Quote for the Week

We actually can see and indeed measure how badly investors do at timing. They’re their own worst enemy. As Warren Buffett says, the two greatest enemies of equity investors are expenses and emotions. You can see the expenses in the gap between the market return and fund returns, and the emotions in the gap between fund returns and investor returns. When you look at data on the origin of these shortfalls, it is staggeringly loaded toward the degree of fund specialization; in other words, the biggest gap between fund time-weighted returns and fund investor dollar-weighted returns is found in technology funds, telecommunications funds, aggressive growth funds. We did a study that covered six years, i.e., the last three years of the up market and the first three years of the down market. With the ups and downs taken together, the twenty-five largest sector funds actually returned about 5.5 percent per year, versus 3.7 percent for the twenty-five largest diversified funds. However, while the typical investor in the diversified mutual funds ran about 2 percent behind the funds themselves, the investors in these specialty funds fell short of the fund returns by about 14 percent a year, which, when compounded over six years, is a staggering shortfall of 59 percent. — John Bogle (source)

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Here’s what I’ve been reading for the past three months:

• How to Win in Wall Street – George Goodman referenced this book in his classic The Money Game. Published in 1881, the author mixes in stories related to the period to discuss investing basics, warn about gambling, the need for patience, and more. He offers 9 rules to “win in wall street.” Most should sound familiar today.
• A Week in Wall Street – An even older book, written in 1841. It takes a humorous, almost cynical, look at the inner workings of the early days of Wall Street.
• The Great Salad Oil Swindle – Norman Miller tells the crazy story of Tino De Angelis and one of the largest cases of financial fraud in the 1900s. It involved vegetable oil, loans to buy vegetable oil futures, and an “inventory” of oil, used as collateral, that exceeded the total supply of vegetable oil in the U.S. Those that follow Warren Buffett’s early investments might recognize this story. The aftermath led to Buffett buying American Express.
• Hedgemanship – The book is a byproduct of the rise of hedge funds in the 1960s. It explains hedge fund strategies that individual investors might employ. In turn, you get a history of hedge funds by Alfred Winslow Jones and others.

Book notes from last quarter:

• The Pleasure was All Mine by Fred Schwed Jr.

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Quote for the Week

If you’re going to seek out volatility because that’s where opportunity is, you don’t want your entire portfolio to be volatile, you only want to make volatile bets within it. You have to be sure that there’s some systematic arrangement of the bets that you make so that the portfolio risk in the total portfolio is not as volatile as the individual components. One of Markowitz’s great insights was precisely that. That you can take a lot of high-risk bets—as long as they’re not correlated—and come out fine. I don’t see what’s fraudulent about trying to do that…

As I said, the markets are macro-inefficient. They can go haywire. That is a matter that you deal with through your asset allocation in the first place, so that you don’t get killed if the totally unexpected hits you in the face…

My own affairs are run that way because I know that extreme outcomes can happen and I don’t want to get killed. But that doesn’t mean that I’m not making bets in the middle of the portfolio somewhere. — Peter Bernstein (source)

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Diversification is not just a defensive strategy but an offensive one too. 2025 was a perfect example, from the start, of how portfolios benefit from both.

The defensive side stepped up early with the U.S. markets poor start and tariff panic in April. The offensive side took over with the recovery. Especially, international and emerging markets, which fared better than the U.S. market in April and went on to produce a blowout performance on the year.

By the end of 2025, emerging markets led with a 34.4% total return (almost double the S&P 500 on the year). International markets followed closely behind at 31.9% total return.

The last time emerging markets outpaced everything, was 2017. Prior to that, it was 2009 (then 2007, 2005, 2003).

In fact, from 2000 to 2009 — while the S&P 500 experienced its lost decade averaging a 0.95% annual loss — emerging markets were only outpaced by U.S. REITs, by a slim margin (REITS at 10.6%/yr, EM at 10.1%/yr). The returns from emerging markets and REITs made up for the drag produced by U.S. stocks, in a diversified portfolio, over that 10-year period.

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Quote for the Week

What the economists call fabrication or demand in use is inversely correlated with price. Or, more simply, you know, if gasoline prices go up, other things equal, you’re going to drive less. So price and demand are inversely correlated: basic economics. And that’s the way it is for things that are used. But in financial markets, it isn’t the case. That actually, demand is positively correlated with price. More people buy things when they go up; if stocks start to go up, more people want them than if they’re going down. The higher they go up, the greater the demand for them. That’s why you see people chasing mutual fund performance; it’s why you see the bubbles that you saw in technology and Internet stocks where all the money flowed in after they’d gone up a lot… It’s been very well established that demand follows price. — Bill Miller (source)

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The asset class, sector, international, and emerging markets quilts are up to date for 2025. Links to the updated versions are below:

• Asset Class Returns
• Sector Returns
• International Market Returns
• Emerging Market Returns

You can also download copies here or grab the images below (screenshots work too). The historical data is updated and available for download as well.

I’ll have the usual deeper dive for you next week.

For now, the lesson of 2025 is not a new one. A home-biased portfolio carries the risk of falling short of a more diversified allocation. That was true for 2025. Allocations into U.S., international, and emerging market stocks produced a better return than a U.S. only allocation.

Broadly, the major asset classes were positive on the year. Emerging and international stocks topped the list with total returns in excess of 30%. U.S. large caps finished the year at 17.9%. U.S. small caps earned 12.8%. High yield bonds, high grade bonds (U.S. Agg), cash (3-mo T-bills), and REITs were next, in that order.

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