Oh, Those Ladies! March 11, 1998March 25, 2012 So I don’t want to gloat, but did you hear about the Beardstown Ladies? These are the nicest, sweetest old gals, world famous for their market-beating investment club. Big best-seller, translated into lots of languages, sequels . . . how can this not warm your heart? It warmed mine, albeit I doubted that they, or almost anyone, could significantly beat the market over the long run, other than by taking greater-than-market risk. (And they did not strike me as the kind of Ladies who’d do that.) It now turns out, millions of book sales later, that they had a funny way of calculating that market-beating return. Say you or I started the year with $40,000, added $5,000 more from our savings account, and saw our account total $50,000 by year’s end. You or I might say our $45,000 had grown very nicely to $50,000. Not bad for a single year (though most of us have become far too spoiled by this bull market to realize that). What the Ladies apparently were figuring is that they started with $40,000, now it’s $50,000 — that’s a 25% increase for the year. Which it is, except that half the gain came from their own pockets. So when all the figures are recalculated sensibly, it turns out, I believe, that the Ladies did a bit worse than the market, like almost everyone else. No one is suggesting intentional deception. They are sweet little old Ladies, after all, with a sweet little old Publisher that apparently felt no need to check the accuracy of their claim. But it’s rather as if Dolly weren’t a clone after all, just a normal sheep. She might have gained significantly less attention, and would almost surely not have made the Bahhh-Seller List. All of which suggests, as always, that over the long run, most people who take average risk will get average returns. (Those who take above-average risk will like as not get killed — higher risk makes higher return possible, but by no means guarantees it.) And it suggests, as always, that keeping taxes and transaction costs low (and annual expense charges low, if you’re in mutual funds) may be even more important, and certainly easier, than picking a portfolio of market-beating stocks. Not that I don’t try.