Concentrated portfolio of stocks or Index funds or Mutual/Hedge funds

How should I invest in the stock market?

Should I invest in my own selected stocks and manage my own portfolio?

Should I entrust my money to the fund managers in mutual funds or hedge funds?

Or, should I just buy an index-linked fund or an ETF?

Investing in mutual funds and hedge funds

The problem here is, as an aggregate, these funds underperform the market, after taking into consideration the costs incurred.  

Over a one year period, these costs maybe small, but over a long period, these costs compounded into a huge amount that is leaked out of your portfolio, not available to you to reinvest into your portfolio.

It is generally sound to avoid these funds, since there are better alternatives.

Investing in index linked funds or ETF

Index linked mutual funds have on the aggregate given you the chance to capture the returns of the market at low costs.    

They have in general outperformed the mutual funds and hedge funds, as a group over the long term.

Due to recent awareness of the performances of the mutual funds and hedge funds due to the higher costs involved, more and more money are flooding into index linked funds or ETFs.

Investing in a concentrated portfolio of  a selected group of stocks

I believe this is possible for those with a good and sound philosophy and method; who are hardworking, knowledgeable and disciplined.

These constitute less than 5% of the investors in the market.

An example of a sound philosophy:

• Know the business you are investing.
• The business has durable competitive advantage.
• The management has integrity and are capable.
• The company is available at a fair or bargain price.
• The investing time horizon is long term (> 5 years or more).
• Dividends are reinvested.

The stock markets have returned averagely about 10.5% per year for a long period.  The returns of the stock market over the short term is extremely volatile; inflation over this short period is small.   On the other hand, the returns of the stock market for any 5 years or more rolling period have always been positive.   Those who choose the "good quality stocks" bought at "bargain prices" can expect to perform better than the average and should have returns better than the 10.5% per year.

In summary:

1.   If you are knowledgeable, do invest on your own.

Own a concentrated portfolio of good quality stocks (those with durable competitive advantage).

Do not overpay to own them.

Keep them for the long term, reinvest the dividends, and allowing compounding to give you the higher returns.

2.   If you are not so knowledgeable, but still intelligent in your investing.

Go for index linked funds.

Do you have the uncanny ability to pick out the best mutual or hedge fund managers?  If you have, you may wish to park your money with them.  If not, avoid these products altogether and go for index linked funds or ETF.

Buffett slams Wall Street 'monkeys', says hedge funds, advisors have cost clients $100 billion

Andrew Harrer | Bloomberg | Getty Images

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc.

Warren Buffett on Saturday devoted more than four pages of his 29-page annual shareholder letter to criticism of active managers on Wall Street, excoriating what he perceived as exorbitant fees they charge for returns that fail to live up to lofty assumptions.

Meanwhile the legendary stock picker extolled the virtues of passive investing and its advantages for regular investors. The 'Oracle of Omaha' even compared active managers to monkeys, and estimated that financial advisors, in their futile search for ways to beat the market, had cost clients $100 billion in wasted fees in the last 10 years.

"When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients," stated the widely-read letter released on Saturday morning. "Both large and small investors should stick with low-cost index funds."

Chris Kleponis | Bloomberg | Getty Images

'The results were dismal'

Buffett started this critical section of the letter with an update on a 10-year wager against Wall Street's active management he made nine years ago, with the proceeds going to a charity. This is how the billionaire described his original challenge:

"I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?"

To his surprise, only one person stepped up to take the other side of the bet: Protégé Partners' Ted Seides, a 'fund of funds' manager. According to the bet, Seides selected five funds of hedge funds, whose results after fees would be averaged and compared to Buffett's selection, a Vanguard S&P index fund.

Here's what happened, according to the letter: 

"The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily prove typical for the stock market over time...The five funds-of-funds delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000."

In fact, none of the basket of funds came even close, according to Buffett:

Source: Berkshire Hathaway 2016 shareholder letter

"The results for their investors were dismal – really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved – fees that were totally unwarranted by performance – were such that their managers were showered with compensation over the nine years that have passed," Buffett wrote. "As Gordon Gekko might have put it: 'Fees never sleep.'"

Investors seem to be heeding Buffett's anti-active advice, as more than $20 billion flowed out of U.S. active equity funds in January despite a rising stock market, according to Morningstar. In the last 12 months, more than half a trillion dollars have flowed into passive funds, while active funds have experienced outflows, Morningstar's data showed. 

In his letter, Buffett criticized how the whole Wall Street complex is still set up to send pension funds, endowments and other investor types into under-performing active vehicles. He claimed that the wealthy investor classes are getting ripped off the most:

"In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial 'elites' – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is –on an expectancy basis – clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative."

Buffett stated that he knows of only 10 managers that he spotted early on who could outperform the S&P 500 over the long term, and they did so. He acknowledged there are more out there who may be able to beat the market, but they are the clear exception. 

"Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that some investment professionals, just as some amateurs, will be lucky over short periods," Buffett wrote.

"If 1,000 managers make a market prediction at the beginning of a year, it's very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him."

The billionaire heaped praise on Jack Bogle, the founder of the Vanguard Group who started the first index fund 40 years ago.

"If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle," the letter stated. "In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned."

"He is a hero to them and to me," Buffett added.


John Melloy | @johnmelloy
Saturday, 25 Feb 2017
CNBC.com

http://www.cnbc.com/2017/02/25/buffett-slams-wall-street-monkeys-says-hedge-funds-cost-100-billion.html

The Little Book of Common Sense Investing by John Bogle

This small book is divided into eighteen chapters, each ten to twenty pages long, that spells out piece by piece the ideas behind the philosophy that one should do their investing in low-cost index funds.

Read more here:
http://www.thesimpledollar.com/review-the-little-book-of-common-sense-investing/

John C. Bogle - The Battle for the Soul of Capitalism

Dean Lawrence R Velvel interviews John C. Bogle, founder of the Vanguard Group, Inc. and president of the Bogle Financial Markets Research Center, about his book The Battle for the Soul of Capitalism. Bogle analyses what went wrong in corporate america, from pension plans to corporate profits to mutual funds to stock options to corporate greed.


2 markets:  Business market and the Expectation market

@ 34.30 min - Owner capitalism is now transformed into a pathological mutant form where the managers have taken far too large a proportion of the share of the profits.  Today financial institutions own 68% of all stocks; they are traders and speculators mainly, playing in the expectation market.

@ 49.30 min - Costs of mutual funds.

@ 53 min - The magic of compounding returns.  The tyranny of compounding costs.  The tyranny of compounding costs overwhelmed the magic of compounding returns.  Get rid of costs and emotions.

Mr. John Bogle speaks on many issues related to investing. Don's listen to history.

Lange-Bogle 1: Investment vs. Speculation
Published on 4 Feb 2013
Noted IRA expert and estate planning attorney, James Lange, interviews Vanguard Group founder, John Bogle. Here, Jim discusses Mr. Bogle's history as a leader in the financial world and delves into a discussion of his newest book, The Clash of the Cultures: Investment vs. Speculation. Mr. Bogle explains his definitions of investment and speculation and tells us why he feels only one of these path creates wealth.


Lange-Bogle 2: Speculation - A Loser's Game
IRA expert and best-selling author, Jim Lange and John Bogle, founder of Vanguard, discuss the cultures of investment and speculation. Investment is about long-term wealth creation by investing in the growth of corporations. The culture of speculation is akin to betting, and in John Bogle's perspective, the house always wins!



Lange-Bogle 3: What Hurts the Everyday Investor Now
James Lange, CPA/Attorney and host of The Lange Money Hour and John Bogle, founder of Vanguard, go over the hard facts. Of the 33 trillion dollars that change hands every year in the markets, only 250 billion of it can be characterized as true investing. John Bogle speaks plainly about the mess Wall Street is in, and the role speculation has played in getting it there.



Lange-Bogle 4: Conflict of Interest in Our Broken System
John Bogle, founder of Vanguard, shares with Attorney and CPA Jim Lange, where he feels the system is broken and how we find ourselves in our current speculative culture. There is a critical conflict of interest that prevents our money managers, agents, and financial institutions from being true fiduciaries. Who is looking out for the interests of the shareholders?



Lange-Bogle 5: The 10 Gatekeepers of our Financial System
Noted IRA expert and estate planning attorney, James Lange and John Bogle, founder of Vanguard, discuss Bogle's broad indictment of the gatekeepers of our financial system in his newest book, "The Clash of the Cultures: Investment vs. Speculation." The gatekeepers of our system, according to Bogle, are more interested in the current price of stock, the speculative aspect of it, rather than the support of thriving companies and creation of long-term wealth for shareholders.



Lange-Bogle 6: The Cause of the Recession and How to Fix It
John Bogle, founder and former CEO of Vanguard, talks to Attorney and CPA, Jim Lange, about the terrible fraud perpetrated by mortgage companies and how the severed link between the borrower and the lender sent our economy into a tail spin. If Bogle were Czar, he would pass a federal statute eliminating conflicts of interest and demanding fiduciary duty of money managers.



Lange-Bogle 7: The Need for Full Disclosure
IRA expert and best-selling author, Jim Lange and John Bogle, founder of Vanguard, discuss the need for an industry standard for full disclosure of not only potential conflicts of interest, but also the true cost of unreasonable fees and commissions. John Bogle feels that fees are often underestimated and if the public truly understood the costs of the investment choices they made, the world would be a different place in which to live and invest.



Lange-Bogle 8: "Don't do something, just stand there!"
James Lange, CPA/Attorney and host of The Lange Money Hour and John Bogle, founder of Vanguard, talk about the history of success in indexing and how the passive strategy behind "Bogle's Folly" (the Vanguard 500 Index) went from foolishness to genius with decades of proven results. Active managers do not beat their benchmarks a strong majority of the time. Owning all the companies and holding them forever has been proven a winning strategy and, in Bogle's opinion, is the only way of being a true investor.



Lange-Bogle 9: Time is Your Friend, Impulse is Your Enemy.
James Lange, CPA/Attorney and host of The Lange Money Hour and John Bogle, founder of Vanguard, talk about the importance of not relying on past performance to predict future results and the miracle of compounding interest. Like the Law of Gravity, Reversion to the Mean is an eternal rule. What goes up must go down, even in the stock markets. Time is your friend (the miracle of compounding pays off hugely). Focus on the long term. Resist the impulse during periods of adversity and fear.



Lange-Bogle 10: Simple Rules for Investment Success
Noted IRA expert and estate planning attorney, James Lange and John Bogle, founder of Vanguard, go over a few of the "10 Simple Rules" laid out in Bogle's newest book, The Clash of the Cultures: Investment vs. Speculation. These are some new twists on classic Bogle investment advice, or "Bogleisms," including: "Buy Right and Hold Tight," "The Bagel and the Donut," "Forget the Needle, Buy the Haystack," and "Minimize the Croupiers Take." Beware of your market returns being overwhelmed by the tyranny of long term compounding of your costs.



Lange-Bogle 11: There is No Escaping Risk
Less volatility doesn't mean less risk. It means different risk. IRA expert and best-selling author, Jim Lange and John Bogle, founder of Vanguard, discuss the dangers of ignoring inflation risk. Many retired people do not want to incur any risk, but there is no escaping it. Over time inflation eats away at the value and purchasing power of your money. John Bogle explains that you need to incur some volatility and investment risk in order to build a retirement fund.

Lange-Bogle 12: Beware of Fighting the Last War

In this video, John Bogle, founder of Vanguard and CPA, attorney and best-selling author Jim Lange, review some of the investment wisdom imparted in Bogle's most recent book, The Clash of the Cultures: Investment vs. Speculation. Mr. Bogle warns us not to listen to history! As interesting as it may be, where investment is concerned, it doesn't repeat itself. The founder of Vanguard also suggests something you may not expect... throw your statements away and don't ever look at them!  Fox versus hedgehog.  The foxes know a lot of things but the hedgehogs know only ONE great thing.



James Lange Talks to John Bogle
John Bogle, founder of The Vanguard Group, tells James Lange his most important piece of advice for investors.

John Bogle: Keep Investing

2 Oct 2008

The founder and former CEO of Vanguard talks to Morningstar's Christine Benz about why to stay the course amid the financial crisis.

A sharp market decline is bad for sellers but it is very good for buyers.

Wealth, fame and power. One should re-define what success should be other than these.