Invesra, Invest in your Future

Bill Miller of Legg Mason and famous for his string of calendar years of beating the S&P 500 is having a rough time. Year-to-date through June 12th, Legg Mason Value Trust is down over 23% versus the S&P 500 loss of 8%. His 32 stock portfolio is invested heavily in financial services, home builders, and the consumer services. Most of his holdings experienced severe losses. Bill Miller, a good fund manager over the long run, has had bad things happen to his fund in the short run.

Another very well known investor, Warren Buffet has had his share of bad times. With his value orientation, Warren Buffett was practically pronounced dead when the tech bubble was in full bloom in late the 1990’s. Buffet’s Berkshire Hathaway was a sluggish and stagnant investment while other funds were soaring with hefty technology bets. Thankfully for Buffett’s investors the bubble collapsed and Berkshire Hathaway was once again on top.

So here is the question, what can be expected from the mortal investor?

Miller and Buffett and others like them are paid to manage and to provide superior returns compared to an index. Based on historical data, Miller’s Legg Mason Value fund could be expected to outperform or underperform two thirds of the time by 8 percentage points. This means that if you invest in this type of fund, you will be either very happy or very sad.

Remember that fees for active management are not a guarantee that the fund will provide you a better return. You are simply paying for the POTENTIAL of outperforming an index.

There is an alternative to the angst and emotional upheavals of actively managed funds. You can choose not to play this game of trying to beat the markets by just investing in a low cost index fund and receive roughly the same return as the market. What you get is no additional volatility from outperformance or underperformance, only the pure volatility that the markets deliver.

In fact, many of the most sophisticated and largest pension plans and endowment funds do not spend money, time and energy trying to outperform most of the US equity market. They invest in very low cost index strategies to gain exposure to the asset class. Their funds are large enough to invest in strategies and asset classes that are not available to the average retail investor.

At the Berkshire Hathaway Annual meeting, Warren Buffett said that the single best investment that someone in their 30’s could make would be in a low cost index fund from a reputable firm. Buffett has great investment intelligence and perception. For those who love to hate Microsoft, Buffet ousted his good friend, Bill Gates, as Forbes Magazine’s world’s richest person in 2008*.

As far as investing is concerned, I would take Buffett’s advice any day.

*Side note on Forbes Magazine’s billionaires for 2008: only 2 out of 10 are from the United States.