One of the characteristics of humorist Garrison Keillor’s fictional town of Lake Wobegon is, all the children are above average. The joke is that by definition, average means that some are above and some are below. All of the children cannot be above average.
Let’s say the advocates of index investing (also called passive investing) inhabit a fictional town called Passivia, where their beliefs are the rule.
In Passivia, all the investors are below average. Nobody does better than average. If one appears to, it is marked down to luck. Furthermore, it is thought to be impossible for any human to do better than average because of innate flaws in human nature or other factors. Fortunately, the advocates say, it is possible to nail average performance by following their plan. And since all investors are below average, this is an improvement for everyone.
Just as all the children in Lake Wobegon cannot be above average, all of the investors in Passivia cannot possibly be below average. It is a joke that almost nobody gets. Some investors necessarily do better than average and some do worse—just like the children of Lake Wobegon.
In our shop, we believe that investors do considerable damage by joining stampedes in the markets. But somebody is on the other side of every transaction. One of our three fundamental principles is to avoid stampedes in the market.
We also believe it pays to try to find the best bargains, which are often found among the least popular companies or concepts. So while many may be chasing fads that already made investments too expensive, we are looking for bargains.
The third principle is to ‘own the orchard for the fruit crop.’ If we do so, we do not need to care what the neighbor would pay for the orchard, or whether his bid is higher or lower than the time before. By inoculating ourselves against reaction to short term price changes, we are better able to focus on long-term results.
We have no guarantees to offer, not even that we will be successful in applying our principles. But we believe the attempt to do so increases the potential that we will be above average over the long term. After all, some people have to be above average, by definition! If you have questions about how our philosophy applies to your situation, please write or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly.
