Skip to main content

Labor Day Weekend calls to mind a few essential memories from adolescence: back-to-school planning, the sinking feeling that you forgot everything from the last school year, and an end to TV reruns.

With that in mind, today's 10 Questions aims to encompass all these hallmarks of Labor Day -- in other words, it's a rerun of the best lessons from previous columns over this past summer. And investing timetables are a bit like school years -- sell in May and go away, and then endure the low-volume summer doldrums before fall brings renewed market activity.

So, for the poor readers who are trolling financial news sites on Labor Day, try not to think of today's column as a rehash of previous Q&As, but as a refresher course of timeless investing advice to help prepare you for the coming year. Read on for the best morsels from 10 Questions since Memorial Day weekend.

Ted Aronson, Aronson+Johnson+Ortiz

On Aug. 27, we published a 10 Questions interview with " The World's Most Honest Money Manager," Ted Aronson. Aronson runs the $11 million (QUSVX) - Get CCM Small Mid impact Value A Report Quaker Small-Cap Value fund and also manages institutional assets for his Philadelphia-based firm, Aronson+Johnson+Ortiz. But the reason Aronson is so much fun to talk to is his unflinching honesty: He rails against Wall Street and says index funds are the best bet for most investors. In the following excerpt, Aronson explains why a highly successful active manager would tout the virtues of passive index funds.


There are three reasons why index funds make a lot of sense. First, this is a competitive ball game. The past three years -- I guess you could call it a melt-up, then meltdown -- have humbled everyone. It's a very competitive game and most don't measure up to the performance of the indexes.

Second, investors need to understand that what Wall Street is expert at is separating clients from their money. When the pie goes around, there are more fingers in it than the owners have any idea -- so expenses are amazingly substantial.

I'm not just talking about brokers, mind you, but loads and other fees, and the government, too. If we accumulate wealth, Uncle Sam is in for a cut. Put all the pieces together and

Vanguard founder John Bogle has it right: It's not easy to outperform.

Third, we're all human. We tend to do exactly precisely the wrong thing at the wrong time. I used to get exercised about it. I used to think people were stupid, now I realize they're just people.

We all fall prey personally to human nature. We finally buy


(CSCO) - Get Cisco Systems, Inc. Report

at $84 and decide to throw in the towel at $11. We can laugh, but it's true -- professionals and individuals alike.

When you put those three elements together, you realize that your best bet is to make your investments, lock them up and don't look at them for a good long time -- except to rebalance occasionally. Didn't Warren Buffett say his favorite holding period is forever?

Larry Swedroe and the 14 Truths

On Aug. 18, we published a conversation with Buckingham Asset Management principal Larry Swedroe to mark the publication of his newest book, which discusses " The 14 Simple Truths You Must Know When You Invest." Swedroe likes to say he's on a mission to save investors, one at a time if necessary. In keeping with the "back-to-school" theme of today's 10 Questions, we'll highlight his answer on Truth #12: Knowledge of Financial History Is Critical.

TheStreet Recommends


People think the bubble of the 1990s was different this time. It wasn't different, except that it was the Internet the time. I demonstrate in my book that if you just changed the names from

JDS Uniphase


and the rest to the

electronics companies of the 1960s, it was exactly the same bubble -- same P/Es of 200, same IPO frenzy, same bursting and all the scandals that followed. People say, "Don't burst my bubble." I won't, but the market will.

People all said the Internet would change the world. These technology-inspired booms are remarkably similar. If individuals knew their financial history, they would have been wise to what was happening in the late 1990s. I mean, we had daytrading back in the 1700s!

James O'Shaughnessy and Retiring Rich

Our 10 Questions interview on Aug. 11 was with Bear Stearns Asset Management's James O'Shaughnessy, in which we offered a refresher course from his book, How to Retire Rich. In the following passage, O'Shaughnessy discusses the virtues of asset allocation as a bulwark against the vagaries of the market.


Asset allocation and style diversification are bedrock principles of investing. One of the biggest mistakes people made was jettisoning every asset class that wasn't large growth because they were weighing down their returns.

And this was easy to do in the late 1990s, when you had people -- including many experts and media pundits -- saying, it's a new era! It's different this time! They repealed the business cycle! (Laughs.)

It's never different this time. Now that we have once again learned this lesson, a lot of investors have to start over. Asset allocation and style diversification are the starting points.

Look at your portfolio and then go on Morningstar, Smart Money or any place that explains style attributions of your mutual funds. Make certain that you have exposure to the following asset classes: large growth, large value, small growth and value and mid-cap growth and value.

Now, how should you allocate those assets? You should have at least a market weighting in small-cap stocks. The unequivocal proof for the last 75 years is that in any 20-year period small-cap stocks have done better. I'm not saying bet the farm on small-caps, but you have to have them included in your portfolio.

So, about 25% of the market according to capitalization weighting is smaller-cap stocks. You should have at least 25% of your portfolio in smaller growth and value.

That leaves 75% for large-cap stocks. How should you allocate between large growth and large value? If you look at the Fama-French historical data, large value outperforms large growth. This is consistent with the data I used for

What Works on Wall Street


You could put 45% in large value, and 30% in large growth. Now, if you are comfortable with a little additional risk, you can tilt your portfolio more toward small-cap, maybe a little more growth. If you are more conservative, you can tilt it more toward large value.

Whatever you decide to do with your asset allocation, you must remember to rebalance. One of the biggest mistakes investors make is that they fail to harvest gains. At the end of the first year, one of those asset classes is going to be overweight. If small-caps rise, you may have 38% instead of 25%.

Bring it back to the target.

Take money off the table in the classes that did well, and put it back in the classes that have underperformed. People normally do it the other way around, throwing more money into hot asset classes. This is what leads us to the Dalbar results.

We remain unequivocal in our advice on fixed income: Avoid long bonds. Long bonds are not in a position to do well in the next long while. To quote Floyd Norris, we're going from a period of risk-free return to a period of return-free risk.

Use intermediate-term bonds as your longest bonds. Bring your durations in shorter, to about three years. Interest rates are going to go up, and bonds are going to go down. They will not give you protection. Stick with intermediate-term bonds and lower. Besides, intermediate-term bonds offer better diversification. When equities have been negative, intermediate bonds have done better. So the historical numbers would say that intermediate-term bonds are better anyway.

Getting Minnesota Nice With Mairs & Power Growth fund's William Frels

How about a geography lesson?

On July 28 we chatted with Frels, a congenial Midwesterner who manages Mairs & Power Growth, a fund that has a special fondness for stocks in its Minnesota backyard. It just so happens that the Land of 10,000 Lakes -- in addition to verdant countryside, the hipness of Minneapolis (Prince's hometown) and the friendly populace -- has a preponderance of great companies, such as Target (TGT) - Get Target Corporation Report, 3M (MMM) - Get 3M Company Report and Medtronic (MDT) - Get Medtronic Plc Report. Garrison Keillor might call it the state "where all the companies are above average." In the following passage, Frels explains how the Minnesota bent works, and names a recent favorite.


We consider ourselves fortunate from the standpoint that there are a lot of attractive companies around the Twin Cities, which is where we're based. While the fund has a national charter, we find we have plenty of attractive opportunities right in our own backyard.

Since most of the people at Mairs & Power have grown up in this area, we're familiar with these companies and the people managing the companies. That's helpful when we want to have access to management. You know who to talk to.

Of course, since we've had some success, we have national companies that visit us on a regular basis. Our funds tend to be long-term holders. The companies we own appreciate the fact that we are invested in their businesses for the long haul.

We like to think that our knowledge base on Upper Midwestern companies is a little better than outside investors. We know these companies. That works a little bit more with smaller and mid-cap companies that don't have the visibility and exposure outside this area.

Recently, we added a new company this year to the growth fund called


(TECH) - Get Bio-Techne Corporation Report

, which participates in the biotech area. We've been aware of the company and visited management, but we always felt that the stock was too expensive.

Over the past year, the price has come way down and the growth rate has slowed a bit, in part from spending cuts at the National Institute of Health, colleges and drug companies. They are a supplier to those markets. The stock price just got down to a point where we thought, geez, it looks pretty interesting. There's a steady demand for the products they make.

We had the management into our office. We had a field trip to the company and kicked the tires. It just seemed like while the short- to intermediate-term growth outlook was fuzzy, that was being overly discounted in the marketplace.

We started moving in and, lo and behold, the earnings were better than expected, and you know what happens on Wall Street these days with upside surprises. The stock's up about 50%. It's not that we have any inside information, but we look for factors that are longer term, not just quarter to quarter.

We're willing to be patient, too. More often than not, we're buying companies that are getting beat up because they didn't provide Wall Street with a pleasant surprise or they might have missed earnings for a quarter. Everything is a judgment call, and we've been fortunate about the judgments we have made.

William Bernstein Meets the Enemy, and It Is Your Fund Firm

On July 7, author and investment guru William Bernstein chatted with us for a 10 Questions entitled, "Is Your Fund Family the Enemy?" The author of the outstanding book, The Four Pillars of Investing, conveyed a simple message: The interests of mutual fund companies are highly divergent from yours. Plenty of firms, in his opinion, are far more interested in maximizing the fees they collect from you and peddling hot products you might want but certainly don't need. In the following passage, he explains why the hunt for the next Microsoft (MSFT) - Get Microsoft Corporation Report may be costlier than you think



The reason you can't make a living buying one or even 10 stocks is because it's unsystematic risk -- risk above the broad market that you aren't compensated for.

You can't put a significant portion of your nest egg in such concentrated holdings. Your chance for getting 20 clunkers is actually very good.

That's the problem with trying to find the next Microsoft among the small-growth stocks. You're basically buying a lottery ticket, and it's easy to get 100 losing lottery tickets in a row. That's why small growth is the worst-performing domestic equity asset class -- everybody is looking for the next Microsoft, so the prices of these small-growth stocks get bid up so hideously.

The Professor and the New Economy

For the final "back-to-school" excerpt, we'll revisit a conversation with a real, live professor. On June 9, Joel Mokyr, an economic historian at Northwestern University and author of The Gifts of Athena: Historical Origins of the Knowledge Economy, discussed why the New Economy remains with us but doesn't make for good investing. Mokyr believes that "technological innovation is great for human society, but it's also a most wasteful enterprise." With the badly beaten tech stocks rising out of the ashes of the bear market the past few months, investors would be well-served reading Mokyr's thoughts before deciding a great new investing age is upon us. In the following excerpt, Mokyr explains why the Internet will revolutionize our society but won't be profitable in the ways we expect.


The knowledge industry wasn't established to make money. Some things make money that don't change history, and some things that change history don't make money.



bubble was a result of people being confused. A lot of the money was really redundant, people investing in 10 companies attempting to do the same thing. Plus, companies were trying to do things that shouldn't have been done at all.

Technological innovation is great for human society, but it's also a most wasteful enterprise. Whenever you have lots of people running in a race for innovation, only one gets to the finish line first. That's the nature of creative destruction. It's never going to be very efficient. Thomas Edison said that because of his failed experiments, "I know 5,000 things that don't work."

Another reason profits are often elusive: It's very hard to keep out competitors and it's driving prices down. Look at email. People keep forgetting the amazing thing about email is that it's free. Every email replaces a 37-cent stamp. Not only faster, but it's free! The fact that it's free ought to raise a question: Who's paying for it? Obviously, the fact that it's free shows that not a lot of money can be made from it, even though it's revolutionary.

The economics of this are unusual. The marginal cost is so low. It's almost unthinkable. Nobody owns cyberspace, and as long as nobody does, profits will be tough to come by.