This clearly puts us in a minority, but it also means our investment approach and philosophy is only suited to a minority. Most people probably should be invested in diversified mutual funds or a broad market index fund, and not because that’s where they’ll make the most money—they won’t, but because it will give them a more comfortable chair to sit in while they go nowhere. To make real money over the long term, investors should train themselves to be comfortable being uncomfortable.Back in 2009 we took a look at Fidelity, the mother of all comfort ships. Fidelity at that time had around 46,000 employees worldwide. If we applied for a job there, we might be lucky enough to get a position making the coffee (we once offered to work for Raymond James for free but they turned us down). Fidelity’s offices are filled with talented and educated people with every diploma known to modern man. They are up to their eyeballs with MBAs and CFAs and talented marketers. They have over 450 mutual funds which offer the global market sliced and diced every which way you can want or imagine. Fidelity has been so successful they have been entrusted to manage over a trillion dollars of other people's assets. Yet, according to Morningstar, as of 9/30/09 (when we did our work on this), of those 450 funds under Fidelity’s umbrella the best performing fund over the previous 10 years was the Fidelity Latin America Fund (FLATX) with an average annual return of 17% (it was still Fidelity’s best fund as of 6/30/2012 according to BestMutualFund.Org). The average mutual fund over the same period produced 4%. Nobody should invest 100% of their wealth in a Latin America fund. The average mutual fund investor probably got closer to the 4% return even if he was lucky enough to have FLATX in his portfolio and things haven’t improved much since then.
According to an article in USNews, for the year ending June 30, 2012, the S&P Composite 1500 beat almost 90% of all actively managed domestic stock funds.In many ways, the difference between the average mutual fund and the kind of deep value, out-in-the-storm, concentrated investing we do, is the difference between a chair maker and a taxi driver. Do you want to be comfortable or do you need to get somewhere? Ask anyone who has invested in mutual funds for the last ten to fifteen years how their retirement plans are going, or how they are going to educate their children, or god forbid, pay for health care. The famous hedge fund guys like Einhorn, Ackman and Loeb will take you somewhere, but after giving them their 2/20 (as in 2% of assets and 20% of profits) for a few years you will realize they spend most of their time taking you where they need to go and not where you need to go. The bottom line is most mutual funds don't work for most people and hedge funds are too expensive. Index funds are cheap but often deliver returns that won't get most people to their desired destination. In our opinion, to improve long term performance the average investor needs to think differently and that includes how they view the perceived value of comfort. When Matthew Schifrin of Forbes interviewed us for his book ‘The Warren Buffetts Next Door’ we explained that investing our way was a bumpier ride than a mutual fund and that it was definitely not for everyone (here’s an embarrassing and cheap homemade video where we make this point). Picking the right investor to copy is hard enough. Picking the right time to start doing it may be even harder. If our experience is anything to go by, the more uncomfortable you feel, the closer you will be to getting it right.
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