Great Mirror of Folly

Science vs. Art in the investment arena

Great Mirror of Folly

Index Funds Advisors Inc. explains how investors can relax and make more money

Buy low, sell high, pick a winner ... the mantra of the active investor. Investing as art, at best, and fortune-telling at worst.

But it doesn`t have to be that way, according to one online investment advisor. Index Funds Advisors Inc. (IFA), based in Irvine, Calif., has created a web site to spread the gospel of index funds investing, which has been scientifically proven to outperform active investing. IFA President Mark Hebner has developed a 12-Step Program, "Active Investors Anonymous™," to help investors understand how they can earn better returns on their investments by trusting the market, not the managers.

Part sales pitch, part appeal to reason, Hebner makes a compelling case for index funds at his web site,

"The analytical technique used by active investors can be best described as qualitative or art, while the indexed approach can best be described as quantitative or science," Hebner claims at Judging from several studies quoted on the web site, science has a decided advantage.

Active investing is a process in which an investor, whether professional or amateur, attempts to beat the market by buying a stock when it is perceived as being low-priced, and selling when it is perceived as being high-priced. Attempts to beat the market involve stock picking, market timing and track record investing. The goal of stock picking is to identify and profit from mismatches between the current market prices of individual stocks and what are believed to be their true values.

The goal of market timing is to shift money in and out of different investments in order to profit from short-term cyclical events in financial markets.

The goal of track record investing is to buy stock portfolios or mutual funds managed by stock market gurus or experts who have the best track record performance.

None of these methods are consistently reliable, although successful examples dot the investment landscape and continue to inspire the faithful. But, in the long run, patience pays off, Hebner argues.

Investors select index funds based on the investors` capacity for risk and the asset allocation of the funds, then sit back and wait. In a recent 14-year period, the average equity individual investor earned a respectable 148 percent return on his or her initial investment, but two top-performing index funds returned more than four times as much. The Standard & Poor`s 500 earned 840 percent and the Dimensional Fund Advisors Inc. Equity Balanced Portfolio earned an incredible 924 percent over the same period.

Not surprisingly, Index Funds Advisors favors DFA products. And well they should. The company was formed in 1981 by David Booth and Rex Sinquefield, disciples of a 100-year-old concept which asserts that markets are random and efficient. The concept is key to the Modern Portfolios Theory, which earned the 1992 Nobel Prize in economics, and which guides IFA`s investment advice.

Visitors to IFA`s web site will find information on efficient-market financial theory, links to market news and information about DFA Inc.`s portfolios, but the key to the site is Hebner`s 12-step program.

"We have created the 12-Step Program to Index Funds to help investors understand the advantages of index funds investing," Hebner says in the introduction. "In the process, we want to minimize the desires of investors to gamble in the stock market."

There are five phases to the 12-step program: Recognition, education, evaluation, allocation and implementation.

Ultimately, graduates of the 12 steps are offered the opportunity to open an account with IFA. But, even if they study and agree with the steps` information, there`s no guarantee they`ll be converted.

"There`s something in people, you might even call it a little bit of a gambling instinct," MIT economist and Nobel laureate Paul Samuelson says. "They want to be interested in the process of investing, and it`s traditionally been difficult to get too jazzed up about indexing."

Still, it`s hard to argue with science.

"I tell people (investing) should be dull. It shouldn`t be exciting. Investing should be more like watching paint dry or watching grass grow," Samuelson says. "If you want excitement, take $800 and go to Las Vegas."

About the author: Ken Garner is a newspaper reporter and freelance writer and editor. He lives in Albany, Georgia.