoid living your last 25 years poor!

  5. @Mich Yes...fully indexing offers the best strategy for most investors as long as they are low fee and the investor doesn't pay upwards of 1%/year to an advisor.