Index Investing Unmasked: 96% Of Stocks Are Garbage

Tyler Durden's picture

Submitted by Daniel Drew via,

Warren Buffett released his annual letter over the weekend, in which he praised Jack Bogle as his "hero" for promoting index investing. The irony is that investors would have been better off buying Berkshire shares. Over the last 10 years, Berkshire stock is up 139% while the S&P 500 is up 71%. The real question is why Buffett just doesn't tout his own stock rather than promote index investing. He tries to explain himself:

"Charlie and I prefer to see Berkshire shares sell in a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price - it's no fun having owners who are disappointed with their purchases - nor one too low."

Buffett is doing something every skilled salesman does: managing expectations. Buffett's own performance is compared against the S&P 500, and what better way to win that game than by putting a floor under the Berkshire price with the promise of share buybacks and then putting a ceiling on the stock by promoting index investing? The real secret is Buffett is talking his book by not talking it: Rather than tell investors to buy Berkshire at any price, he tells people to invest passively through an index, which leads to the very market inefficiencies that he profits from.

The great appeal of index investing is its low fees, but like buying a cheap pair of shoes that falls apart after 6 months, investors will find that index investing is the most expensive thing they ever did. Vanguard promotes its rock bottom expense ratios, but what is not published is market impact costs that are incurred when the fund rebalances. Since these rebalances are often announced ahead of time, they are extremely vulnerable to front running. Christophe Bernard, PhD Senior Scientist at Winton Capital Management, estimates that front running costs index investors 0.20% per year. That's 4 times the official expense ratio of Vanguard's S&P 500 ETF.

In his latest research, finance professor Hendrik Bessembinder discovered that 58% of stocks don't even outperform a Treasury bill. This study was based on 26,000 stocks from 1926 to 2015. Just 4% of stocks accounted for all of the $31.8 trillion in gains during this period. That means 96% of stocks were complete garbage. Even worse, shares of unprofitable companies outperform their profitable counterparts, which is why you have a marketplace that is dominated by Twitters and Teslas.

Index investing means buying a box of garbage stocks sprinkled with a few hope and glamour stocks whose price gains are solely a result of underperforming fund managers grasping for quarterly bonuses and retail investors juicing up their portfolios in a doomed attempt to catch up on their retirement targets.

While mom and pop buy a Vanguard index with their $500,000 and get front run all day by proprietary traders, the capitalist televangelist Warren Buffett will continue to actively trade billions while preaching the miracle of buy and hold investing.

Warren Buffett

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buzzsaw99's picture

he has made some really shitty purchases over the past ten years.

Midas's picture

The politicians were good investments...

The Saint's picture
The Saint (not verified) Arnold Feb 26, 2017 7:22 PM

Daniel, you make it sound like fund managers avoid the garbage stocks and they all beat the S&P 500.   The fact of the matter is that very few asset managers beat the market indexes but they do rack up much higher management and trading costs.  In fact, beating a market index in one year usually leads to under performance in the next year.  If Buffett has doubled the S&P performance after dividends over 10 years then Berkshire is the extreme exception like the Magellen Fund was decades ago.


NoDebt's picture

I want to see more articles like this.  There are multible nuggest of gold in this little chip of an article.


junction's picture

NoDebt is 100% right, this is a great article that deals with facts, not opinion.  AFAIK, Warren Buffett's best return on an investment was buying a large stake in GEICO in the 1970s, following the example set by college teaher, investor Ben Graham.  Graham bought 50% of GEICO for $712,000 in 1948 and that investment was worth $400 million by 1973.  But back then, there were not as many parasites on Wall Street as now.

J S Bach's picture

"96% of stocks are garbage."

Although I tend to agree, I must also humbly ask... How long have we been reading this?  I remember back in 2008 after that "collapse" how overpriced stocks were, and yet, the DJIA practically doubled.  I know, I know... the Quantitative Easing and other nefarious tactics were unexpected ammo from (((their))) arsenal... but, seriously, WHEN is this all going to end?  It has to eventually.  I must admit a tawdry admiration for our foes in their ability to levitate the world economy far above anybody's expectations.

Midas's picture

It goes on until the insiders have unloaded their stocks onto the sheeple who are buying at the all time high with a portion of their paycheck every two weeks.





Baron von Bud's picture

Yeah, but here's the thing. The rich including Buffett were told by the govt about the true intent of QE. That is, boost stock prices. They knew the game from the beginning and could invest with confidence. For the millenials here, that's called rigging via insider information. The information you never got.

J S Bach's picture

I know you guys are correct.  The great reset is going to come soon.  I feel pity for the uninformed who are pumping their fiat dollars into this bloated corpse of a "market".  Theirs will be the fate of the Roaring 20s dupes who found escape on 10th floor window ledges.

VIS MAIOR's picture

That why elites have no problem of high price of Bitcoin. And they know it that will  coming(big reset). But if that reset come without war with Russia, US will  lose "democratically" the world number one position forever. and the petrodollar... With some of war with russia they will NOT lose  world n.1  position and part of the debt will be erased.

But at least part of them understood that war with Russia is for death for all. And eastern europe will not cooperate even if they are in NATO  and Chinese are crucial to whom was added.

Crucial is  to whom will  choose as friend in war Chinese. but as these are neighbors of Russia, will certainly angry at on "who" to send nuclear missiles to chinese neighbor... radiation near chinese is not good))

According to the statement NATO "boss"  Stoltenberg - declaring that IF nato will must take some  preemptive strike against Russia- will not "total" but will be  very hard... I conclude that they want to use those tactical nuclear missiles which are in europe in nato bases.. 

And the most dangerous of them is- they (usa nato,eu)want to do it with impunity(!).(preventive nuclear attack to russia) since the UN is the US mouth and almost all of europe has already signed NATO membership. (typically without a referendum only if there were short time  a  political parties in government with pro-EU and US ) so now is the kind of situation they can do IT and UN  EU and NATO will to approve that preventive attack ..Because when they will  repeated in msm news  mantra -Russia is wrong - after will brainwashed  ordinary people accept even such a hard blow (like nuclear attack) against Russia...yes it s hard to think  but ITS REAL accordind what do eu-nato ,stoltenberg ,other parts of nato.. msm media all of europe.

Thats way also people in Russia are prepared on something like that ... there was the national excercise on radiation alarm.(nuclear attack on russia) last year 2016.. many people came to little joke with that  exercises. but we'll see ...

Now nato try it but are slightly through the orange revolution and bribery(majdan)proxy wars, etc... MSM news  and sanctions... sanctions that works the other way around )))

Croesus's picture

The Orafice of Omaha is another one who should get thrown off a rooftop.

amadeus39's picture

Envy will get you a down vote every time.

Croesus's picture

I don't worship material wealth; I've got plenty of my own, and came by it through honest means.

He's the embodiment of everything wrong in society: A rich, greedy old man using his wealth to manipulate peoples' lives for his own pleasure and gain.

It's very telling that even his own granddaughter doesn't like him.

ZD1's picture

Buffett not only endorsed Hillary for president, but he donated over $30K to her campaign--$25K came in a single donation to the Ready for Hillary Super PAC.

That old SOB is still trying to make that investment pay off.

markpower49's picture

Like any Democrat, Buffett is not to be trusted. He is a liar.

post turtle saver's picture

"While mom and pop buy a Vanguard index with their $500,000... "

alright, which is it... the average mom & pop in many articles has little if any savings or retirement investments at all, yet in this article they're attaching half a million to an index fund...

here's a news flash... if you have half a million to slap into a no load index fund, you're not the average mom & pop... hell, you can't even _see_ average from the mountain top you're standing on...

Wulfkind's picture

Yeah....but he knows his market. 

Dairy Queen and Mobile homes and the railroads to bring all that cheap iShit to the Dairy Queen munchers in their mobile homes.

38BWD22's picture



I really miss not being able to have a stake in the BNSF railroad, it was the best of the bunch.

ZD1's picture

Buffett's BNSF railroad has a sweet deal hauling crude oil down from Canada after Obama killed the Keystone XL pipeline deal to benefit his old crony Buffett.

scintillator9's picture

The Sweetest deal about the BNSF was pittance he paid for all of that infrastructure, which includes right of way, OIL & GAS MINERAL RIGHTS, WATER RIGHTS.......

Director Facilities
Corporate and Field Facilities,
Oil & Gas, Mineral Rights and Water Rights

In many parts of the USA, one might want to look at one's abstract, one may very well be on land that still has railroad mineral rights to it to this very day.

zjxn06's picture

Yup, BNSF own the ins and outs (highways or Right Of Ways(ROW)) into many of the largest cities in the U.S..

How does one get new cable, pipelines, transmission lines laid into said city?  Call BNSF and expect to pay a hefty ROW fee, often recurring.

What's are those ROW's worth?  Lots.  Are they carried on BRK's books. No.






root superuser's picture

Warren like many rich elite doesnt really own any tangible asset. All his wealth is in digital form. These guys will be wiped out completely once the shitstom hits.

Miss Expectations's picture

Was David Seaman using PizzaGate to shill for a Gold Money/Bit Gold SCAM?  It sure seems like it.  If you don't know, David's Twitter and Youtube accounts were emptied of content yesterday.

This seems like a rather thorough expose:

And to pile on even more:

Northern Lights's picture

Holy shit, Youtube did erase all of his video's from his account!!!!!

AngryNinja's picture

More likely he deleted his own videos. I'm sure there is some crazy pedo shit going on out there, but the Voat Pizzagate board and the David Seaman videos are a complete dumpster fire.

Stopdreaming's picture

Just another scam artist who was huckstering the Pizzagate scandal for his own protit.  Seaman...hmm...I smell gefilte fish!

Catullus's picture

So why bother with the transactions tax? Let the traders chase garbage and lose the money themselves. That should have been discouragement enough.

Zepper's picture

Perfectly said!!!! And the clincher... NO ONE(vast majority) will retire properly without some kind of government or incredibly awesome corporate pension plan because all these private retirement accounts are all 100% BULLSHIT!

milo_hoffman's picture

Most 401K's can  be moved to self-managed.  All mine is that way and in a private brokerage account.  At least you can chose individual investments, metals, even index short funds if you chose.  There is no EXCUSE if people really want to not be slaves to the typical SP500 index funds of your regular company 401k.

a false profit's picture

True enough, and I have done so.


However, you still are bound by house rules.  And, when the SHTF... the house is going to take your 401K... whether self-managed or not.  Expect higher taxes on withdrawls, taxes on Roth withdrawls... they will use a different name for it... and a mandate that you invest a portion of your 401 into worthless government securities - for your own "safety".  

amadeus39's picture

Pessimism produces losers in this game of life. Optimists save money for retirement. Losers spend all  from payday to payday and then borrow from the sharks. Debt is for losers except when borrowed money grows more than that which is borrowed. It's really not rocket science.


Dr_Lucid's picture

Its unfortunate but this tired old prune will never get to see the day when people realize it was all a rouse.  He'll pump ETF's just like the mailman pumps his long as it makes him and others happy. 

ETF's are the last retail play for Tutes to stuff.  Mr. Buffet needs retail ETF's just as much as the sell side does. 

Rufus Temblor's picture

Buffet is an over-hyped bullshit artist. He lied about the taxes his assistant pays compared to him and he also asked for a higher tax on billionaires. What this jagoff fails to do, however, is to lead by example. He has always been free to contribute to the US Treasury or to maximize his taxes instead of paying lawyers and accountants to minimize them.

amadeus39's picture

You are not only misinformed; you are uninformed. You must read alot of tabloids.


Stopdreaming's picture

I'll bet he has a nice big stash of phyzz under his old hay mattress...also did some midnight gardening last night!

Yen Cross's picture

LOL>   Index investing means buying a box of garbage stocks sprinkled with a few hope and glamour stocks.  

  Isn't a [derivative] of that what brought down the subprime mortgage market in 2007 ?

Ban KKiller's picture

Sorry, I don't speak Spanish. Too funny.

You mean it is rigged when only 4% of the stocks were worth a damn?

roddy6667's picture

Index funds still outperform actively managed funds, and both outperform hedge funds these days. The best place to be is out of the market.

yogibear's picture

Buffet and Munger are like Brothers Randolph and Mortimer Duke of trading places.

arrowrod's picture

I'm putting all my money in publishing "Tasty Cannibal Receipes".  

mary mary's picture

"Over the last 10 years, Berkshire stock is up 139% while the S&P 500 is up 71%."

I get that the SP500 is up 63%, not 71%.

And I get that Jack Bogle's recommended mix of 50% Vfinx and 50% Vustx is up 117%.

I don't think 96% of stocks are "garbage" and only 4% worthwhile. If that were so, then "the smartest people in the world", the hedge fund managers, would buy those 4%, and make all the money in the universe.  Silly.  Maybe the good 4% of stocks are hard to find.  Maybe nobody can forecast which the good 4% will be. Maybe the other 96% are NOT "garbage".  It seems to me that saying that 96% of stocks are garbage is like saying that 96% of companies are garbage (which they aren't) and that, therefore, the free market is garbage (which it is not).

edifice's picture


Like so many things, if you do the exact opposite of what ZH suggests in its articles, you will be way ahead. This is another "buy my book / read my blog" article. Vanguard is a very low-cost collection of funds, which saves you a ton in the long run. This can't be argued. You want to put it into actively managed funds, which rape you on fees and underperform? I mean, fuck, you could even put it into ContraFund with Fidelity, which has out-performed the index consistently and has moderate fees. As long as you have employer matching to cover the fees, you will be way ahead.

You can lament all you want and say, "Well, if I had only put $10,000 into AAPL back in 1997, it would be worth $2.5 million today!" You can't think like that. 99% of people can't pick winning stocks.

Assetman's picture

What doesn't necessarily surprise me is the sh*t Warren Buffett says.

What gets to me is the timing.

Jack Bogle has been a 'hero' for over 50 years, talking the talk and walking the walk in the passive world.  And 'ol Warren, after all these wonderful decades of shareholder letters... finally makes mention of the Bogle after all this time???  REALLY?

It's not like anyone has been that awake (apperently) but actively managed funds (and especially really high cost hedge funds) have been getting their collective asses handed to them in the asset flow game for YEARS on end now.  In the mutual fund world, the ONLY funds that are seeing meaningful inflows from investors are the 5-star funds.  And it's been that way for a few years running.  Passive strategies, and specifically ETFs, are ALREADY well on the way to winning the battle.

We can talk about the whats and whys on passives kicking collective ass for later.  The question of the day is "why is Warren beating the sh*t out of a dog that's already seriously injured, and sparing one that is collective neutered?"  

Warren ain't stoopid.  If he can force out more active managers in favor of passives BEFORE there is a real change in market sentiment (and one that perhpas favors active management), then he benefits greatly in finding ANY inefficiently priced security.  And it's not as if Berkshire is having issues with the law of large numbers.  It's really freaking diffcult to get larger when lots of hedge funds are swimming in the waters after the same chum.  Eliminate several, and it becomes a little easier.

As for the 96% stuff?  I don't entirely buy the premise.  Sure, there are a handful of stocks that help explain a good chunk of attributed performance in any one year.  But you could make a decent portfolio of names beyond that and still do well (better than the index).  What IS more difficult to do is to find that ONE stock that provides abnormal positive returns year on year on year.  Warren (and others) have found them in the past and have put them into concentrated weightings with good success.

But it isn't getting any easier.




Dan'l's picture

I knew when I read part of his "sermon" that he was talking his book. This guy is one of the biggest bags of steaming crap that ever existed. He depends on Fed subsidies and crony crapitalist deals like being the "rolling pipeline" for Obama who shot down the Keystone Pipeline for him, repeatedly.