Most investors aren’t seeking to beat the market.

Investors are often described as being greedy and out to make a killing in the market. I don’t see it. Most investors I have spoken with (I have spoken with tens of thousands on discussion boards) are intimidated by stock investing. The last thing on their mind is making a killing. Their hope is that they will manage to do okay, to at least come close enough to matching market returns to be able to finance a decent middle-class retirement.

I believe that this is why John Bogle’s investing advice has become so popular. Bogle argues that investors don’t need to beat the market. That message is music to the ears of the majority of middle-class investors. They don’t want to try to beat the market and Bogle is telling them that that is just fine, that there is no need for them to do so.

Bogle is wrong. Everyone should be trying to beat the market. Bogle is telling people what they want to hear. He is offering flattery in the place of level-headed investing advice (whether he personally realizes this or not). The proper response to the problem of middle-class investors feeling intimidated by the market is not to tell them that they do not need to try to beat it but to tell them what they need to do to form realistic expectations of being able to beat it.

Bogle got a lot right. He is one of my heroes. But he took a terribly wrong path when he came up with the idea that there is no need to aim to beat the market. That one’s a loser. I believe that we will in years to come see just how terrible the consequences are that follow from persuading large numbers of investors that they should not be trying to beat the market.

It is a big mistake not to aim to beat the market.

We all should aim high because we might miss the mark of the thing we aim for and need to settle for something a bit worse.

Bogle became popular during the most insane bull market in the history of the United States. That’s why his argument that it is not necessary to aim to beat the market has come to sound reasonable to so many. In the 1990s, stocks were often paying returns of 20 percent. Aiming for returns greater than 20 percent is greedy. So many perfectly reasonable middle-class investors came to see in Bogle’s advice a rejection of greed. Bogle was saying that the normal U.S. market return of 6.5 percent real is plenty good enough and that sounded reasonable and right to a large number of generally reasonable and right middle–class investors.

Where Bogle and his followers go wrong is in thinking that the conditions that applied during the most out-of-control bull in history are always going to remain in place. The Stock-Return Predictor (see tab at left) tells us that the most likely return over the next 10 years (this article was posted in November 2007) is less than 1 percent real. In those circumstances, it’s not greedy to want to beat the market. In those circumstances, you must beat the market if you are to have any reasonable hope of meeting your long-term financial goals.

Bogle’s approach to investing (conventional indexing) is a victim of the bull market insanity. It is true that matching the market’s normal return of 6.5 percent is just fine. But that return does not apply at times like today. So we need to learn what it takes to beat the market if we are to remain stock investors for the long run.

Advice urging us not even to try to beat the market is dangerous.

It is unnatural to settle for being average. It is unnatural and it is unhealthy.

Can you imagine the damage that would be done if doctors were to begin telling us that we should all aim for a level of health no better than that enjoyed by the average American? An even greater number of us would be trying to suck in our guts when the Cool Girls passed by our Snoopy blankets during our visits to the seashore. Can you imagine the damage that would be done if teachers were to begin telling our children that they should aim to learn no more than the average student? An even grater numbers of us would not be spells or writes so goot. Can you imagine the damage that would be done if personal finance advisors were to begin telling us that we should aim to save no more than the average American saves? The saving rate would soon go negative. I mean, it would go even more negative than it is now!

Aiming for purgatory is not such a hot idea. We are fallen creatures. We have aspirations to take a sad song and make it better. But we are weak. Give us an excuse to let ourselves down, and, more often than not, we will jump at it. Investing advisors who advise us that we should not even try to beat the market give us an excuse to let ourselves down. They condemn us to weak thinking, weak efforts, and weak results.

You can beat the market. You must beat the market. If you are not willing even to try, you have no business investing in stocks. If you are not willing even to try to learn the game, you shouldn’t be playing it with real money. That’s my sincere take re this one.

You can beat the market without putting a great deal of effort into the task.

What intimidates people is that they see experts using all sorts of big words and referring to all sorts of complicated theories and pointing to all sorts of number-filled tables and they feel that they cannot keep up. Most people have jobs and families and friends and weekend plans that do not involve studying investing guides. Given that there are a good number of experts saying that it is not possible to beat the market, they throw up their hands at the idea of even giving it a good shot.

When I was in college, I had an English professor who told me that he liked some of the comments I made in a paper on Shakespeare’s Anthony and Cleopatra and asked me why I didn’t speak up more in class. I told him that a lot of the other students appeared to be able to make reference to a lot more books and plays than I could and that I generally thought it better to keep my mouth shut. He told me that a good number of those others were frauds and fakes and phonies and that the real stuff was the stuff coming from people like myself (not just me, obviously, but a number of students who were not able to put forward lots of impressive-sounding jizz-jazz but who were able to offer sincere real-person takes on the plays).

Please let me make use of this opportunity to take what I learned from that guy and pass it along to you. Most of the people who pretend to be investing experts are frauds and fakes and phonies. The real stuff is the stuff coming from people like you.

You have what it takes to beat the market. Do you want to know what it takes? It takes common sense. When stocks are selling at high prices, you want to lower your stock allocation a bit. When stocks are selling at low prices, you want to increase your stock allocation a bit. Presto! Doing this permits you to beat the market! How remarkable!

Yes, it works. It has always worked. Check out the other investing articles at this site for the details. The bottom line is that it has always worked. It has always worked because it always must work. Anyone who says different is a fraud, a phony, and a fake. Yes, that goes for Bogle. He’s smart as the dickens on a whole bunch of other issues, to be sure. But when he says that it is not possible for us to beat the market, he says something that defies common sense. Don’t listen!

The idea that you cannot beat the market by changing your stock allocation in response to wild price swings does not make sense. Go with what makes sense, and you’ll do fine.

Fail to beat the market and you may squander years of good returns.

There’s a line in the article entitled “Community Comments on Using Stock Data to Diminish Retirement Risks” that gives me chills (the bad kind). A community member named “Mikey” tells us: “Some safe withdrawal rate discussions are being held by people who are already in the belly of the whale but just don’t know it yet.” That’s a hard saying. That’s a true saying. That’s a saying that we all need to think through a bit until we come to an understanding of how these unfortunate souls got themselves into their current predicament.

You turn 30 in 1980 and begin investing in stocks. Over the next 20 years, you enjoy the most bonkersville bull market ever experienced in the history of the United States. You need to accumulate enough wealth to be able to withdrawal $40,000 each year to be able to retire, and assume that it is going to be hard to pull off by age 65. But no! Your returns for those 20 years are so strong that you meet your goal at age 50. It’s early retirement for you! Some folks get all the luck!

Except when they don’t. The historical stock-return data shows that those who relied on the Old School safe-withdrawal-rate studies to plan retirements beginning in 2000 have only a 30 percent chance of seeing their retirements survive 30 years. Some luck! All that the great bull did for many of us was to so puff up our pride that we handed in our resignations many years sooner than we could afford to do so, condemning ourselves to decades of fear and defensiveness and bad investing returns and hard, tightfisted living.

It didn’t have to turn out that way for those unfortunate early retirees and it doesn’t have to turn out that way for you. What did they do wrong? They bought into the idea that they couldn’t beat the market even when it got to the absurd price levels it got to in the late 1990s. Anyone can beat the market at those prices; all you need to do is take some money off the table until sanity returns. But those retirees were told so often that they couldn’t beat the market and that it was a mistake even to try that they turned what should have been a wonderful gift (the huge bull market) into something truly painful (a no-fun busted retirement).

Don’t you do the same. You can beat the market by noticing when the market goes nuts and electing to stay sane.

Run through a few scenarios on The Investor’s Scenario Surfer. Notice what usually happens when you have had a string of good returns and then decide to stubbornly stick to the high stock allocation that brought you those returns no matter how high price levels go. You’ll get the idea as to what works in the real world and what does not.

Fail to beat the market and you may miss out on huge opportunities to win financial freedom early in life.

Young people are generally more willing to acknowledge the dangers of investing in overvalued stocks than are investors who earned oversized returns during the years when the wheels went off the rails. There’s a logic mistake that I have seen young people make on numerous occasions, however. They note that it is unlikely that stocks will be providing strong returns for some time and conclude from this that they have been put at a disadvantage as a result.

No! It’s just the other way around!

If you were young in the mid-1990s, you indeed were put at a disadvantage. Stock valuations had gone so high that there was little realistic hope that the best long-term asset class for the middle-class investor would be providing returns that would beat those provided by far safer asset classes. We’re now 10 years on from those days! Stock prices have improved a bit from where they were at the top of the bubble and each year we get closer to the day when stocks will once again offer those juicy long-term returns that have permitted so many middle-class investors of the past to win financial freedom early in life indeed. We’re not there. But we’re getting there. That’s exciting.

It’s exciting for all of us. It’s doubly exciting for the young investor, the investor best positioned to take advantage of the low prices that will be available after The Big Price Drop. Young investors who are convinced that it’s not possible to beat the market are walking around with sad faces, singing a song of woe because it is their fate to be acquiring assets to invest at a time when the likely long-term returns are so low. Those who know that they can and must beat the market are making plans to do just that.

Stock prices are in all likelihood going to go far below fair value in days to come. I challenge you to take a look at what The Stock-Return Predictor (see “Return Predictor” tab) tells us about the long-term returns available at times of low valuations and tell us that you cannot figure out how it is possible to beat the market!

Play with the Scenario Surfer some more. Which scenarios give the best long-term results, those with high-level prices, mid-level prices, or low-level prices? The answer is — those with low-level prices. Guess what sort of price environment we very much appear to be heading into in days to come? Take heart, young investor with a desire and knowledge to beat the market!

Fail to beat the market and you may end up giving up on stocks altogether.

Lots of people give up on stocks. I think it’s unfortunate. I think stocks are a wonderful asset class. I think we should be asking ourselves what causes people to give up on stocks.

It’s not paying attention to valuations. It’s ignoring valuations. We must put an end to this nonsense! I don’t mean tomorrow, I mean today! Now! Do it, friend! Don’t talk about it, do it!

There are only a few times in history when stocks have distributed bone-crushing returns to those heavily invested in them. There is one thing that each of those times had in common — they were all times of high prices. Warn people about the risks of stock investing at times of high prices, and you all but do away with the possibility of those people suffering bone-crushing losses.

So why don’t we do just that? It’s because too many of us have bought into the idea that we cannot beat the market. To believe that you cannot beat the market is to believe that applying intelligence to investing decisions cannot provide a payoff. Come to believe that applying intelligence to investing cannot provide a payoff, and you come to be a mindless investor.

It is mindless investors who end up giving up on stocks altogether. They didn’t start out mindless. They became mindless by hearing too much of the mindless advice we hear from people trying to persuade us that it’s not possible to beat the market.

Here’s Marshall Crenshaw’s take (from the song entitled “Hold It!” on the Field Day album):

And whenever somebody tells me
That the good times are all through,
I look them straight in the eye and I tell them:
“Hey! I’m sure surely glad that I’m not you!”

John Bogle is smart. Marshall Crenshaw is smarter.

Aim to beat the market and your confidence in buy-and-hold will grow dramatically.

It works the other way around too. Accept that you can and must beat the market and your confidence in your ability to invest successfully grows and grows and grows.

Why? Because investing to beat the market makes sense. In all other life activities, we aim to do better than average. To play it differently with stock investing requires us to turn off our brains. Not good. Leave your brain turned on, and you will become ever more confident in your investing skills over time instead of becoming ever more defensive over them and uncertain about them.

Please take a look at the article entitled “Investing Discussion Boards Ban Honest Posting on Valuations!” (see the “Banned at Motley Fool!” tab). A comment that you will see made over and over again about the “leaders” of the Vanguard Diehards board is that they are defensive and mindless and hostile and abusive in their efforts to block discussions of what the historical data shows us regarding the effects of valuations. Why? Why are the “leaders” of this board (I do not think this is so of many of the non-leader participants) so darn dogmatic and just plain mean-spirited?

They are dogmatic because they are too smart not to see that their key investing ideas do not stand up to informed scrutiny. They should abandon those ideas! For whatever reasons (there are many), they do not feel comfortable doing that. They pay a big price for failing to do so. Each year, we all gain experience investing. Those who are open-minded learn and learn and learn. Those who have become slaves to idiotic dogmas do not.

You will become a more confident investor over time if you follow reasonable investing strategies. Strategies rooted in the idea that you cannot beat the market are not reasonable. They are holding you back. Trash ‘em.

Beat the market and your accumulated wealth will grow faster than you thought possible.

Enough words. Please go back to the Scenario Surfer. Develop a strategy that involves increasing your stock allocation when prices are good and lowering your stock allocation when prices are bad. Compare the results obtained at the end of 30 years with the results obtained through rebalancing (the argument for rebalancing is that it is not possible to beat the market by adopting valuation-informed stock allocations).

The proof is in the pudding. The numbers tell the story. Either rebalancing makes sense or the idea of beating the market by adjusting allocations in response to changes in valuation levels makes sense. It’s one or the other. The results I have obtained from working the Scenario Surfer tell me that I can and must aim to beat the market. After seeing the numbers generated by this calculator, I would not ever again give serious thought to investing in stocks without trying to beat the market.

How about you?