Few manage to beat the stock market

The Beardstown Ladies were an investment club who purported to beat the best on Wall Street. Alas, it was all a mistake.

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The Beardstown Ladies’ record was good, but not that good! Their international fame was based largely on a data-entry error.

The Beardstown Ladies were an investment club made up of 16 elderly women from Beardstown, Illinois. They achieved international fame for beating most experts on Wall Street. From 1983, when the club was founded, to 1993, they boasted an average annual return of 23.4 per cent on their portfolio.

What intrigued the public the most was that these were ‘ordinary’ women. More than half were already retired when they joined the club, and most didn’t know a smidgen about investing in the stock market. A favourite comment from the Ladies was that they thought a portfolio was a briefcase.

So imagine these retired, plain Janes from a small farming community whipping the top dogs on Wall Street. The resounding message was that if they could do it, so could you. After achieving a 59.5 per cent return in 1991—more than 10 times the performance of the S&P 500 that year—the Beardstown Ladies became overnight celebrities.

They appeared on numerous TV shows, had dozens of articles in newspapers and newsletters written about them, were the subject of a video called Cookin’ Up Profits on Wall Street, and in 1994, they wrote a book which sold 800,000 copies: The Beardstown Ladies’ Common-Sense Investment Guide: How We Beat the Stock Market—And How You Can Too.

They mistakenly overstated their returns

In March 1998, an audit by PricewaterhouseCoopers showed that the Beardstown Ladies had overstated their performance, and had actually under-performed the market. They achieved an average annual return of 9.1 per cent, not 23.4 per cent. That’s because an incorrect data-entry error caused them to count the average annual return for 1991 and 1992 as their performance for the entire decade (1983-1993).

The Beardstown Ladies achieved the prominence they did because many investors want to believe consistent outperformance is possible. They want to believe that financial gurus exist—that there are experts who can see the future and who can help them capitalize on it. They’re convinced that market trends may be predicted and there is a pattern which can be exploited—if only someone could see it.

Often in their quest to continually outperform the market, investors are drawn to the latest gurus and the stock-picking systems they advocate. But it’s not only wizards that people chase. Just look at the mutual fund industry. Top performing fund managers often turn out to be wonders for just a limited time period. What’s more, their superior returns may sometimes have less to do with financial brilliance and prescience, than just so happening to be in the right place at the right time. Check on their performance a year or two later and see if they’re still at the head of their class. Chances are they’ll eventually be toppled by another star performer.

If you accept that there’s no magical formula—whether it’s rational or otherwise—for consistently outperforming the market, then you’re probably a step ahead of those who are attracted to the latest stock-picking fad. A thorough reading of investment history tends to support the view that the path to investment success is rather boring. It consists of diversification, asset allocation, emphasizing quality and investing for the long term.

At The Investment Reporter, we don’t pretend to see the future. Our central approach—choosing and holding high-quality stocks in different sectors for the long term—is one that has paid off for many of our long-time subscribers. Our goal, then, is to help you maintain the discipline needed to achieve success over the long run if not the short.

This is an edited version of an article that was originally published for subscribers in the December 4, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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