I published The Coffeehouse Investor book in 1998 after spending 13 years working for a major Wall Street firm. It became obvious to me that an investment story very different from Wall Street’s traditional story needed to be told.

Ten years ago, I revised and expanded the book and included this in the preface, “Now, ten years later, after reflecting on the profound impact The Coffeehouse Investor has had on people’s lives during a period of immense global turmoil and market volatility, it is time to reestablish these lifelong principles as fundamental to building wealth, ignoring Wall Street, and getting on with your life.”

Twenty years later, the portfolio is still helping investors build wealth, ignore Wall Street, and get on with their lives. Proud to be part of Forbes portfolio list resonating with folks across the country.

A quick read-through of any financial journal serves as a reminder of the unfolding of business at breakneck speed around the world.

Artificial intelligence, Blockchain technology, Cloud computing, Remote delivery services; for many investors, it is a daunting challenge to keep up with this dynamism, and then to integrate it within portfolios throughout a lifetime of investing. And so, they turn to experts – Wall Street authorities whose job it is to guide investors into the top-performing stocks, industries, and trends.

But do “experts” really exist, and if so, how should we rely on them for portfolio advice?

This question is especially timely considering the current portfolio performance of legendary bond “expert” Bill Gross.

For many years, Mr. Gross was Wall Street’s acknowledged bond “expert” heading up Pimco’s Total Return Bond Fund, the world’s largest fixed-income fund.

Following a contentious split with Pimco, Mr. Gross switched firms to manage Janus’ Unconstrained Bond Fund (JUCIX). Recently, Mr. Gross positioned this fund to take advantage of the almost certain rate increase in German bonds, especially in comparison to the already higher rates paid by Italian fixed income investments.

Unfortunately, with chaos unfolding throughout the Italian political system, investors began fleeing Italian bonds in favor of the more secure German funds. The result? Janus Unconstrained bond fund plummeted over 3% in one day and is now dead last in year-to-date performance for its Morningstar category.

Mr. Gross’ bad luck reminds us of another “expert” whose stellar market calls experienced a similar fate.

Infamous Bill Miller

For much of the previous decade, Wall Street’s favorite stock-picking guru was Bill Miller. His Legg Mason Value Trust’s (LGVAX) beat the S&P 500 index for 15 consecutive years from 1991 through 2005. But his streak ended abruptly in 2006, and over the next five and a half years, the fund he managed lost 36% while the S&P 500 gained 13%.

Investors holding positions in LGVAX were faced with the question, “Do I stay the course with what I own, or do I switch into another fund with hopes for a better outcome down the road?”

The problem with searching out “experts” and then attaching a portfolio’s performance to their insights, is that one starts to rely on tenuous external forces to reach lifetime goals, instead of turning within and focusing on financial planning decisions that actually matter in the larger context of reaching one’s goals.

If you missed our latest newsletter, here are a few highlights …

Are You Adequately Insured? – Is it time to review your own insurance policies? Soundmark Advisor, James Nevers discusses the gaps and misconceptions of homeowners and umbrella insurance policies in his blog.

Connections Matter – It’s always a good time to reassess lifestyle habits. We all know we should eat more vegetables and move more, but the connections and relationships we share with others may be our most beneficial health move yet. Review this midlife tune-up list for inspiration.

The Problem with Excuses – The 2018 SPIVA Scorecard results continue to show the failures in active management. Larry Swedroe discusses the flaws in underperformance excuses and the real reason active funds can’t beat the benchmark.

Read a piece recently from Adam M. Grossman in Humble Dollar and two thoughts come to mind.

Compounding is the magic sauce to aging. Most of us aren’t excited about turning another year older, but as we age, our investments are provided more time to compound. The more compounding experienced, the more our money grows. Adam shares the story of four individuals who lived well into their 90’s and left substantial financial legacies, despite living frugal lifestyles. If they started saving early, they had a lot of time to experience compounding. I think we often forget the simple principle when we start chasing down the hottest stocks.

Secondly, once you remove yourself from Wall Street’s obsession with trying to beat the stock market average and accept the fact that equaling the stock market average is a rather sophisticated approach to the whole thing, life gets a whole lot simpler. This method can also help predict future returns in a more realistic manner. If you calculate your return on more of the conservative side, you may be pleasantly surprised by the outcome.

As humans, we often over complicate things in life. The same goes for investing, it doesn’t need to be difficult to enjoy the fruits of the process.

Planning is key to most things in life, including Social Security benefits. As automatic as the benefit is for most U.S. citizens, there are multiple factors to consider before enrolling.

Many retirees are unsure of when to start collecting the benefit and how much they may gain or lose by delaying their start date. Vanguard provides a detailed breakdown of total payments an individual will collect starting at age 62 up to full retirement age (FRA). Total benefit collection can differ by nearly $100,000!

Unfortunately, many Americans don’t fully comprehend or take the time to understand the various strategies surrounding their benefit. They also haven’t calculated how much retirement is going to cost. As explained here, there is a large discrepancy between what retirees plan to collect and what current retirees are collecting in Social Security. This expectation difference can make retirement difficult to navigate.

Manipulating different scenarios, including the expected age of death, can help ensure your retirement is financially covered. Don’t let your golden years be riddled with stress and debt accumulation.


We read a great piece recently from Shane Parrish on his thoughts from his trip to the Berkshire Hathaway annual shareholders meeting. This really resonated with us.

“The point is that the answers stay the same.”

We know that Coffeehouse Investors grow tired of hearing the same three principles repeated – save for a rainy day, don’t put all your eggs in one basket, and there is no such thing as a free lunch. But the game never changes, our rules never change. Our same three investment principles apply regardless how the market performs. Investors search our website for the magic formula, but we don’t believe investment success is determined by stock picks. Rather, investment success is often attributed to one’s determination to stick to a long-term plan.

So, if you find yourself out there searching, just remember … save for a rainy day, don’t put all your eggs in one basket, and there is no such thing as a free lunch.

We wanted to highlight a few bits of knowledge we’ve recently read …brain

  1. One of the most frequent questions we are asked at the Coffeehouse Investor is, “what happens if everyone starts passive investing?” Larry Swedroe discusses this and the actual impact index funds have on the market.
  1. Learn the art of saying “no” and how to take back your own driver’s seat.
  1. Why a “bunny market” and volatility could be a good thing for investors.

In my last post, I discuss what happens when the valuations of large companies are driven to unsustainable levels and end up retreating to market-level valuations, otherwise known as “reversion to the mean.” Ignoring this investment concept can often lead a beginner or even the most experienced investor, astray.

I dedicate an entire website page to this concept because I want investors to understand the relatively basic idea of what goes up is likely to come down, and that what goes down is likely to bounce back, in other words, it “reverts back to the average.”

Here’s a visual to explain the idea:

It is at this point, when C is outperforming the average and A is underperforming the average, that many investors sell A in favor of C.

Reversion to the mean causes lots of problems for lots of investors because almost everyone begins by choosing A, that is, they choose a mutual fund or a sector with a good track record.

Then, when A reverts to the mean, or goes underwater, these same investors must decide whether to hang on to the underperforming A or switch to C.

Most people invest in sectors or mutual funds that have had a good track record (after all, that’s the most logical way to choose mutual funds). Unfortunately, because of the powerful force of reversion to the mean, investors inevitably become disappointed with their selection and are on to the next hot fund or sector.

If you want to be a successful investor of common stocks, forget about conventional wisdom and focus instead on reversion to the mean.

In 1976, The Vanguard Group, led by its founder John Bogle, created the first retail index fund. Although slow to capture the attention of investors, this fund, initially labeled the S&P 500 Index Investment Trust, has grown to become the largest mutual fund in the industry today.

With a focus on simplicity, in 1992 Vanguard created the Total Stock Market Index Fund to include mid-cap and small cap stocks – one fund that essentially represents ownership in all the publicly traded U.S. companies.

With a common stock portfolio consisting of one “Total Stock Market Index fund,” some might consider ownership of “all” the publicly traded companies as the ultimate in diversification, and for many investors, it is.

While we can’t argue with the premise of one low-cost, tax-efficient portfolio as the ultimate in simplicity, looking at the stock market from a different perspective offers significant benefits of diversifying beyond a Total Stock Market Index fund. Let’s take a closer look at the data.

Traditionally, most index funds have been constructed on a “capitalization weighted” basis. This means that the market capitalization (number of shares outstanding times price per share) determines its weight within the fund. As a result, even though Vanguard’s Total Stock Market Index fund reflects the collective price movement of “all” the publicly traded companies, in essence, its performance is impacted by the largest of the large cap stocks, with its top 10 holdings representing 18% of the portfolio. In other words, the Total Stock Market fund is basically an S&P 500 Index fund, and its performance confirms the same.

From a diversification standpoint, the goal isn’t to simply own thousands of companies in one mutual fund. It is to identify different components of the market that move dissimilar to each other, at least in the short run, and build a portfolio on this premise. Academic research reveals that the most effective way to accomplish this is to identify value stocks and small stocks to complement ownership in the large cap stocks of the S&P 500 Index.

The benefit of this approach to diversification can be found as recently as the 2000-2007 timeframe. Reflecting on the beginning of that era, large cap stocks of the dot.com boom had driven the price to earnings (P/E) valuation of the S&P 500 index to over 30, far outside its traditional range of 15-20.

Over the next eight years, various dimensions of the market produced the following annualized returns (represented by the corresponding Vanguard funds):

bs graph

The above data serves as a reminder that for investors who embrace only domestic large cap stocks, they face the almost impossible task of “staying the course” for an extended time when these stocks underperform by a wide margin, as they inevitably do through normal market cycles.

There is another compelling benefit for investors to consider in diversifying beyond large cap stocks. Because large companies tend to be the “darling” of both institutional and retail investors (in 2000 a few names that come to mind are Intel, Microsoft, and Cisco – today, it is the likes of Apple, Amazon, Google, and Facebook) the valuations of these companies are driven to unsustainable levels. As a result, future returns tend to be muted on these companies as P/E ratios retreat to market levels.

This “retreating” to market-level valuations, also known as “reversion to the mean,” is one of the most powerful forces at work in capital markets. This mean reversion theory persists across all global markets and all time periods. Thus, one can conclude that a basket of stocks with cheap valuations relative to the market will consistently outperform stocks with expensive valuations over time, and the research shows this to be true.

Overlapping periods: July 1926 – December 2016

bs GRAPH 2

With current market valuations expensive by any measure, we feel that the persistence of a “value” premium in both large cap and small cap stocks will play an increasingly important role in the total return of clients’ portfolios. In addition, these dimensions of the market provide the necessary diversification and much-needed motivation to “stay the course” in all types of market environments.

Performance numbers shown above were published from www.vanguard.com and www.dfaus.com. The performance data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.


Taxes - CH blog“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin, 1789

And in this world, where we try to minimize taxes, we need to stay updated on the newest tax laws and the recent changes in many of our paychecks. Recently, the IRS released a revised withholding calculator to help verify allowances and ensure you aren’t getting too much or too little of a pay bump. You may want to review the new numbers and avoid a few surprises when you file your taxes in 2019.