The Importance of Efficency In Investing

We believe one big difference between more successful investors and less successful investors is the efficiency with which they manage their investment portfolios.

By efficiency, we refer to not paying for services which add no value to, or actually subtract value from, the investment process. The most widespread source of inefficiency in investing which we see today is in the ownership of mutual funds. In 1997, the average domestic mutual fund underperformed the Standard & Poor's 500 Stock Index by 9%.

Since the S&P 500 returned 33%, this still left the average mutual fund owner with a net return of 24%, and so he was not apt to feel abused. 9% of the value of all of one's common stock investments, however, was an extraordinary price to pay to let a mutual fund hold his stock certificates for just one year.

Furthermore, common stocks should not be expected to return 33% per year every year. The long-term average has been nearer 12% per year.

If a mutual fund earns 12%, and we sacrifice 9% to let it hold our common stocks for us, then we net only 3%. In such a case, we are better off putting our money in a bank.