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done worse than the index, if he had put all his eggs in the “buy-and-forget” Fortune 10. (Better to forget than buy.) And indexing does avoid the management fees and other costs that afflict most mutual funds. But timing really matters. Markets are efficient much of the time, they’re efficient in the long run, but they’re not efficient all of the time. As Ben Graham said, in a now celebrated passage:

The market is not a weighing machine . . . [but rather] a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.30 Measured in real dollars, stocks did not return to their 1929 level until 1958, and did not return to their 1966 level until 1992.31 And indexers, far from escaping the Fortune 10, would have owned eight of them – all but the two foreign stocks, Nortel (which was in the index until sometime in 2001) and Nokia – and lots more like those eight.

Underlying the insistence on indexing is an often casual assumption or hope that the irrationality – the overconfidence, trend chasing and the like – operate only during the easily discerned “market frenzies.” Or perhaps that these emotional biases might be self-cancelling, leaving the smart money in control.32 Alas, reality, as former Treasury Secretary Robert Rubin is fond of saying, is always messier than models.33 The smart money was obviously overwhelmed in the late ‘90s, but then

again the same was true of the conglomerates of the 1960s, the so-called nifty-fifty of the 1970s, the “energy darlings” of the late 1970s, the

southwest real-estate bubble of the 1980s, and . . . .34 This sort of wishful thinking seduces the public to have a lazy confidence that one need not

bother with the arduous task of patient, thoughtful selection35

  • and has encouraged fund managers to cater to those

impulses. John Maynard Keynes, perhaps the earliest value investor of them all, summed it up


To suppose that safety-first consists in having a small gamble in a large number of different directions . . .as compared with a substantial stake in a company where one’s information is adequate, strikes me as a travesty of investment policy.36


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