So where are American markets right now, today, in 2018?
They’re very expensive. In fact, the American markets are about as expensive as they have ever been in American history. The only dates that compare are in 1929, just before the Great Depression, and the late 1990s Dotcom Bubble. That does not mean that markets will necessarily crash (nobody can accurately predict short term market movements) but it does strongly suggest that you will not fare well as an investor if you blindly put your money into an index fund.
Other first world countries are much cheaper, so index funds covering those markets are probably better buys, but you’re still faced with having to become an expert global index fund picker. And, while Bogle would disagree (he does run an index fund company, after all), there are much better ways to save for retirement.
One way is to effectively create your own index fund by buying a diversified basket of deep value stocks that are cheap on some fundamental basis. Remember the industry drumbeat mentioned above? Well, it’s mostly marketing. Small investors CAN earn great returns picking individual stocks, and even beat Wall Street professionals. I’ve taken this route and have done very well.
I don’t have investing super powers, but I have adopted two vital techniques for success: adopting a solid deep value strategy and investing in tiny companies. Some investment strategies have records of large outperformance that span decades and have been used successfully in practice by people such as Warren Buffett. Leveraging these strategies, as Ben Graham recommended simply means buying a diversified basket of stocks that display a handful of basic criteria. It doesn’t make sense to focus on anything else.
But I also refuse to compete against professional money managers. Luckily, they’re restricted to larger firms, companies with market capitalizations roughly over $500 million, because they’re trying to manage tens of billions of dollars and can usually only buy less than 5% of a company’s outstanding shares. If they trespass over this line, they start pushing the stock price up, or they get a stern warning from regulators. As a consequence, investors like me completely sidestep competing against the pros.
Saving for your retirement is serious business, so it pays to really think about what you should do to make wise choices. Blanket statements such as “buy index funds” or “most small investors underperform” are not helpful. You owe it to yourself to look deeper.
This article was republished with permission from Modest Money.