I am grateful to Jane Bryant Quinn for forwarding this gem:

STOCKHOLM (Reuters) – A yucca plant is the latest investor on the Stockholm Stock exchange, issuing buy and sell orders on the exchange’s 16 most traded shares.

Swedish artist Ola Pehrson has attached electrodes to the plant’s leaves and, through a sensor, can feel the plant’s growth with movements linked to a computer program tracking the 16 most active stocks. When the yucca’s stock recommendations perform better than the bourse’s general index, it is given water and light. If the plant fails to deliver profits, it stays dry and in the dark. The yucca is part of an exhibition by seven Swedish artists in Stockholm.

But what if you don’t have a yucca plant?

John Wilkerson: “I would like to know by how many percentage points my fund needs to outperform the comparable low-expense funds in order to equal or beat them. Like so many investors, I hope my selected fund will outperform even over time. While this is a questionable assumption, it would still be useful and interesting to have this calculation.”

Good question. If — say — your fund has 4% in costs each year and mine has 1%, then your fund has to somehow make up that 3% difference. So if my fund matches “the market” before considering costs, your fund has to BEAT the market by 3% each year merely to equal mine.

Which is harder than it sounds, because although 3% is “a small number” when it comes to most things — our swimming pool has 3% more water in it after a good rain (who cares?) — it is a HUGE thing when it comes to investments. Over time, investments in “the market” have been expected to grow, between dividends and appreciation, at 9% a year. These days, many of us expect a lot more, but I’m not sure that’s realistic. Anyway, to make the math simple, stick with that 9%. For YOUR fund to grow 3% faster is for it to grow one-third faster. Your guy has to run one-third faster just to keep up with my guy.

Interestingly, the stock market investor who’s run the fastest over the years, Warren Buffett, owes his extraordinary success in no small part to his practice of minimizing taxes. (He also kept his costs ridiculously low — for the longest time, headquarters had a total of six people, including the boss. And those headquarters are not a penthouse suite of offices in Manhattan, they’re a modest affair in … Omaha.) As I have written elsewhere, if he had paid long-term capital gains tax on the growth of his fortune each year, rather than letting it compound year after year, he would have cut his long-term compounded growth from 26% or so to more like 18%. Instead of having $40 billion or whatever he’s worth by now (sorry, no time to look it up), he’d have barely $4 or 5 billion.

Costs make a huge difference. As Buffett’s example proves, a few rare individuals CAN outpace the market by a wide margin and for a long time. But high costs and high turnover are rarely the way they do it.

Which leads me once again to invite you to visit the new Personal Fund site, for those of you who haven’t. We just got a really nice endorsement from the Consumer Federation of America (“invaluable”).

 

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