The most popular book on stocks after Benjamin Graham’s classic The Intelligent Investor probably is Burton Malkiel’s 1973 classic, A Random Walk Down Wall Street. In it Malkiel wrote that “a blindfolded chimpanzee throwing darts” at stock listings could pick stocks as well as the Wall Street pros. Malkiel’s point, if it still eludes you, is that no mortal can beat the market over time.
Nobody? Not Warren Buffett? Bad example. The Oracle of Omaha is not purely a stock picker. Buffett takes large positions in firms he can fix or influence. He’s a turnaround guy.
Hedge funds? Some indeed (but fewer than you’d think) have enjoyed long records of besting the S&P 500. Even Malkiel concedes that the high-risk way can work. Well, in a backhanded way he does. Malkiel recently wrote in the Journal of Economic Perspectives, “efficient financial markets … do not allow investors to earn above-average returns without accepting above-average risks.”
For those who like numbers, the benchmark of average risk and volatility is the S&P 500 index. Its “beta” score is 1.0. By comparison, the higher-risk, higher-reward Nasdaq index has a beta of 1.6. A portfolio of, say, electric utilities might have a beta of 0.5.
Enter the California investor Ken Kam. He’s created a fund, MOFQX, that has a low-risk beta score of only 0.48, yet has more than doubled the returns of the S&P 500 since it was founded in November 2001. MOFQX’s return is calculated after Ken skims off a hedge-fund-like 1.95% management fee. But who’s complaining? Double returns at half the risk is Kam’s claim. Wait till you hear how he does it.