This article does its subject something of a disservice in the fourth paragraph: "His fortune comes not from some flash of entrepreneurial brilliance or dogged devotion to career, but from a lifetime of prudent do-it-yourself buy-and-hold investing."
We learn later in the story that Wertheim did in fact demonstrate enterpreneurial brilliance and dogged devotion to his career and was an unimaginably successful buy-and-hold investor. The company he founded, BPI, threw off up to $10M / year in cash that funded his investment portfolio.
That he he was successful not just as an investor, but also as an inventor and entrepreneur, is what's truly amazing.
Actually, from the article it's unclear if he's beaten the S&P500 as an investor. It doesn't mention much about what he invested in before 1980, but it does say he lost about $50 million dollars in a margin call in 1982 so he was already quite wealthy either from BPI (the company started in ~1971) or from investing in the 60's/70's.
If his total investments at that time was $100 million, which seems somewhat reasonable given how much he lost in the margin call, investing that in the S&P500 would be worth $4 billion today, which is quite a bit more than the $2.3 billion he's actually worth.
That's also ignoring his currently $10 million a year income from BPI, so he could have spent 100% of that money.
I wonder why internet commentators who haven't made billions always bring up this index fund stuff, when no one who actually has made billions did it by piling their money into the S&P 500.
Because it has been very well demonstrated that almost all active investors, fund managers etc... virtually never beat the market cumulatively over decades. There are some exceptions, but not more than you would expect from random chance due to large sample size (a lot of people playing). So given that information why should most of us spend the effort trying to beat the market especially considering the low expense ratio on some really solid ETFs. Generally speaking if you expect the economy to continue to grow for the next few decades than index funds are a pretty good option.
The weak form of the Efficient Market Hypothesis is true but the strong form, which you’re expounding, is a crock. Warren Buffet has beaten the market for longer than I have been alive at what the stock market is optimised to do. George Soros made multiple fortunes as a trader and Julian Simons’ Renaissance hedge fund mints money and has for decades. The only one of those you can invest in is Buffett because it pleases him to run Berkshire Hathaway his way instead of maximising his personal returns like the founders of the best hedge funds. After fees the investors in them don’t beat the market but the principles make giant piles of money for long periods of time.
Investing skill exists, is rare and often captures all of the gains accruing to it because wannabe investors bid for access to it and due to the winner’s curse often overpay.
George Soros is like Steve Jobs. Making a giant fortune once could be luck but if you can repeat it again and again the chances it was ever luck just go down and down.
> The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds generating long-term returns above the market index. All these funds were managed by Benjamin Graham's alumni, pursuing different investment tactics but following the same "Graham-and-Doddsville" value investing strategy.
All that said. The weak form of the EMH is true. You personally are very unlikely to beat the market over the long run.
Book value vs market cap is the liquidator paradigm which is the advice that Buffet professes. But really he buys distressed assets. Structural buy ins such as American Express, GEICO, Salomon Brothers, Goldman Sachs, General Electric, USG, Harley-Davidson and Bank of America.
Saying you can't beat the market is like saying it's impossible to find a bug in a program because someone would have found it already. The market is only somewhat efficient, and they way it stays (somewhat) efficient, is if everyone is trying to make money.
Moreover, the returns of investors is not normally distributed (a lot of people flipping coins would result in a normal distribution). If you look at the actual distribution of returns, from not just the market, but from investors, you find there's a lot of kurtosis (fat tails) to the distribution. This implies that there are both more losers and winners than what a coin flip would imply.
Some of those winners are pretty clear: Berkshire Hathaway, Renaissance Technologies, 2 Sigma, Bridgewater, etc.
> So given that information why should most of us spend the effort trying to beat the market especially considering the low expense ratio on some really solid ETFs.
By managing your own money, you are inherently making asset allocations. Do I just invest 100% in SPY? That's a pretty bad idea, so even if you are just using low-cost index funds or ETFs, you are still actively managing your portfolio. You need to decide your asset type (equities, bonds, options, etc), your universe (S&P 500, Russel 2000, etc), your portfolio weights, and a host of other factors.
There is no such thing as just investing in the "market." Everyone is making an explicit or implicit choice, and that, of course, is the definition of active management.
What does any of that have to do with the simple fact that billionaires don't make their fortunes through index funds? This isn't a discussion about active versus passive investing. It's a discussion about whether to attribute wealth to entrepreneurial acumen or to an index fund.
No, the discussion was specifically a response to a comment speculating that a person with 100M in 1971 would have been better offer investing in the S&P 500.
Quotes from the GP
> Actually, from the article it's unclear if he's beaten the S&P500 as an investor.
> If his total investments at that time was $100 million, which seems somewhat reasonable given how much he lost in the margin call, investing that in the S&P500 would be worth $4 billion today, which is quite a bit more than the $2.3 billion he's actually worth.
And the parent made a snarky comment about why internet commentators always bring up the s&p 500. And the simple answer is that for most of us ETFs are probably one of the best options for growing wealth. No one actually thinks they will be billionaires by retirement age with ETFs. So if you want to be a billionaire go get richer parents and if that doesn't work, invent Google. Good luck.
If that were true fund managers would be out of the job.
Fund managers do make money, lots of it, enough for their salaries and enough for their company profits. The problem is once you factor those in the index wins out for customers.
The funny thing is that it's the inefficiencies created by index investors that allow the funds to make their money.
Well one reason was because before 1978 you couldn't really invest in the S&P500, unless you had the time to manage a portfolio of 500 stocks. And back then most people laughed at the idea.
It's only very recently that people have started to realize that it's a good bet.
Are you saying that they're wrong? Because they're not - the maths is black and white. People have a tendency to trade in and out of securities because they feel it will give them an edge over the market, but in reality, most people struggle to outperform the market. Often they really are better off just buying and holding an index.
No one who won the lottery invested the money they spent on the ticket. That doesn't mean that "buy lottery tickets instead of investing" is sound financial advice.
This may be true, but also it's one of the most dangerous times to invest in S&P 500: there hasn't been a recession for more than 10 years, which is pretty unique. Of course this is not a problem if somebody really takes a 50 year view.
I’m constantly finding this to be the case when you research the rich and their business moves. Most seem to be elaborate ways to waste a lifetime of attention and energy and not beat an index fund.
He got his first pot of gold from a very decent business, then brought into 2 of the best historic stocks of all times (AAPL and MSFT) at its lowest and held to it longer than most.
> “My thing is I wanted to be able to have free time. To me, having time is the most precious thing.”
Interestingly it's a backward model when compared to people that use time as a resource towards money/success/<your_goal>...
I guess actual freedom indeed requires both free time and available resources (money/skills/knowledge/etc.).
I see many people always filling up their schedules months in advance while I always feel better without the constraint to follow past decisions. Maybe linked to control seeking & risk aversion vs. interest for unexpected opportunities...
Yes. I saw the photos and this was my first question. Mind you the free red fedora they gave away around the time of the public share offering was truly trashy-bad. I suspect anyone with a real fur fedora saw warning signs there...
1/3 of his net worth comes from a single good (almost lucky) investment in his friend's company, which he was an advisor for. That's sort of on the line between investor and entrepreneur.
He's done really well, but it's a bit disingenuous to say that he did all through investing. He started a business that gives him 10 million a year to invest with! Yes, he appears to have taken that and increased it many times over, but it helps to start at a high base level.
I'm pretty sure they made a mistake with the "World Yacht". They linked to a small boat in New York [1] that is used for weddings and other events, which is pretty funny.
I'm almost 100% sure that they were talking about "The World" yacht [2]. I found out about this last year, and I'd be tempted to buy an apartment if I could ever afford it (you need at least $10 million.) The expeditions are amazing [3], as well as the regular lectures and workshops [4].
It's also pretentious, dystopian, and a bit embarrassing. I don't know if those are the sort of people I'd want to spend all my time with, but maybe many of them are just ordinary people who happen to have a lot of money. It would certainly be an interesting place to live.
That's good for wealth preservation and nominal maintenance. But it's almost certainly not going to generate wealth. Buffett is one of the richest people in the world because he manages money for other people (and does it well), not because he bought and held index funds.
Obtaining vast wealth requires doing things which have a multiplier effect well beyond the scale of your labor. That usually requires doing something related to the aggregation or generation of capital. It can't be done solely with your own capital unless you're already wealthy.
Unless you bought Kodak, Enron or Pets.com. You still have to pick the right stocks. For most it's probably better to buy an index fund. I bought Cisco in 1999 and I think it's barely back to that level right now and it will probably go down once this bull market ends.
“Almost never sell” doesnt mean he never sells. Most people read this quite literally. Giving it more weight than the actual investor. This guy by his own admission sells off when is loss 25% or more. So those positions that you mentioned would have been sold off for tax harvesting reasons. He might have acquired a new position in the same stock if he believed in the company and his investment thesis.
If you diversify enough then a tiny amount in Kodak, Enron, and Pets.com isn't going to hurt you. That whole HODLing thing isn't unique, Bitcoin is just a simulation
But that's not what index funds are at all. The S&P 500 re-balances every quarter and stocks are constantly being swapped out.
It's much more likely that if you chose some stock in 1940s and never sold that you would have lost money than made money.
The reason why the S&P 500 looks so good overtime is because the S&P 500 is actively managed. It is effectively crowd-sourced from the very best invest ideas of mutual funds and hedge funds.
It also involves rebalancing the weights of each stock to account for stock splits, dividends, and change in market capitalization or the float number (the amount of shares on the public markets).
> It also involves rebalancing the weights of each stock to account for stock splits,
No.
> dividends,
No.
> and change in market capitalization
No (at least for the changes related to price movements and not share count).
> or the float number (the amount of shares on the public markets).
The last one is the only valid concern. In the end turnover is quite low (a few percentage points per year, including additions/removals and adjustments, if I remember correctly).
Regular dividends are not on that list (only "special" dividends result in adjustments). And market cap changes are only relevant as far as the "change in outstanding shares" is concerned, which is not usually the main driver for market cap changes.
The problems for an index are a little different than an ETF following an index. If you have to allocate capital behind the index, you have to do some more adjustments and the expense ratio is going to reflect that.
In general, here's what I think a good long-term stock selection strategy is: Look at all companies that will benefit from technology disruption and the future and discount the companies that will be hurt.
An example of company that would be helped by future disruption would maybe be Amazon or Tesla. Examples of companies that might be hurt by the future would be Exxon or Phillip Morris or Safeway.
We learn later in the story that Wertheim did in fact demonstrate enterpreneurial brilliance and dogged devotion to his career and was an unimaginably successful buy-and-hold investor. The company he founded, BPI, threw off up to $10M / year in cash that funded his investment portfolio.
That he he was successful not just as an investor, but also as an inventor and entrepreneur, is what's truly amazing.