In a talk titled, The Quest for Alpha, delivered to clients of PWL Capital, Larry Swedroe related the amusing story of investment returns earned by the Mensa Investment Club. The June 2001 issue of SmartMoney reported that between 1986 and 2001, the club’s investments gained an average of 2.5 percent per year. Over the same time period, the S&P 500 earned 15.3 percent resulting in a stunning under performance of about 13 percent per year. In one of the biggest bull markets, the club managed to grow a $10,000 investment into $15,000. The same investment in a S&P 500 index fund would have turned into $84,500.
How did the club manage to suck so badly? Turns out that instead of buying a basket of stocks and holding it for the long-term, as most investment clubs do (and still trail the benchmarks), the Mensa club churned its portfolio at an alarming rate by following a complicated system of trading (I won’t even attempt to describe their strategy, you can read about it here) that resulted in a 40 percent loss in 2001 alone. The club may not be very good at investing but at least its members have a sense of humour. One member described their trading strategy as buy low and sell lower.