“Index funds are imperfect, but they provide the best outcome for most know-nothings, in order to avoid being misled by fools and liars.”

Charlie Munger

Investing is the process of putting money away now to be sure of getting more money back in the future. A good definition of success is the ability to earn a higher rate on one’s principal than commonly available. Ideally this would be achieved over at least a 10-year period, where the terminal level of the S&P 500 is the same as the starting point. An examination of investors’ track records shows that success, as so defined, is scarcely practicable; more than 90% of portfolio managers fail to earn excess returns consistently.

On page 6 of this document you will see the track record of Scott Rothbort, the founder of Lakeview Asset Management. When the S&P 500’s return was +13.62%, he earned only 8.46% and when the S&P 500’s return was +3%, he earned 3.83%. Including dividends, the S&P’s returns were actually 15.7% and 5%, which means Rothbort’s performance is even worse than stated.

Vitaliy Katsenelson, author of Active Value Investing and the portfolio manager for Investment Management Associates, also has a mediocre track record. After nearly 30 years, IMA’s two funds have underperformed the S&P 500 by a shade (he removed the performance figures shortly after I drew attention to them). One of IMA’s objectives is to lose less than the index in down years and to match the index in up years—a goal straight out of the Buffett Partnership “Ground Rules.” Needless to say, Katsenelson could not accomplish this. IMA’s slogan is “Consistent Success for Serious Investors Since 1979,” but a more honest slogan would be “IMA: A Partial Anagram for I Might As Well Index.”

Despite achieving below average results, Rothbort and Katsenelson exude the confidence that comes with mastering a craft. This sort of salesmanship-without-performance behavior has been criticized by such eminent investors as Ben Graham, Charlie Munger, Warren Buffett and Seth Klarman. Investors not only suffer sub-S&P 500 returns and unjustifiable fees, but the managers perpetuate useless strategies as well. It is particularly undesirable when these managers teach, and in fact both Rothbort and Katsenelson are professors.

Nothing is of more dollars-and-cents importance than to distinguish between sound strategies and unsound strategies. To that end, all investors should pursue opportunities with clear ex-ante mathematical expectation and cogitate over how they work out. It seems axiomatic that great investors do this automatically.

“Most of the stockbrokers, financial analysts, investment advisers, etc., are above average in intelligence, business honesty and sincerity. But they lack adequate experience with all types of security markets and an overall understanding of common stocks—of what I call “the nature of the beast.” They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can’t do well.”

Benjamin Graham