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Wall Street Journal Slams Clubs
Some of you might have noted a recent Wall Street Journal article (November 4, 1998) that made a bit of a commotion, announcing that the "majority of investing clubs have failed to beat the market." Let's review this a bit.
First off, know that according to the study cited, 60% of the 166 investment clubs studied have not outperformed the S&P 500. This means that 40% have succeeded in topping that index. A Fool might ask, "How does this compare with mutual funds? How do living rooms full of average Americans do against highly paid MBAs who manage money for a living?" A great question. Well, as we love to point out, the vast majority of mutual funds (we're talking roughly 90%, not 51%) don't beat the market. So the 40% of clubs who do isn't such a shoddy showing.
Here's something else to think about. Especially due to the fact the number of investment clubs has been increasing steadily in the last few years, many of those examined in the study are likely to have been new clubs. Any young club is not likely to outperform the S&P 500 right off the bat. Heck, many of these people are still learning what the S&P 500 is (and our jester caps are off to them for deciding to learn about investing). Once a club has been around for a year or a few years, and it's operating like a well-oiled machine, we might expect it to be performing well. Until then, however, the most we might expect is a market-matching return. If you assume that the clubs are going to match the S&P 500, the easiest way to do that would be to invest in an S&P 500 index fund. If they do that, however, because such funds take a tiny percentage off the top in fees, they're destined to underperform the S&P 500 -- but only technically, and by only a fraction of a percent.
It's also instructive to think of the alternatives. If these club members weren't learning about investing in clubs, what would they be doing? For many, the thought of learning and investing on their own would be so daunting that they'd either (a) do nothing (in which case a sub-market return would soundly beat a return of nothing) or (b) leave their finances in the hands of a Wise professional (who more often than not will have even more trouble beating the market). Sure, we might think that these folks' best alternative is simply to become Foolish, investing in index funds and then the Foolish Four before moving on to smaller companies. But remember -- as shocking as it might be -- not everyone has heard of the Motley Fool yet!
-- Anonymous, January 05, 1999