In 2007, Warren Buffett made a 10-year, million-dollar bet with Ted Seides, a very successful hedge-fund manager. Seides had claimed that, in that time, hedge funds would outperform the markets. So Buffett challenged him to beat an S&P 500 index fund with a portfolio of five hand-picked (by Seides) hedge funds. The winner would donate the proceeds to a charity.
Ten years later, Girls Inc., Buffett’s charity, received the prize. The compounded annual return of Seides’s five funds averaged 2.2%, while the S&P 500 returned 7.1%.
What does that tell us?
I’ll get to that in a moment. Right now, let’s look some facts about the market that might surprise you.
10 Possibly Surprising Facts About Stock Investing… and
What Warren Buffett Says You Should Do About Them
- Historically, the Dow has been positive 52% of the total trading days and negative 48%. The average daily return is 0.73% when it’s up and -0.76% when it’s down.
- There is no significant difference between the Dow and the S&P 500. The rolling one-year correlation since 1970 is 0.95.
- The S&P 500 is very unstable. In the 41 years from 1957 to 1998, only 74 of the original 500 companies were still in the index.
- Between 1980 and 2018, there were 36 corrections. (A stock market correction is a downturn of 10% or more.) That’s 36 corrections in 30 years.
- If there were 36 corrections between 1980 and 2018, there were also 36 recoveries. The stock market can recover from a correction in a pretty short period of time. But some individual stocks don’t. According to research by J.P. Morgan, of all the companies in the Russell 3000 index since 1980, about 40% of the stocks suffered a permanent 70% or more decline from their peak value.
- A similar fact: Since 1980, more than 320 companies were removed from the S&P 500 for business distress reasons.
- In 1980, gold traded at around $800 per ounce and the Dow was around 800 points. Gold has since gone up 62.5% (to about $1300 per ounce), while the Dow has gone up 3150% (to about 26,000).
- If you had invested from 1960 to1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980 to 2000 and underperformed the market by 5% a year.
- Mutual funds do not outperform the market over the long term, according to every study ever done on the subject. And those that perform well over a short term do so because of luck, not skill, according to a recent study.
- Fortunemagazine published an article titled “10 Stocks to Last the Decade” in August 2000. By December 2012, the portfolio had lost 74.3% of its value.
And here’s a bonus fact:Warren Buffett is generally considered the greatest investor of all time. In the 20 months leading up to the dot-com peak, Berkshire Hathaway lost 45% of its value. The NASDAQ 100 gained 225% over the same time.
So what does all this tell us? It tells me that…
* The stock market is not a single thing. It is a name we give to thousands of economic and business interactions and billions of individual decisions. It is not rational and it cannot be predicted.
* Only a small percentage of the brightest and most experienced fund managers can beat the market over the long term. And those few that have done so probably accomplished it by luck, not skill.
* The long-term trend of the stock market is positive, yielding between 8% and 11% annually, depending on how you do your calculations. It seems reasonable, therefore, to invest in the stock market for the long term.
* Although the stock market as a whole has performed well historically, many of its biggest and best companies have fallen by the wayside. Diversification is the only sane way to invest for the long term.
* Long term really means “not now but maybe later.” To get the 8% to 11% the market has delivered historically, you have to be able to wait 5 or 10 years to cash in. If you think you can beat the market, you are almost certainly delusional. If you try, chances are you will end up with much less than half of what you’d make if you are willing to accept that 8% to 11%.
* You can get very rich over the long term with an ROI of 8% to 11%,
Bottom Line:The best way to lock in average returns is to follow Warren Buffett’s advice: Invest in a low-cost index fund or in a portfolio of individual stocks that acts like an index fund.