Over the last few columns, I noted that the great majority of mutual fund managers, hedge fund managers and amateur investors underperform the S&P 500.
That is why millions of investors have their money in index funds.
(As the old saying goes, if you can’t beat ’em, join ’em.)
Yet the long-term outperformance of money managers like Warren Buffett, John Templeton, Peter Lynch and others shows that it is possible to beat the market by a substantial margin and over long periods of time.
And the benefits are significant.
If you invested $10,000 in the S&P 500 when Warren Buffett took the helm of Berkshire Hathaway in 1964 – and reinvested all your dividends – you would have approximately $2.6 million today.
But if you had invested the same amount in Berkshire Hathaway over the period, you’d have $376 million today.
That’s quite a difference.
What is it that allowed these men and their shareholders to create so much wealth while professional and amateur investors struggled?
I’ve studied these money managers’ investment techniques for nearly 40 years.
And I can boil it down to three primary factors: knowledge, optimism and patience.
The first – knowledge – is attainable for all of us. But it needs to be the right kind of knowledge.
Unfortunately, many Americans are too busy working, raising their families and enjoying their free time to study the major trend lines.
So here’s a pop quiz to see where you stand. Are the following statements a) all true or b) all false?
- Over the past 10 years, carbon emissions in the U.S. have increased.
- Over the last 15 years, military spending as a percentage of the budget has increased.
- Over the past 20 years, air and water pollution in the U.S. has increased.
- Over the past 30 years, violent crime in the U.S. has increased.
- Over the last 40 years, global economic inequality has increased.
Most readers probably answered that they’re all true.
But, while you wouldn’t know it from listening to the mainstream media, they’re all false.
Only No. 1 was remotely tricky. (Carbon emissions have increased globally but decreased nationally.)
This is the problem with following the headlines rather than the trend lines.
The media obsesses over bad news and sensational developments while paying little attention to slower developments that shape our world – or conflict with a predetermined narrative.
Context and balance are often missing. Meanwhile, positive developments are underreported.
For example, U.S. incomes and household net worth are near record levels.
Standards of living have never been higher. Educational attainment has never been greater. Human life spans have never been longer.
Deirdre McCloskey is an economic historian and author of 17 books and more than 400 scholarly articles.
She insists that humanity is going through what she calls the “Great Enrichment,” a period of exponential wealth creation that started more than 200 years ago and is still accelerating today.
Look at the quality of your transportation, the speed of your communications, the laborsaving devices that surround you, the little luxuries that permeate your life, and the huge variety of goods and services available at the click of a button.
(To put things in perspective, an annual income of less than $40,000 puts you in the top 1% of all income earners worldwide.)
Even the poor in the U.S. are rich by historical standards.
Most Americans living under the poverty line today live in larger accommodations than the average European.
Historically, being poor meant having to struggle to get enough calories to survive.
Today we have the opposite problem. Obesity is creating a healthcare crisis among the poor.
The average person living below the poverty line in the U.S. today also has a telephone, a TV set, indoor plumbing, central heat and an automobile.
A hundred and fifty years ago, the richest robber barons could not have dreamed of such wealth.
When you understand these things, it creates a different perspective.
As Warren Buffett has said in the past…
American GDP per capita… in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well… The babies being born in America today are the luckiest crop in history.
This knowledge – readily available yet seldom recognized – leads to a rational optimism about the outlook for American business, national prosperity and U.S. stock prices.
This optimism, in turn, fortifies investors with the patience to get through difficult periods like we’ve experienced over the last year.
(Some folks are naturally more patient than others. But when it comes to investing, it is a virtue that can be cultivated.)
The bottom line? We in the West today are living longer, healthier, safer, richer, freer lives than any people in the history of the planet.
Once you understand this, it’s a lot easier to have optimism and patience.