I know this statement is in direct conflict with the teachings of modern finance. Modern finance provides us with multiple studies that, if taken at face value, offer a pretty convincing case that the ability to earn better than average returns is a fool’s game. Yet, our human nature cannot accept being average.
It is our human nature that drives us to escape the realm of “average.” When we were young, our nature drove us to do an extra hour of homework to improve our grades. Our nature drove us to change the style of our hair or dress to be anything but average to those around us. As adults, it is our nature to spend $50.00 on gas traveling from store to store to save $30.00 on our latest purchase; just to feel as if we obtained the best deal in town. It is our nature to work an extra hour or two to get ahead. And it is our nature as investors to seek out higher than average returns no matter who tells us it’s nothing but a “fool’s game”.
I will admit that I claim to be a member of the human race and take full ownership of all the baggage that comes along with this claim, including those little bits of human nature that want to be something other than average. So I work an extra hour or two in hopes that I gain a bit of knowledge that will be rewarded. A couple extra hours of work doesn’t mean much unless you multiply those few extra hours a day by the number of days it takes to cover three decades. It has paid off. But it took two of those three decades of extra effort before I could claim any rewards.
With my confession I hope you will understand why I would say “The S&P 500 has not been particularly difficult to beat…” I believe this statement, but the words are not mine. They are the words of John B. Neff, CFA spoken during the question and answer period of a presentation he gave to the 2006 Financial Analysts Seminar held in Evanston, Illinois. The question was: Do you think active managers can outperform the S&P 500 Index over extended periods? Before I share his answer with you, I want to introduce John.
In 1964, John was appointed by his employer, Wellington Management, as the portfolio manager of a small mutual fund that the firm was hired to take care of on behalf of The Vanguard Group. The fund was named the Windsor Fund. During his tenure as portfolio manager, the fund became the largest mutual fund in the country, even though it was closed to new investors in the 1980’s. Of course you don’t become the largest mutual fund in the country without providing some benefit to the investors. John never let them down as his work resulted in being recognized as the best performing mutual fund in the country.
