Gone are the days when he was running around slapping buy recommendations on the same stocks that he was privately calling piles of dung. These days Henry Blodget sounds positively John Bogle-ish. In a column in the Huffington Post, Mr. Blodget urges readers to draw the right lessons from the massive insider-trading investigation currently underway in the United States. The lesson is not to give up on stocks altogether under the impression that the game is totally rigged against the little guy. The REAL lesson for retail investors, according to Mr. Blodget, is that “it’s basically idiotic to trade” because the game is similar to the New York Jets taking on a high school football team. No prizes for guessing which team small investors are playing on.

The solution? Playing the game we can win:

Long-term investing, preferably via low-cost, tax-efficient index funds.

Unlike professional investors, small investors don’t have to worry about their performance in a given week or month or year. They can avoid the second-to-second warfare that defines the professional investment business. They can be patient and allow Ben Graham’s long-term “weighing machine” to eventually do its work, rebalancing their portfolios to take advantage of the market’s never-ending cycles of fear and greed along the way.

If they do that, and keep their costs low enough, they’ll outperform 75% or more of the professionals.

Bogle couldn’t have said it better.

This article has 18 comments

  1. It’s very disappointing whenever these stories emerge; however, if we chose not to go to a doctor simply because we heard of a story of another quack out there, we’d need a psychiatrist. Let’s not overreact…

  2. What a great article. I liked the bluntness and the analogies. The only thing that dampens my enthusiasm is Blodget’s history of misleading people.

  3. This buy and hold argument assumes a continuing rising tide that lifts all boats. I am am not so sure.

  4. Index hugging is the hot trend these days and it’s fine. However, the individual investor can beat the market and it is possible if one has the time to research and the discipline to stick to a plan (my DIY portfolio is an example). What was the ROI for index huggers who invested between 2000 and 2009? What if we have another lost decade ahead?

    I am by no means blasting buying the index, my RRSP is invested in index funds because it has its advantages. However, we shouldn’t step into the territory of one single ideology trumps all.

  5. @BeatingTheIndex

    So, what do you recommend for the older worker nearing retirement, the middle-class worker, etc… who don’t have 40 hours a week to look at research papers like a DIY investor would? Maybe you should open up a fund for these people so they can hug your index 😛

  6. @IIW, I would have loved an answer to the lost decade question (past + future potential). Having said that I did not completely burn my bridges to buying the index as it is suitable to those who do not have what it takes to take control of their investments.

    why open a fund? you can already see what I buy/sell for free. Nothing complicated, buy low sell high.

  7. @Michael: I agree. Blodget definitely doesn’t have Bogle’s squeaky clean background. May be I’m biased but he is talking sense now!

    @BTI: Let me take a stab at your question on the lost decade. Yes, stock investors experienced terrible returns in the 2000-09 period. The question is: did DIY stock investors do any better? A small minority likely did. But the vast majority almost certainly had returns far worse than even the index, which we can agree did poorly.

    You cite the example of your DIY portfolio. Let me ask you this: What are your returns (net of expenses) in the 2000-09 period? I notice that you trade pretty much every day, mostly in micro-cap resource stocks. Why are you comparing your returns to that of the TSX, which is an index of large cap stocks. A more appropriate benchmark may be a small cap index such as the TSX Small Cap Index or better still, an index of small cap resource equities.

    http://www.standardandpoors.com/indices/sp-tsx-smallcap/en/us/?indexId=spcadntx–caduf–p-ca-s–

    So, tell us, how do your returns stack up against an appropriate benchmark?

    Let’s say you did end up beating the index. That still doesn’t tell us much. It may be luck, not skill. Even if you turn out to be highly skilled, it doesn’t follow that traders like you as a group will be above average. In fact, given your high turnover, your cohort will almost certainly trail the appropriate benchmark. And odds are pretty badly at that.

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  9. I believe that there is a less time-consuming way to beat the index, through the judicious buying of ETFs, (and sometimes mutual funds), and by re-evaluating one’s portfolio, 4 times per year. I even know of an all-star who has successfully done so for 9 years. This fellow did not have a lost decade either. Buying and ignoring is easy, but perhaps not prudent.

  10. @Dr. Dale: We are back to disagreeing with each other. All is well with the world 🙂

  11. @CC, I would not be able to give you an accurate answer on the DIY investors’ results from 2000-2009, you can come up with a loser and I can come up with a winner and that will not make a proper statistic.

    Unfortunately, I was not in the DIY investment arena from 2000-2008, I entered the workforce in 2003 and my free cashflow went into real estate since then as I never paid for rent in my life. I started in 2009 in a sector I understand the most, relative to the others. I would be able to give you a proper answer in 2019…

    Why the TSX? it’s simply to compare returns between a dollar invested in index funds in my RRSP and a dollar I invest myself. At the end of the year I will have a comparison with the TSX small cap and other sub-sectors for a better view.

    If you read one of my portfolio updates, you will notice that there’s no huffing and puffing. I never underestimate the task at hand. Even-though luck certainly has its place, there’s so much weight you can assign to it.

    The investment world is not black and white, there’s a lot of grey in between.

  12. One other point that could be made is as follows. The demographic/baby-boomer age wave, which is now beginning to unfold, may have a negative effect on stock markets in general, and indexes in particular. My crystal ball is as hazy as anyone’s but, when investors retire, they tend to get more conservative, and switch from equities to fixed income investments. This bodes poorly for equities. (Less demand equals lower prices).

    Moreover, gen X and Yers might not be able to pick up the slack, because they have fewer pensions — (which buy equities) — and may well have higher taxation than the boomers — who have political clout, and will demand hip surguries and expensive cancer treatments.

    Sorry to be such a Dr. Downer.

  13. These comments only apply if you’re investing primarily in large caps for capital gains.

    In contrast, if you’re investing mainly for yield, then it’s sometimes much better to be a small investor because we can get into and out of names much quicker than institutional investors or pension funds – meaning it’s much easier to buy and sell our 500 shares than it is for them to buy & sell their 500,000 shares. And if you’re happy with the yield where you got into the stock, then who cares what direction that the price goes as long as the underlying business is profitable enough to maintain its dividend.

    The same goes for investing in small and micro-caps because the lack of liquidity and the size of the issue may be too small for the pension funds to even bother to evaluate – sometimes the 1000 shares of some micro-cap company that I buy as a small investor may make up the entire day’s worth of trading in that share. Institutionals wouldn’t even have that company on their radar.

  14. @BTI: I wish you luck in your investing adventures. But I have serious doubts on whether frequently trading in and out of small cap resource stocks is a sensible strategy for average investors out there (I don’t deny that it may work for you).

    IMO, you should also measure your returns against that of an appropriate benchmark. The TSX composite is clearly not the benchmark for the type of stocks you invest in.

  15. @CC, thanks for the wishes. In return I would like to thank you for the interesting exchange. It is these differences that makes the investment world interesting. I will measure the YE performance to a host of benchmarks as it is the yearly results that count the most.

    Remember, I never burned my bridges to Indexing as my RRSPs are all in low fee indexed funds. However, I enjoy investing in a particular sector with a particular style and this is what my DIY portfolio is for.

  16. Re: Man AHL Diversified Funds
    Stay away from this one …. Quarterly dividends are not being paid on time and its value has deteriorated substantially over the last 30 days……stay away

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