The spell of academics

Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory : the stock market was totally efficient, and therefore calculations of business value – and even thought, itself – were of no more importance in investment activities. (we are enormously indebted to these academics : what could be more advantageous in an intellectual contest – whether it be bridge, chess, or stock selection – than to have opponents who have been taught that thinking is a waste of energy?)


A horse that can count to ten is a remarkable horse – not a remarkable mathematician.

S&P 500 index fund

My money, I should add, is where my mouth is : what I advise here is essentially identical to certain instructions I’ve laid out in my will. My advice to the trustee could not have been more simple : put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund (I suggest Vanguard’s). I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.

Ignore the chatter

If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would occur as it sought advice and switched properties. Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

Macro opinions

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment : “You don’t know how easy this game is until you get into that broadcasting booth.”)

Alice in Wonderland

During the 20th Century, the Dow advanced from 66 to 11,497… For investors to merely match that 5.3% market-value gain [today], the Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099… If your adviser talks to you about double-digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.”