You can't beat the market indexes!

I keep hearing on some threads that it’s impossible to beat the indexes long term. And it’s stated as if it’s an established fact, and that “Everyone knows that!”.

I started keeping track of my portfolio results in 1989, when my wife found herself pregnant with our daughter, and I had plans to retire in 1996 (panic!) On Jan 1st 1989, the S&P was at 285.4. Last night it was at 2373.5, which represented an 8.3 bagger in 28 years. Not bad (I guess).

Now let’s look at how my results compared during that time. Well I’ve made a 352.2 bagger on my entire portfolio since that time (Not up 352%, but a 352 bagger(!), up thirty-five thousand one hundred twenty percent). Now an 8 bagger versus a 353 bagger seems to me to be beating the market. Long term!

Some will complain that I didn’t add in the dividends of the S&P stocks. Okay, double that return to a 16 bagger, or triple it to a 25 bagger. It doesn’t change anything. And I’m not sure exactly what day in 1989 I started keeping track. Maybe it made a difference. Knock my results down to a 300 bagger, to allow for errors. What the heck…I don’t care. Any way you look at it a dedicated investor can beat the indexes. Long term!

How about this year? Let’s see: I was up 20.2% at yesterday’s close. The S&P was up 6.0%. The Russell 2000 small cap index was up 2.0%. The IJS small cap value index was DOWN 0.7%. (Those indexes average up 2.4%).

How can I be up 20.2% when the Indexes are up an average of 2.4%? Well there’s no magic to it. I tell you what I’m doing each month. There’s no slight of hand. There’s as much transparency as you’ll ever see…not “xxx owns shares of ABC” but percentages of my portfolio and often if I’ve added or subtracted (and why). Yes, you can beat the indexes.

Let’s all continue to have a successful and profitable year!



I’m probably not doing worse getting ideas from you than I would with, say, Tom Gardner. And probably less volatility.

What ideas have I gotten from you and put money into? Skyworks, Silver Spring Networks, Skechers, LGI Homes, Twilio, Ubiquiti. There will very likely be more.

Ubiquiti is the only one that I had some previous interest in.

By the way, let me assure you that I know that in a market meltdown the kind of aggressive growth stocks I invest in, will fall further than the S&P (but we all know that). But they go up much more when the market is rising. And the market rises much more than it falls (witness the S&P going from 285 to 2373 over a 28 year period). So holding growth stocks over the long term will probably pay off in the end.


In case I am one of the accused(!), I reply:

You do not hear from me that ‘it’s impossible to beat the indexes long term’ but what is certainly an ‘established fact’, and ‘Everyone knows that!’ (or darn well should) is that it is extremely difficult. For the undoubtedly striving managers of mutual funds, all beavering away like mad, the outcome for their clients after fees, after a reasonable investing timescale - say 20 years - is that there may be one or two managers who have beaten the index but they cannot necessarily be credited with skill because unfortunately their number is roughly what chance would predict. Nor can they be identified in advance.

There was rather a good book on this I read years ago. I think it was called ‘The Great Mutual Fund Trap’.

So, Saul you are a rare bird! Congratulations.

Of course, people who are successful rapidly become hedge fund managers and business owners. Only running a business (a hedge fund is a very good business indeed) really butters the parsnips.

Owning a business or a superlatively-spiffing salary is the thing. Investment is a little icing on the cake, nothing more - for most.


There was rather a good book on this I read years ago. I think it was called ‘The Great Mutual Fund Trap’.

Hi Streina,
I agree completely. A mutual fund manager doesn’t have a chance against an intelligent individual investor. Why? Here are the reasons (some from the Knowledgebase):

Since they are investing many millions, if not billions of dollars, they can usually only take a significant position in very large established companies, and hope to find a pricing anomaly.

If a fund manager does real well for a year or two, not only does his fund get larger because of capital gains, his fund get flooded, swamped, with inflows of dollars and he can’t duplicate what he did when the fund was small.

Also, when the market is near its peak, people will be pouring money into his mutual fund, and he’ll have to invest in companies that he knows are overpriced. Then when the market is near the bottom and he’d like to be putting money in, the fund holders will be pulling money out like mad, and he’ll have to sell at the bottom.

Also he has lots of people looking over his shoulder, and ready to criticize any adventurous picks that don’t turn out, and watching his quarterly results (are they equaling their benchmark each quarter?). It makes it hard to get good results, I’m sure.

As far as Hedge Funds, the average hedge fund gained 6.5% in 2013, when the S&P 500 gained 29.6%, and the best hedge fund manager was congratulated because he gained 25%. It shows how hard it is when you are investing billions of dollars, and how we can beat any mutual or hedge fund on a consistent basis. They are too big to invest in most of our type stocks. Also hedge funds invest in futures and currencies, which are zero sum games. When one wins, another loses and the sum comes to zero.

But, if you want to invest for yourself, you have to be willing to treat it like a hobby and put time into it. It has to be a game for you that you like to play. If it’s a chore instead, it’s probably better to let someone else manage it, and just watch carefully.



It’s not easy to beat the market, but Saul’s experience is proof that it is done.

It’s also important to realize that there are many different ways to reach goals when investing. Sometimes it’s more about preservation then looking to beat the market. I’ve been in that mode for a year now, mostly in cash, although I’m only down 2% from the S&P one year return and with now 63% cash. I’m good with that as I’m not a believer in the overall bull market continuing, and I’m just not finding Greta buys out there right now, but that’s me. When I do see an opportunity I take it regardless of where the index is. Take PAC for example. Even though I’m worried that we are approaching a bear market, I bought PAC at 80,75 and 72 because I saw value.

I also only have 10 stocks right now and all are in the green, most are core positions. If I was only 10% cash and owned say 6 more stocks, it doesn’t guarantee I’d be doing any better.

So I’m not sure we should always be comparing our personal portfolio to the index. If you are a disciplined investor and have a long term game plan I think it’s pretty likely that you will grow your wealth over time regardless of what the index does.


Simple mathematics says that some people must beat the indexes. If no one beats the indexes then everyone must match the indexes because not everyone can be below the indexes. Statistics say that one out of four investors beat the indexes. That adds up to the fact that beating the indexes is hard but doable.

Denny Schlesinger


of course when you beat the indices it may be luck not skill.
Or you may tend to pick stocks from sectors doing well over a 2 or 3 year period only to see them collapse the next few years as the whole sector falls out of fashion. Sector selection tends to over power individual stocks. Me,. I am terrible at picking sectors ,better at picking stocks. But still would rather be lucky than clever.

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In the back of my mind, I think of how to design an index that would beat the other indexes. The discussion about that high-performing Internet tech index encouraged me to continue this. The Nasdaq 100 (QQQ) does pretty well, too.

I might start with the Wilshire 5000, and remove the stocks that are too illiquid, though maybe keeping the ones that sell for less than their net asset value or book value.

If I wanted a nimble index, I’d remove the lumbering elephants, large-cap stocks that don’t change much, unless they paid a steady dividend of at least x%. I’d probably remove companies that had very large capital investment, so that would generally leave out car manufacturers, for instance.

I’d concentrate on the larger small-caps, plus the mid-caps, for an optimal combination of safety and growth. Then I’d look at the ones with the most potential to grow (such as Ubiquiti) and weight them somewhat heavier.

Or I could just do a mechanical screen, start with the Wilshire 5000, weed out the illiquid ones and the ones with the worst ratios, such as P/B, P/S, P/E, ROE, etc.

I was surprised to find that the Wilshire 5000 performed very similarly to the S&P 500, despite the latter being a very “active” index, with stocks replaced all the time, and weighted by market cap. That gives Apple and a small group of other big companies a huge influence on the S&P 500.

“What ideas have I gotten from you and put money into?”

I forgot to include Shopify and Paycom.

This forum is one of my go-to places for investment advice.

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Some will complain that I didn’t add in the dividends of the S&P stocks.

Saul, an impressive performance to be sure. I found this online S&P historical calculator that has options for including dividends (reinvested of course), as well as offsetting due to inflation:

FWIW, from March 1989 to end of Feb 2017, the S&P returned 713.775% (8 bagger), or 7.775% per year. With dividends reinvested, it returned 1364.398% (14.5 bagger), or 10.06% yearly. Clearly dividend reinvestment is important.

I go back to saying that if you can’t consistently beat the S&P (averaging 10%/year since 1989), then you should consider just investing in an S&P 500 fund. No stress no hassle and long term you’ll do quite well.

But clearly, Saul should be sticking to his investment strategy.

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If you view Saul’s monthly report on his portfolio as a tip sheet, you’re kind of missing the point. I don’t know if that’s what you’re doing, but it kind of sounds like it from your post. I’ve learned to look at Saul’s portfolio as suggestions to investigate to see if they appeal to me. I hold some of the same stocks he holds, and I hold others that he does not. Not all have been winners, but I’ve become far more adept at trimming or even completely selling the non-performers and putting the money into better performers, while being reasonably careful to not become too heavily invested in one company (at present, I’ve got “too much” SHOP, but one of the reasons is not repeated purchases, it’s just been growing like a weed. I’m reluctant to sell any of it even thought I know I should).

Nobody, least of all Saul, is forcing you to buy anything you find on this board or how much to invest in it. I don’t load up on anything initially, irrespective on my confidence level. I don’t mind paying more for a stock going up in value. I’ve not quite mastered the buying more when it’s going down. That takes a lot of confidence.

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I think there is another force which drives fund managers to mediocrity. Few are truly independent, they are all managers of a fund which is part of large family of funds. If one manager tends to stand out with respect to performance on a consistent basis, he makes the rest of the family look pretty bad. Now we’re not just talking about trying to be agile with battleship; we’re talking about the whole damn fleet. The Admiral does not like one ship with a cowboy at the helm making the rest of his fleet look like they have a bunch of fools at the helm. There are a million ways to put the brakes on a fund manager that consistently outperforms his peers. The entire industry is highly motivated to not make any fund manager (even a competitor) look too bad, too often.

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Sector selection is the Fisher investment thesis. And since he’s built a rather large and successful business based on this thesis it should come as no surprise that he keeps publishing “scientific, unbiased” white papers that support it. Kinda makes me wonder how it’s possible to do all that research and never once come up with an even mildly conflicting result.

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Saul, I agree with every point you make but the problem is there are many mutual and closed-end funds with small, sometimes very small capitalization and which are completely flexible, especially in Europe, and there is no indication their managers are any better.

In terms of hedge funds, I was referring to the businesses themselves! The customers may get a poor return but the business confers tens of millions, mansions and super-yachts on management. That is why anyone who has established what is probably bogus reputation over an irrelevant 5 year career does it.

Denny, I do not think one out of four investors beats the index over 20 years. The period involved is critical to any judgement of investment ability. I think 15 years of documented results is an absolute minimum to indicate possible ability but 20 likely to be sufficiently accurate to demonstrate it.

EdGrey, I completely agree that you can improve your chances that way. But the critical thing is to buy cheap. I am astonished that Buffett does not qualify his S&P index recommendation in that way. The time to buy the S&P500 was in 2008-2009. The time definitely not to buy it is now. More frequently, sectors throw up opportunity.

But I am right with you Saul. I am determined to beat the index substantially! Our strategy is different although we sometimes overlap. I enjoy and am grateful for the very interesting board you host.


I should of course add a couple of cynical riders to the point that 20 years probably demonstrates ability: first, the investor or manager may be that outlier that chance alone would predict; secondly, if you do get it right over 20 years, immediately retire! Peter Lynch got it right, John Neff, Anthony Bolton and others did not. Not sure how Bill Miller worked out in the end.

I enjoy and am grateful for the very interesting board you host.

Thanks streina, for your very kind words.

In the back of my mind, I think of how to design an index that would beat the other indexes.

I would not try to design an index but pick a time-tested one instead. Part of the idea behind indexing is to remove your emotions, biases and timing from stock picking.

I’ve notice that over the years the “tech heavy” NASDAQ outperforms the “broad” S&P 500 but it does so at the cost of volatility.

Pick any index at the wrong time and you get slaughtered. One way to avoid that is to dollar cost average and another is to take profits at the right time (hard as hell). Don’t worry about little wiggles, it’s the big ones that kill the portfolio.

There is one lesson that the above chart should pound into our heads, investing is not an escalator to financial heaven, it’s a winding road full of potholes and other dangers.

To stir the pot a bit, ¿Is Saul successful because he deals mostly with “tech heavy” stocks? ¿Should he compare his results to NASDAQ instead of to the S&P 500?

Denny Schlesinger

I’m reminded about a story of a trip by bus on a dangerous road. The anxious lady passenger asked if the road was as dangerous as it was made out.

A: “Yes, M’am.”
Q: “Are your drivers good?”
A: “Yes, M’am.”
Q: “How do you know?”
A: “The bad ones are all dead.”


Denny, I do not think one out of four investors beats the index over 20 years.

The market is way too complicated (complex) and mobile to model. I take my “one in four” cue from the resultant wealth distribution as discovered by Wilfredo Pareto, the 80-20 rule.

February 20, 2011
Why Does the Average Mutual Fund Underperform?…

Denny Schlesinger

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Fund managers are judged on performance and paid to perform, Saul is not.

I would argue that if Saul began a fund and was paid by a group of investors to manage millions, if not billions of dollars, his investing style might change a bit, especially during a downturn which then might effect his performance going forward.

Saul only you can answer this. I’m curious if your popularity on this board, as it has grown, has it effected your performance in any way.