The Coffeehouse Colloquy

“Life is just one damn thing after another.” Will Rogers

Most of us get up every morning, put on our working shoes and go to work,
meeting deadlines,
raising children,
learning new technologies,
building careers,
attending school functions,
keeping up with the competition,
and generally giving it all we’ve got.

For most of us, somewhere between the chaos of giving it all we’ve got today and achieving a financial goal tomorrow lies the daunting task of building and maintaining a successful portfolio today.

Along the way, we have discovered that one of the secrets of success is to embrace this thing called failure. We have discovered that the most successful people are the ones who pick themselves up and and dust themselves off and give it another shot after they have failed the first, second or third time.

I think you know what I mean, because I’m sure you’ve been there.

However, when it comes to picking and choosing between 15,000 hot stocks and cool mutual funds for your portfolio you won’t get a second chance ten or twenty years from now to make the right decisions that need to be made today.

That’s why the Coffeehouse philosophy of investing is so critical to your long-term investment success.

It should come as no surprise to you that Wall Street will never discuss these things with you. In fact, Wall Street would probably prefer you stop right here and change the channel.

That’s Wall Street for you.

They are a funny bunch.

You might not agree with everything presented here, and that’s okay also, but at the very least you should be aware of these concepts so you can make informed investment decisions today and more importantly, live with your decisions tomorrow.

First of all, the annual return of the stock market average consists of all the publicly traded companies in the country, and is best measured not by the Dow Jones Industrial Average or the S&P 500 index, but by the Wilshire 5000 index.

Now, here is the deal:

Over the long haul, your stock portfolio will produce one of three results:

A. Outperform the stock market average
B. Equal (approximate) the stock market average
C. Underperform the stock market average.

One of these three results will occur. You can’t have it any other way.

This is where the great debate begins. So welcome to the raging great debate.

On one side of the great debate is Wall Street. And Wall Street is screaming at the top of its lungs,

“You should do everything you can to pursue option A in order to BEAT (outperform) the stock market average! And with 16,000 stocks and mutual funds to choose from we are ready and willing to help you with the enormous task of choosing the right ones.”

(C’mon, what else are they going to say?)

It is so ingrained in our investment psyche that we hardly know another way.

From day one Wall Street has encouraged us to analyze all the available data and then do our very best to pick the top stocks and/or mutual funds, or let them do it for us.

It’s the American way! Go for it big guy, you can do it! You can beat the stock market average!

Or so says Wall Street.

On the other side of the great debate is Academia which replies,

“Hey, hey, hey, Wall Street, not so fast there. We have analyzed your performance and looked at the data,and, while your intentions might be honorable, it just ain’t happening, Wall Street, at least not very often. To put it bluntly, Wall Street,


You’ve got to admit Academia does have a point.

Over the last fifteen years, more than 80% of all domestic common stock mutual funds have underperformed the stock market average.

(Actually, it is much worse than that, but we won’t go into that here.)

This is what the great debate is all about.

Wall Street says, “Yes we can!”
Academia says, “No you can’t”

Wall Street says, “Yes we can, just look at the mutual funds that have beaten the stock market average!”

Academia says, “Get real, Wall Street. Identifying the ones that have done well in the past is a heck of a lot easier than identifying the ones that will do well in the future.”

Wall Street says, “Gulp, uh, well, we still think we can!”
Academia says, “Forget it Wall Street, we have found a better way to invest.”

The great debate continues to rage. It will never stop. Never ever.

For you and me, that debate is irrelevant to our investment success. The question we need to ask ourselves, isn’t “Can I beat the market?” The question we need to ask ourselves is,

“What is the price I pay if I try . . . . and fail?”

Let’s stop right here, stand up, stretch, get a drink of water, and clear our minds, because what we’ve just discussed, while interesting and important, is nothing compared to what we are going to discuss next.

Are you ready for the rest of the story?

Remember your three possible outcomes, A, B and C?

A. Outperform the stock market average
B. Equal (approximate) the stock market average
C. Underperform the stock market average.

Get these three points firmly implanted in your investment psyche, because A, B and C strike at the very core of what the Coffeehouse Investor is all about.

A, B and C.

Unfortunately, I have some very bad news.

Options A, B and C are only half the story.

To get at the heart of the matter we need to introduce option D.

Caught in the middle of this great raging debate are millions of investors who are attempting to make intelligent decisions and unfortunately end up with option D.

If A means outperform the stock market and B means equal the stock market and C means under perform the stock market then D means: horribly, pathetically, underperform the stock market average.

Let me explain.

Most investors either knowingly or unknowingly shoot for option A, (beating the stock market average) because that is what Wall Street tells them to shoot for and that is what they’ve been doing since day one.

There is one small problem with pursuing option A, though.

The problem, or dilemma is:

“What do you do when your mutual funds or individual stocks begin to underperform the stock market average or its respective benchmarks?”

Do you hang on to it, or do you switch it for something else?

Every investor who pursues option A must deal with this DILEMMA and this QUESTION.

Do you hang on to it, or do you switch it for something else?

If you are a pursuer of option A (beating the market), don’t think for a second that you are the only one faced with this DILEMMA and this QUESTION.

Large institutions that pursue option A have to deal with it also. They convene investment committee board meetings to decide whether to fire or rehire this underperforming money manager or that one.

Do you hang on to it, or do you switch it for something else?

It is the same dilemma you faced the last time you convened your board meeting of one and decided whether to sell or hold your dog of a mutual fund for another one.

Most investors switch to a better-performing fund in pursuit of performance. This causes them to dramatically underperform the market average.

Graphically, it looks something like this…

There are lots and lots of investors who knowingly or unknowingly pursue option A (beating the market) instead of B (equaling the market) and end up with option D.

Now, looking at this logically, over the long haul, option A (beating the market) is obviously better than option B (equaling the market), but keep in mind that there is one thing worse than missing out on option A (a long shot at best) and that is ending up with option D (you know what that is).

I suspect that most investors who pursue option A haven’t any idea as to whether their common stock portfolios are returning A, B, C or D.

Do you?

By pursuing option B (equaling the stock market average), you know what you are getting. You are getting the market’s entire return.  There are no surprises.

There is no moral to this colloquy, but there is a point.

The point is: don’t end up with D in pursuit of A when the market freely gives you B.

That’s all for now.

The Coffeehouse Book

The New Coffeehouse Investor Book

The Coffeehouse Investor

How to Build Wealth, Ignore Wall Street & Get On With Your life by Bill Schultheis

Download the first chapter

Buy on

Buy on