Ode to Ben Stein

October 22, 2007

I have met the lawyer, writer, actor and economist Ben Stein a couple of times when we both appeared as guests with on Fox’s “Cavuto on Business”. I was a little star-struck at first, but after a few minutes of chatting in the green room, I realized that he was closer to my investment philosophy than that of the other guests. While they were salivating over individual stocks, he and I were happy to talk about boring old exchange-traded funds based on the value of major indices.

I thought about Mr. Stein recently after receiving a few calls on the radio show from investors who were ecstatic about one stock or another. I know that this is not a popular position, but frankly, I am not that intrigued by individual company stories. Yes, we know that your brother in-law’s cousin was the first guy to buy Microsoft, but in twenty years of doing this, I have rarely encountered any retail investor who consistently beat the stock market index with a portfolio of individual holdings. It’s worth mentioning that rarely does an investor regale you with the story of his most embarrassing losers; rather he seems only to talk about the winners.

I acknowledge that are some incredibly brilliant people with resources far greater than mine who are truly gifted stock pickers. But given that 90% of a retail investor’s return is derived from the top-line asset allocation decision (i.e. the choice of stocks, bonds, commodities and cash), doesn’t it make more sense on concentrating on that part of the analysis than to hoist that dart towards a board filled with individual stocks? Ben Stein recently underscored this concept in the New York Times (“Sound Investing and Peaceful Sleep” October 14, 2007) when he stated clearly: “Avoid individual stocks. The data on this is as clear as a bell, and has been compiled by high-end thinkers ranging from Nobel laureates to the best friend the ordinary investor has ever had, John C. Bogle of Vanguard. Basically, you and I cannot pick stocks.”

Mr. Stein then points out what I have been saying for some time---that it has never been better to be a small investor! The advent of open-ended, no load mutual funds, index funds and exchange-traded funds have opened up opportunities that have never been possible in the past. You can now select assets to create a well-diversified portfolio without paying boatloads of money or worrying about company-specific risks. “The evidence that this form of investment does better over long periods than trying to pick stocks is simply staggering…Just as you might stop to gamble $300 as you pass by the craps table at the Mirage on your way back from the meeting to your room, feel free to take a flier on a few stocks just for laughs. But keep it limited.”

It’s worth noting that I’ve been around a lot of talented traders in my time. It is interesting to note that almost every one of them, ranging in ages has abandoned individual stocks in favor of exchange-traded funds. When they want a little “action” on a particular stock, they dabble with small amounts in their retirement accounts. If it’s good enough for these stars and Ben Stein, maybe you should try it too!