Digital Wealth

Chapter 14 Tilts and Other Ways to Help Long-Term Performance

“Spend each day trying to be a little wiser than you were when you woke up.”

—Charlie Munger

The stock market is broadly efficient. This means that is not easy to outperform the broader stock market over time after all costs are factored in. Of course, let’s remember that this doesn’t necessarily make the stock market a bad investment. Being average is okay, since historically even average returns have been good. Just by tracking the index many investors have done well, but it does mean that beating the index is a challenge.

However, several strategies beyond basic index investing have been shown to contribute to performance history. Unfortunately, there is no free lunch.

Often, these strategies require a long-term investment horizon and entail greater tax inefficiency or other costs. Sometimes the cost is more in terms of behavioral rigor needed to implement the strategy effectively. Certain strategies are simply hard to follow or have the potential to make you look stupid if they fail, which can particularly be an issue for professional money managers who report actions to their clients periodically. So the question is not does the strategy work but does the strategy work predictably after all costs, including behavioral costs are factored in? Performing this analysis leads to a narrower set of feasible options. Table 14.1 shows this. Ideal strategies both have underlying performance value, but also enhance returns ...