152 The Business of Value InvestingThere are many advantages to making a few sound, sizable
investments and just sitting back and waiting:- You pay fewer brokers ’ commissions.
- You ’ ll hear a lot less nonsense from everybody and anybody
eager to give you sales pitches. - And if your investments work, the government will let you
keep more of your profits every year as they compound over
and over again.
A simple mathematical example illustrates that last point. If
you buy something that compounds at 15 percent per annum
for 30 years, and you pay a 35 percent tax at the end of those 30
years, after taxes you keep about 13.3 percent of that compound
rate. In contrast, if you bought the same investment and had to pay
35 percent in taxes each year on the 15 percent you earned, your
net return would be about 9.75 percent per year compounded. By
doing nothing, you earned a spread of more than 3 percent. How
signifi cant is 3 percent? Mutual fund legend John Bogle discovered
that 85 percent of mutual funds lag the Standard & Poor ’ s (S & P)
500 Index after all fees and expenses. Bogle also found that only
.5 percent of all mutual funds beat the indices by more than 3 per-
cent. How many disciplines pay such an unbelievable premium to
sit still?
It ’ s easy to speak of the benefi ts of patience and long - term
investing; but as is characteristic of many investing philosophies,
it ’ s easier said than done when it comes to patience. Most investors
have become trained to have their minds think dependently, not
independently, when it comes to the stock market. They operate
under the assumption that the market realizes their existence when
in fact the market exists at the mercy of the investor. The stock mar-
ket is nothing more than a voting machine on the price of securi-
ties. Each day security prices are determined by the available supply
of buyers and sellers in the market. Value investors understand thisCH008.indd 152CH008.indd 152 9/2/09 11:48:54 AM9/2/09 11:48:54 AM