Beardstown Ladies Could Have Done Worse

So the grandmothers of the Beardstown Ladies investment club didn’t really know how much money they’d made in the stock market between 1984 and 1993.

Congratulations, Ladies--you’re members of a much bigger club: the vast majority of individual investors who also couldn’t honestly say what they’ve earned on their total portfolios over the long run. Or even over the last 12 months.

We’ll come back to that, but first, a little bit of clarification is in order before this national scandal displaces Monica-gate from the headlines.

The Beardstown, Ill., Ladies’ now-famous miscalculation, which they announced on Tuesday, was definitely more than a rounding error. Their publishing mini-empire since 1995 has been built on the market-beating 23.4% annualized return they said they’d earned on stocks from 1984 to ’93.

Whoops. The real number was 9.1%, a Price Waterhouse audit of the Ladies’ records showed. It was a data-entry error, the Ladies said, and there’s no reason to disbelieve them.

Has some grave harm been done? Some people will think so. If you bought one of the Ladies’ five books on the belief that you, too, might be able to “beat the market” by following their strategy, your initial reaction might be that you’ve been fleeced. Somebody call the SEC!

But it’s hard to imagine who could truly be hurt by basing an investment strategy on advice such as this: “Without planning, it’s nearly impossible to increase your wealth.” Or this: “Keep your eyes open for promising companies and industries.” Or this: “You don’t have to bet the farm to make hay when the sun shines.” (Yes, those are actual tips from the Ladies’ books--which also include recipes, such as Doris Edwards’ Four-Bean Salad.)

Maybe the 14 Ladies are guilty of making stock investing seem just a little too simple--like any rube could do it. But the truth is, a lot of rubes have fared just fine in the U.S. stock market for the last 16 years, amid this astounding bull market.

Let’s put the Ladies’ numbers in perspective. As we now know, they didn’t earn 23.4% a year in the 10 years through 1993. They earned 9.1% a year. That was substantially less than the 14.6% they could have earned by simply putting their money in the Vanguard Index 500 Trust, which replicates the Standard & Poor’s 500 stock index.

On the other hand, that 9.1% far exceeded inflation, which ran at 3.7% annually in that period. And it also beat the 6.4% annualized return that the Ladies would have earned had they just kept their money in grandmother-approved U.S. Treasury bills.

So how bad an idea was it, really, for the Ladies to be learning how to be stock jockeys from 1984 to ‘93, as opposed to keeping the money in a pickle jar--which was the advice they would have heard from more than a few Wall Street pros who have been bad-mouthing the market’s rise all along.

More significant, the Price Waterhouse audit also showed that the Ladies earned 15.3% a year on their portfolio from 1984 through last year. That number, too, trailed the S&P; index, which returned 17.2% a year in the period.

But 15.3% beat the annualized returns on long-term U.S. bonds (12.7%) and short-term T-bills (6%) in that period, and also handily beat inflation (3.4%), according to number-cruncher Ibbotson Associates in Chicago.

Maybe the Ladies don’t deserve to have sold all of those books. Or maybe we should say, their publisher doesn’t deserve to have sold all of those books, without bothering to have their numbers audited.

But as silly as it was for anyone to imagine that these pleasant women from a small Midwest town had discovered the secret formula to beating the market, it would be equally silly now to suggest that individuals can’t be successful--and we use the term relatively--using basic, time-honored strategies to build an investment portfolio.

Why not just index your money if you want to own stocks? You won’t get any argument against that here. Yet most people don’t index, and perhaps never will, even if they should.

For many people, the problem with indexing is that it is against their nature to accept an “average” return, which is what indexing is all about. You want to believe you can do better than average--and the “success” of the Ladies, and other media-created gurus, feeds that belief.

Do most people beat the market over time? Nope. By definition, a majority can’t beat the average in the long run. And the truth is, given how difficult it is for individual investors with diverse, dynamic portfolios to pinpoint their overall return from year to year and decade to decade, most will never know exactly how well, or how poorly, they’re doing.

But you’ll probably know your big victories, and your big mistakes, and hopefully you’ll learn from both sides of that ledger. And if you have decent diversification, and can stick with the markets for decades rather than days, you’ll probably still do better over time in stocks and bonds than if you just use the pickle jar to hold your dollars.

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Tom Petruno can be reached at tom.petruno@latimes.com

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Not So Great?

How the Beardstown Ladies’ stock returns compare with returns on key investment indexes, 1984 to 1997:

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Investment Annual return S&P; 500 +17.2% Ladies +15.3% U.S. T-bonds +12.7% U.S. T-bills +6.0% Inflation +3.4%

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Source: Ibbotson Associates