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ACCORDING TO THE consensus of HumbleDollar’s thoughtful and learned readers and contributors, I’m making a mistake by actively managing my investments instead of passively investing in index funds. In an earlier piece, I touched briefly on my reasons for doing so. It’s simple. I do it because I like to do it.
After the past few months, when my investments have definitely lagged the averages, I’ve decided to revisit my decision. What I write here is in no way intended to influence anyone else’s decision. My decisions and conclusions may be correct for me, but they’re quite likely to be a bad fit for anybody else.
I decided it was important to list my reasons for doing what I do in the way I do it. I strongly believe good writing is a result of good thinking, and that putting my thoughts on paper will have real value to me, if not to anyone else.
Well, maybe.
I still have the notes my wife and I made outlining all the good and logical reasons for buying a flower shop in the neighboring town some 30 years ago. That was a disaster—and a reminder that writing things down doesn’t always help your thinking. Nowhere in the list of pros and cons did we consider employee theft. We should have.
First off, a memory: I’m sitting on the board of a small nonprofit, and we’re discussing how to handle the organization’s relatively modest portfolio. The rest of the board is strongly in favor of hiring an investment advisor. I argue that we should invest in index funds. I hand out copies of several articles, which cover ground familiar to HumbleDollar readers and which document index funds’ performance superiority relative to actively managed funds. I also point out that, if we eschew index funds, management fees will cost the organization tens of thousands of dollars each year.
The argument went on for the rest of the time I was on the board, and the staff invested the money in some index funds while we argued. I guess I won while I was there, but my suspicion is the index funds were sold and an advisor hired at the first board meeting after my retirement.
You’ll have noticed a contradiction here. Why would I argue for index funds for the nonprofit, while actively managing my own money? Well, as Walt Whitman wrote, “I contain multitudes.”
We had interviewed several prospective advisors, and none impressed me as being the least bit original in his or her thinking. If a manager is bound by what everyone else in the market is thinking, if she’s afraid to stray too far from the market consensus, then she’s unlikely to have returns better than the market because she is the market.
One of the advantages of a portfolio as small as the nonprofit’s is that we could invest in companies that couldn’t be invested in by managers running large portfolios. But none of our prospective managers mentioned that fact, convincing me that our portfolio would be managed in conjunction with the rest of the funds managed by the company being interviewed—meaning we’d be throwing away the small investor’s biggest advantage.
To be sure, it takes a certain arrogance to actively manage your portfolio, because it’s a declaration that you can do a better job than most investment professionals, some of whom wear nice suits and French cuffs. Still, I’m convinced that I have an advantage running my own money, because I can buy companies that are too small to make much difference to large investment funds.
Of course, I’ve often failed to make the most of that advantage because of the other reason I don’t use index funds. I am by nature cheap. My wife and I have only bought two new cars in our 46 years of married life. Our house is a project, well over 100 years old, and bought cheap because of the needed maintenance—repairs that will never be completely finished. None of my farm machinery is newer than 10 years old. I tie my overalls up with baling wire, and only replaced my last pickup when the wheels literally fell off, causing a wreck. Might have overdone the cheapness a bit there.
Index funds reflect the market. As Apple and Nvidia increase in value, their percentage of the fund goes up. By the nature of the beast, your stock portfolio is concentrated in the stocks that have risen the fastest, and are almost by definition more expensive than the average stock, certainly the average stock in my portfolio.
I just can’t buy the best companies. It goes against everything my Depression-surviving grandfather taught, that my 88-year-old father believes, and what I know in my very soul. I’ll never own a market leader, and that reluctance will no doubt mean that my cheapness will be dear, at least when the market is headed up.
It also means that I sell my small-cap discoveries too quickly. I bought Apple at $18 and sold in the low $30s. I bought Berkshire Hathaway (the first time) at $2,500 and sold at $16,000. I owned shares of a local convenience store chain at $10 and sold at $13. It’s now trading at $246. I still believe that small investors have an advantage, but all too often I’ve squandered it by selling too soon. I’m working on doing better, but—if a stock I own makes the front page of The Wall Street Journal—I’m selling.
Tell me a story about a stock that’s out of favor, and I’m there. I have oil stocks and cigarette companies. I’m a sucker for losers who are still fighting, and I’ve certainly picked some losers over the years. I won’t own stock in a company with a lot of debt.
I know there are index funds that reflect my investing style. I even own a couple. I also own some stocks, like Berkshire Hathaway, that are involved in many industries and have large portfolios. After all, if index funds are desirable because the fees are low, I’m hiring Warren Buffett for free. Still, I do use funds for all of my foreign investments.
So, how has it all worked out? My returns over the long term slightly lag the market, but I’m convinced that my risk exposure is much lower. By buying index funds, I would never have had the joy that comes from reading 10-Ks and transcripts of earnings calls, or from trying products with the idea that I might someday own part of the company. When it all works out, it’s a thrill that can’t be equaled in any area of life—or, at least, no area that can be discussed on the pages of HumbleDollar.
Has it been worth it? I think so, but if my kids ask—and they haven’t—I’d still recommend a good index fund.
Blake Hurst farms and grows flowers with his family in northwest Missouri. He and his wife Julie have three children. Their oldest daughter and both sons-in-law are involved in the family business, growing corn and soybeans, and shipping flowers to four states. Their middle daughter is the chief operating officer for a small hospital. Their youngest, a son, is a lawyer for the Department of Justice. Blake and Julie have six grandchildren. Blake is the former president of the Missouri Farm Bureau and a freelance writer. Check out his earlier articles.
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So, why don’t you play around with limit orders? Once the local shopping chain reaches $13, you could put a limit order to sell at $12 and keep raising the limit as the stock goes up. Gives you a chance to ride momentum a bit
I really enjoyed your article and relate to much of it. I especially endorse your statement: “small investors have an advantage, but all too often I’ve squandered it by selling too soon.” I’ve enjoyed investing in individual stocks over the past 35 years or so but always kept the bulk (80%) of my portfolio in funds, mostly indexed funds. One of my lessons learned is to let my winners run. Unfortunately there were many I sold far too soon to “lock up profits.” Thanks for sharing your experiences.
Hey, if it works for you- go for it – enjoy reading those 10Ks
I have my own style, I read nothing and select funds based on their appealing name. I use a dart board method, take a shot and wherever it lands, buy.
I’m quite sure I am not smarter at investing than anyone else, so why try. My investments are worth more than they were twenty years, I’m happy.
Buffett gave a speech in 1984 and a transcript entitled “The Superinvestors of Graham-and-Doddsville” of the talk was reproduced in the fourth revised edition of “The Intelligent Investor”. He described the remarkable records of various other investors besides himself, and pointed out there were no obvious similarities among the holdings of each of these investors compared with those of the others. The only similarity these investors shared was that they were all students of Graham, and followed his methods. It was a rebuttal to those who simply dismissed Buffett as an anomaly. I am unaware of any refutation of the points made in this speech. To those who note its been 39 years since the speech, and Berkshire is no longer growing faster than the market, I’d suggest its too big to do so but remains a great investment for long term minded folks. And of course, he now advises people asking where they should invest to index.
I’ve read where index funds outperform 90% of actively managed funds over long periods. Not bad at all for someone who has no talent or skills in selecting stocks!
“I’ve made most of my money by selling too soon.” – Bernard Baruch
I really enjoyed your article. Like you, I prefer to manage my own investments and, like you, I don’t recommend it to my kids. I also enjoy researching stocks and spend several hours a week keeping up on things. If a person (like you and me) truly enjoys doing this and willingly spends the time and effort, then I think the small investor has some advantages rarely discussed in the media. For example, unlike a fund manager I’m never forced to sell shares at a loss to cover redemptions during a market downturn. Similarly, I’m free to underweight or overweight a sector as I see the market make what I consider inefficient assessments of value. Also, unlike a professional I have no career risk if I underperform, so I don’t have to chase returns but can stay focused on much less risky investments. Unfortunately, I suspect many people who do buy stocks do so based on very thin knowledge and research and are focused on chasing “big wins” rather than looking for “sound investments”. Without due research, stock investing is more akin to gambling rather than investing. For most folks who aren’t going to really give it some serious time and thought, I very strongly suggest staying with index funds. If and when I get to a point where I’m no longer enjoying the effort and willing to put in the time, then I’ll switch back to index funds (which is how I invested during my time constrained working years).