If you are reading this article, I believe you are a person who already knows about the advantages of diversification, index funds, rebalancing and low expense ratios. I also hope that your own investments are in low cost index funds already, with proper allocations to stocks and bonds, based on your risk tolerance and investment horizon.
(If you did not understand anything I mentioned in the first paragraph, please stop now and do yourself a favor. Read the book "The Bogleheads Guide to Investing" by Taylor Larimore et al. Don't worry, I am not affiliated with the Bogleheads, nor do I get compensated for referring that book, nor there is an Amazon affiliate link in that URL. That book that gets you to almost an under-graduate level in investing. Without understanding that book, I can confidently say that value investing is not for you.)
You probably have been doing some reading or research on alternative investment strategies, obviously to do better than what you think your current passive indexing strategy will probably deliver. Maybe you read some books by Benjamin Graham, or listened to Warren Buffett, or read some books about Buffett or some other value investor, and are thinking of adopting value investing strategies.
I was exactly in your situation. I and my wife have some money in our retirement accounts. Most of that is invested in Vanguard Target 2045 retirement fund, with the rest mostly in Vanguard index funds. I say "most of that" because my employer has an index fund with another company, so I have no option but to pay the 0.31% expense ratio for a total stock market index fund, for which I would pay a paltry 0.05% with Vanguard!
I read Benjamin Graham's "The Intelligent Investor" couple of years back and realized that active investing is a very time consuming process (think 40+ hours a week). I decided to be a passive investor and follow Vanguard 2045 retirement fund (the year chosen based on when I will roughly turn 65). But every now and then, I would wonder if I could do better than this passive investing strategy. I started reading a lot on value investing recently! After about two months of reading over a dozen books and several hours of online research, what I realize is that even people who are full time value investors do not succeed all the time. The ones whom you hear about are the ones who succeeded after several years of value investing. For each successful value investor, there are probably anywhere from tens to hundreds of failures. It is not because value investing principles do not work. They certainly do. But as human beings, we do not always stick to those principles! If you read Graham's book, he says repeatedly that it is easy for him to give guidelines, but difficult for us to follow it in practice. Just ask yourself - did you floss your teeth today? did you exercise for at least 30 minutes today? Two or three years of inferior returns from value investing will drive almost all of us out of value investing into indexing with our tails between our legs!
I have high regard for Warren Buffett and his sage advices on value investing, but trying to use his value investing advice in our own portfolios is impractical. He has unusual intelligence with numbers, excellent memory and has a solid command over estimating odds. He says he got wise by reading a lot - by lot, I mean he reads about 500 pages of financial documents a day! He has the ability to really understand what he reads and remember that too. And finally after several years of value investing, he says in his 80s, that for most individual and institutional investors, index funds are the best! Thank God he finally said that!
The field of value investing is very enticing to someone like me, who loves to learn a lot and think of myself as a contrarian! Let's just look at the game I am going to play. Here I am with all this knowledge I acquired by reading so much. I also have a solid engineering and math background. Most people don't understand much about stocks, most people don't take the time to read, most are not as mathematically oriented as me. Most of them buy when market goes up and sell when it goes down. So isn't it obvious that with all this intelligence I got I should do better than the vast majority of others? This kind of thinking is detrimental to our investment returns. What happens in reality is that even with all those qualifications, many have played this game and failed miserably. We don't hear much about them because no newspaper or magazine wants to hear from them! Their interviews won't sell. Even if there is such an interview, most of these investors never admit their mistakes; instead they blame someone or something else. It is very hard to tell in an interview "I thought I could beat the market by doing what I did. Now I realize that the market has beaten me to a pulp. I failed.".
Another important fact is that, historically, value companies have done better than growth companies, but that doesn't mean that same will happen in the future. Growth may very well outperform value over the next thirty years and that may very well be all the time you and I got as our investment time horizon.
Every now and then, someone will come up with some "magic formula" even within the field of value investing. It may even work for a while or even a long time, but I don't want to put my own money into figuring out if they are right or wrong. Beware of all such "magicians", since they usually run magical mutual funds which charge high fees. The magic ensures that they become rich whether we even get the market returns or not!
In conclusion, I believe that for me and a vast majority of regular people who have full time jobs (in fields other than stock market), indexing is the way to go. Spend that little extra time you got every day to doing other things - to learning more about your field of work or spending more time with family and friends or pursuing other hobbies. Manage your money passively with low cost index funds and sleep well :-)
(If you did not understand anything I mentioned in the first paragraph, please stop now and do yourself a favor. Read the book "The Bogleheads Guide to Investing" by Taylor Larimore et al. Don't worry, I am not affiliated with the Bogleheads, nor do I get compensated for referring that book, nor there is an Amazon affiliate link in that URL. That book that gets you to almost an under-graduate level in investing. Without understanding that book, I can confidently say that value investing is not for you.)
You probably have been doing some reading or research on alternative investment strategies, obviously to do better than what you think your current passive indexing strategy will probably deliver. Maybe you read some books by Benjamin Graham, or listened to Warren Buffett, or read some books about Buffett or some other value investor, and are thinking of adopting value investing strategies.
I was exactly in your situation. I and my wife have some money in our retirement accounts. Most of that is invested in Vanguard Target 2045 retirement fund, with the rest mostly in Vanguard index funds. I say "most of that" because my employer has an index fund with another company, so I have no option but to pay the 0.31% expense ratio for a total stock market index fund, for which I would pay a paltry 0.05% with Vanguard!
I read Benjamin Graham's "The Intelligent Investor" couple of years back and realized that active investing is a very time consuming process (think 40+ hours a week). I decided to be a passive investor and follow Vanguard 2045 retirement fund (the year chosen based on when I will roughly turn 65). But every now and then, I would wonder if I could do better than this passive investing strategy. I started reading a lot on value investing recently! After about two months of reading over a dozen books and several hours of online research, what I realize is that even people who are full time value investors do not succeed all the time. The ones whom you hear about are the ones who succeeded after several years of value investing. For each successful value investor, there are probably anywhere from tens to hundreds of failures. It is not because value investing principles do not work. They certainly do. But as human beings, we do not always stick to those principles! If you read Graham's book, he says repeatedly that it is easy for him to give guidelines, but difficult for us to follow it in practice. Just ask yourself - did you floss your teeth today? did you exercise for at least 30 minutes today? Two or three years of inferior returns from value investing will drive almost all of us out of value investing into indexing with our tails between our legs!
I have high regard for Warren Buffett and his sage advices on value investing, but trying to use his value investing advice in our own portfolios is impractical. He has unusual intelligence with numbers, excellent memory and has a solid command over estimating odds. He says he got wise by reading a lot - by lot, I mean he reads about 500 pages of financial documents a day! He has the ability to really understand what he reads and remember that too. And finally after several years of value investing, he says in his 80s, that for most individual and institutional investors, index funds are the best! Thank God he finally said that!
The field of value investing is very enticing to someone like me, who loves to learn a lot and think of myself as a contrarian! Let's just look at the game I am going to play. Here I am with all this knowledge I acquired by reading so much. I also have a solid engineering and math background. Most people don't understand much about stocks, most people don't take the time to read, most are not as mathematically oriented as me. Most of them buy when market goes up and sell when it goes down. So isn't it obvious that with all this intelligence I got I should do better than the vast majority of others? This kind of thinking is detrimental to our investment returns. What happens in reality is that even with all those qualifications, many have played this game and failed miserably. We don't hear much about them because no newspaper or magazine wants to hear from them! Their interviews won't sell. Even if there is such an interview, most of these investors never admit their mistakes; instead they blame someone or something else. It is very hard to tell in an interview "I thought I could beat the market by doing what I did. Now I realize that the market has beaten me to a pulp. I failed.".
Another important fact is that, historically, value companies have done better than growth companies, but that doesn't mean that same will happen in the future. Growth may very well outperform value over the next thirty years and that may very well be all the time you and I got as our investment time horizon.
Every now and then, someone will come up with some "magic formula" even within the field of value investing. It may even work for a while or even a long time, but I don't want to put my own money into figuring out if they are right or wrong. Beware of all such "magicians", since they usually run magical mutual funds which charge high fees. The magic ensures that they become rich whether we even get the market returns or not!
In conclusion, I believe that for me and a vast majority of regular people who have full time jobs (in fields other than stock market), indexing is the way to go. Spend that little extra time you got every day to doing other things - to learning more about your field of work or spending more time with family and friends or pursuing other hobbies. Manage your money passively with low cost index funds and sleep well :-)
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