Fast forward to 2014, and again, the S&P 500 index was up a compelling 13.69% including dividends. BarclayHedge (no affiliation with Barclay's Bank) research shows that Hedge Funds also lagged the S&P 500 in 2014 with only a 2.88% gain. That's not to say all Hedge Funds did poorly, just on the aggregate, the average Hedge Fund under performed passive investing by a long shot. I think it should be stated that by nature Hedge Funds are "hedged" to protect the investor when the market depreciates, so you wouldn't expect some of them to have banner years in an uptrend in the markets.
Nevertheless, statistics show since the crash of 2008-2009, index investing has handily beaten their more expensive competitors, the Hedge Fund. It is also common knowledge in investing circles that over the long term, actively managed mutual funds tend to lag the primary American benchmark, the S&P 500, the majority of the time. There are instances when various sector mutual funds and ETFs outperform the S&P 500. As an example, for the past three years, biotechnology funds and ETFs have been very good to investors. iShares Nasdaq Biotechnology ETF (IBB) gained 177% in the past three years, and is up almost 30% year-to-date in a flat year for the S&P 500.
However, hot sectors like biotechnology tend to be outliers. There's also the dilemma of when to get in and when to get out. Market and sector timing is an inexact science for the novice and professional alike. It's because most actively managed portfolios tend to lag the market, I liquidated all if my individual equity positions at the end of 2013 after a less than stellar performance, and have gone into well diversified index ETFs. In 2013, I didn't do as poorly as the hedge funds, but I left more money on the table than I wanted to in a concentrated portfolio of primarily small to mid cap securities.
Small to mid cap stocks tend to be very volatile. You must have a cast iron stomach to roll with the punches in a high beta tape. I bought Facebook (FB) after it got cut in half at $18, and this resulted in a four bagger in a little less than two years. Somewhat lucky, but a good call nonetheless. However, there were too many others that didn't fare so well, primarily in the smartphone infrastructure and component arena. Although this is a very exciting time in which we live in regards to technology companies, the game changing science in many of these equities becomes obsolete in a matter of months.
I prefer to buy and hold my investments to minimize trading costs and capital gains taxes. Investing in some of the smaller entities that power our iPhones and Android devices seemed like a prudent idea for a small period of time, but didn't pan out the way that I planned. I had to trade too much to keep up with the ever changing computer science. This, coupled with the undeniable statistics that passive investing in a well diversified index fund or ETF is better for your bottom line, caused me to alter my investment thesis.
Back in the late 1990's, I read "Winning the Loser's Game" by Charles Ellis, which is considered the bible for index investors. At that juncture, I was on a hot streak in NASDAQ stocks like Cisco (CSCO) which needs no introduction if you were investing at that time. I fully understood and appreciated the concept Mr. Ellis discussed in the book, but my personal preference was with Robert Hagstrom and his best seller "The Warren Buffett Way". Hagstrom's contention that a concentrated portfolio is the optimal way to invest if you follow the wisdom of The Oracle of Omaha. I followed the advice of Mr. Buffett, and did well.
Times have changed. With the advent of High Frequency Trading, and computerized Web bots that scour the Internet at warp speed assimilating information, the teachings of Benjamin Graham and David Dodd seem outdated in today's world. Although I believe the concepts of "Security Analysis" are still intact, Warren Buffett, the most famous pupil of Value Investing, suggests that individuals use a plain old vanilla index fund. That's a good enough endorsement for me.
So where does that leave this blog? After a sixteen month hiatus, I have decided to continue writing articles about ETFs and individual securities. Although 95% of my equity investment allocation is in either S&P 500 index ETFs, and to a lesser degree the Vanguard FTSE Europe ETF (VGK), I'm still sitting on a small cash position. There are always alpha opportunities to be had in sector ETFs like The Pure Cyber Security ETF (HACK), which has outperformed the market this year, and individual stocks like Netflix (NFLX) and Apple (AAPL) which have also done well. I am not planning on buying or writing about any of these at this point, but they are examples of what is to come going forward.