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Collection: Guy Spier - #9 'Index Investing'



Hi, so here at Google there is a strong community of people who believe in passive investing indexes. And so you said on several occasions, don't optimize, don't optimize, so I wonder like, why not just do that, like, invest in the S&P index?


I think it's a great idea. And you know, John Bogle is a – So the question is, why not just –

EMCEE 00:25

Yeah, mic's working so you don't have to repeat.


I actually have a follow-up to this as well. So yesterday – so I believe you, actually your fund, Aquamarine Fund, is beating the S&P index since the beginning.

But yesterday somebody showed me some interesting data that was some funds that are supposed to be value investing funds such as, let's say, the Sequoia Fund and Tweedy Browne and not that, but even like Warren Buffett and Berkshire, I think they're actually lagging behind the S&P index.

And just out of probability, there is always going to be someone who's going to beat the index, right? So I guess I wonder like how do you know that you're not that random person and that –




– it's bound to happen.

And how do you know you're – (Laughter) – How do you know you're going to keep actually – it seems like an awful lot of effort to do what you're doing and in the end, do you know that you're going to be above the index after ten years from now? (Laughter)


So I could answer that very easily and just say, no. (Laughter)

But – Look, indexing is a great idea. The index is a really hard sort of opponent to beat because it doesn't pay transaction costs. I would say that if you do the index and you know, John Bogle is a really known well guy and there's Vanguard indexes and they've done a service to investors.

And I was telling somebody over lunch today that to sort of say, to look at the index, as a baseline, is a great place to start. But what I would say is that if you're going to index, pick the right index.

So, if you take the S&P during the financial bubble of 2009, it was very skewed by some very overvalued companies and there was this sort of market cap weighted index. So the more these companies became overvalued, the more they had to be in the index. And so you were kind of investing in an index that was skewed towards the opposite of value investing going into the biggest companies.

So I would want to pick an index that doesn't have those skews in it, like the Dow Jones index doesn't have those skews. So I'd want to spend a little bit of time, and probably everybody in this room is capable to understand how the index is constructed, to know that it's the right index to use. So there's absolutely no question that is a smart way to do things and it's a good baseline for even people who are doing other things.

So, you know, to the second part of your question, how do I – you know, we all know that Nassim, it's from Nassim Taleb's book, but you take, you take a bunch of individuals, 1,000 individuals, have them all flips coins, you know and probabilistically after a number of rounds of somebody who's just flipped heads all the way through and then you interview them.

And they really did believe, that they really believe that, "Oh, I knew it. I knew it." They feel like they have a lucky hand – (Laughter) – and you know, it's really powerful stuff.

And, you know, so I don't know. (Laughter) I have to say that, I don't know.

And – So there's this amazing article written by Warren Buffett called, "The Superinvestors of Graham-and-Doddsville." I highly recommend it. I'm sure it's on the internet. I'm sure it's sitting in your servers and multiple places, but – replicated across the world – but he tried to answer that question and he just said, look, what if you know, the monkeys flipping coins, all studied at Columbia Business School under the sky called Ben Graham, and they all talk about buying things at a discount to intrinsic value. Then at some point you might have to ask whether this is not just flipping coins.

And so I think that the probability right now that Berkshire Hathaway, fourth or fifth largest company by market cap in the United States is a fluke is getting pretty low. So clearly there are some ways that some people can act in the world to beat those indices which are incredibly hard to beat.

I'd very much like to be one of those people and I have some huge handicaps because I'm not as smart as Warren Buffett and I don't live in Omaha. I think that I'm much better off today because I figure out those weaknesses and I'm working to compensate for them the way I think Warren Buffett naturally did.

So I actually think that Warren Buffett, everything that I'm talking about, I'm excited because I feel like I've uncovered some really valuable things that the world isn't talking about. I think Warren Buffet understands them. He just has, he gets more fun out of investing than talking about these things.

But – And if you go to the Berkshire meeting, and I invite you all to join me at the south door of the Omaha Convention Center at 5:30 AM on the Saturday morning of the Berkshire meeting, I'll be there, a guy called Alex [Inaudible] will be there, Mohnish Pabrai will be there, a whole bunch of other people and it's a great example of just get around people who are better than you and you can only improve.

But they say every year that if for a long enough period of time, they don't outperform the indices then, you know, then there's questions that have to be raised. And, you know, I think that they've hit a five-year period where they didn't outperform but then they started outperforming again.

And I think that all of their shareholders would not have wanted to remove the management and have somebody else run it. And it's a question that – it's something that I tell my shareholders every time.



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