For supposedly rational creatures we humans seem irrationally drawn to Magic Beans. Being a geezer I’ve been around long enough to see quite a few flavors come and go. What they all have in common is that by the time you start reading about them everywhere, the end is near.
Let’s see…
I remember Growth Stocks were all the rage awhile back.
Why, any management worth its salt should be able to plow profits back into the business and reach even greater heights. Value Stocks that paid dividends? Clearly run by managements with no vision, so lacking in ability that they could think of nothing better to do with profits than to pay them out. You want growth! Find companies with “forward thinking” (what a wonderful phrase!) leaders skilled in deploying capital.
Growth Stocks. You couldn’t go to a party without some guy telling you about his latest killing. Left everything in the dust. Until they didn’t.
I remember Actively Managed Funds.
The investment world is littered with the remains of once super-star fund managers.*
I remember Houses.
Opps. Strike a nerve? Yep, stocks and bonds went up and down but houses? Houses could only go up. See people will always need a place to live, right? Seemed to make sense at the time. Why banks, and how could they ever be wrong, would even loan you money on all your equity. You could cash out profits and still live in the place. What could possibly go awry?
I’m sure glad I learned how to lose money in real estate back in the 80s and before it was fashionable. Saved me a bundle in avoiding this latest debacle.
I remember Gold.
How could I not? Every time I turned on the TV, opened the paper or listened to the radio people were spending huge sums of advertising money to tell me I, too, could get rich buying (preferably from them) Gold. It is, after all, the one true store of value through human history. There was even one place that offered to sell it to you and then, for a fee, store it for you as well. You never even had to see the stuff. Mmm, think about that for a moment. Yikes.
A few weeks back it was pushing $2000 an ounce on its way to $5000. Or $10,000. Or, well, $1566 as of year end and falling.
I remember (reading about) Tulip Bulbs.
You can too: http://en.wikipedia.org/wiki/Tulip_mania
Now? Now it seems everywhere I turn the new flavor of Bean is Dividend Investing or, even more impressively, The Dividend Aristocrats. Here’s an example:
http://www.mrmoneymustache.com/2012/01/02/guest-posting-the-dividend-aristocrats/
Go ahead. Head on over there and have a read. It is clear and well written. Take some time to poke around Mr. MM’s site as well. Its a good one.
Welcome back. Now here’s my 2 cents:
https://jlcollinsnh.com/2011/12/27/dividend-growth-investing/
As I mentioned at the end of that post, I actually made some money last year riding the Div-Stock wave. Mmmm, with all this new popularity I should be taking my chips off the table soon. No better sign than the end is near for them.
So no Magic Beans in The Dividend Aristocrats, but they likely won’t be as poisonous as some of the other Beans. You’ll just lag behind the market over the next decade. In fact here’s a bet that will likely make you more money: Within 5 years you’ll be reading about how Growth Stocks are the sure path to prosperity and Value (dividend) stocks are for losers who can’t do the simple home work of analyzing the good stocks. This will be wrong, too.
What is poisonous in The Dividend Aristocrats post is this:
“For a great primer on valuing stocks, check out the Intelligent Investor, by Warren Buffett’s mentor, Benjamin Graham. Read it, and then get to work combing the Aristocrats for bargains.”
It is a great book and by all means take the time to read it. But remember, when Graham wrote it, Index Funds would not be invented for several more decades and mutual funds were few and far between. Analyzing and choosing individual stocks was the only option.
But now, thank you Jack Bogle, we have index funds. With these we can own the entire market and outperform over time all but the rarest of professional money managers.
This idea that if you read a few books and study what Warren Buffet has done you, too, will outperform the market is, to steal a phrase from Sean’s dad, Horse Hockey. Dangerous horse hockey at that.
People have been trying for decades and yet, there is still only one Warren. Think about it this way:
Remember Muhammad Ali?
The Warren Buffet of Boxing in his day. You and I could have followed his training regiment, maybe even engaged Angelo Dundee to show us the ropes. We could have gotten in top shape, done all our homework. Learned the “sweet science.” And, after all that effort, would you climb in the ring with Joe Frazier or George Foreman or Sonny Liston?
Not me. I’m no Ali. Or Warren. Neither are you. (Unless of course you are, in which case: Welcome back.)
You know what Warren Buffet recommends for individual investors? Broad based Index Funds. Graham, were he still alive, would too.
A little humility goes a long way in saving your ass and your stash.
*Addendum: At various points on this blog I suggest only about 20% of active managers out-perform the index. That’s being a bit generous.
This is a ball park figure based on the many articles on this I’ve come across on this over the years. In fact you can Google this question and find several falling around this percentage. I’m not sure why they vary. Some look at different time frames. Some at different metrics. Some factor in costs, some don’t.
Clearly it is easier to get lucky and outperform the shorter the time you need to do it. Even I called the market almost exactly last year, and I can assure you it was no more than luck: 
https://jlcollinsnh.com/2014/01/01/1st-annual-louis-rukeyser-memorial-market-prediction-contest-2013-results-and-your-chance-to-enter-for-2014/
Vanguard has done research on this looking at a 15-year time frame:
https://personal.vanguard.com/us/insights/article/infographic-outperformance-112013
In it they point out that 45% of actively managed funds fail to even survive over that time, let alone outperform. Only 18% both survived and outperformed. And even those frequently had long periods of underperformance.
So even if you are lucky enough to pick one of the out-performers, it will be tough to live with.
This article references studies done for an even longer period: 1976-2006, 30 years: http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25
The results are even more shocking. As the article says:
“Barras, Scaillet and Wermers tracked 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006.
“And — are you sitting down? Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, ‘statistically indistinguishable from zero,’ the three researchers concluded.”
On reflection, calling the out-performers at 20% I am too generously off the mark.
