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good morning my name is Ted fredman I'm from Cincinnati Ohio you said in the 1996 annual report that most investors will find that the best way to own Common Stocks is in an index fund that charges minimal fees two questions first there are a lot of different index funds that hold different baskets of stocks what criteria would you use or recommend to select an appropriate Index Fund second the price to earnings ratio of the S&P 500 is significantly higher than its historical average what Benchmark should an investor use in purchasing this index yeah I would say that in terms of the index fund I would I would just take a very broad index I I would I would take the S&P 500 as long as I wasn't putting all my money in at one time if I were going to put money into a Index Fund in relatively equal amounts over a 20 or 30y year period I would pick an I would I would pick a fund and I know Vanguard has very low costs I'm sure there are a whole bunch of others that do I just haven't looked at the field but I would be very careful about the costs involved uh because all they're doing for you is is buying that index uh I think that the people who buy those index funds on on average will get better results than the people that buy funds funds that have higher costs attached to them because it's just a matter of of of math if you have a very high percentage of funds being institutionally managed and a great many institutions charge a lot of money for doing it and others charge a little they're going to get very similar gross results but different net results and I recommend all of you reading John John bogle's written a couple of books in the last five years and I I can't give you the titles but they're very good books and anybody investing in funds should read those books uh before investing or if you've already invested you still should read the books and and it's all you need to know uh really about fund investing so I would pick a broad index but I wouldn't toss a chunk in at any one time I would do it over a period of time because the the very nature of index funds is that you are saying I think America's business is going to do well over reasonably well over a long period of time but I don't know enough to pick the winners and I don't know enough to pick the winning times there's nothing wrong with that I don't know enough to pick the winning times occasionally I think I know enough to pick a winner but not very often and I certainly can't pick winners by going down through the whole list and saying this is a winner and this isn't and so on so the important thing to do if you have an overall feeling that business is reasonable place to have your money over a long period of time is to invest over a long period of time and not make any bet implicitly by putting a big chunk in a given time as to the CR criteria as to when you should or shouldn't I don't think there are any great criteria on that I don't think price earnings ratio you know determines things I don't think price book ratios price sales ratios I don't think any there there's no single metric I can give you or that anyone else can give you in my view that will tell you this is a great time to buy stocks or not to buy stocks or anything of the sort it it just isn't that easy that's why you go to an index fund and that's why you buy over a period of time it isn't that easy you can't get it by reading a magazine you can't get it by you know watching television you can't you'd love to have something that said you know I mean that that you know if pees are 12 or below or some number you buy and if they're 25 or above you sell it is it doesn't work that way it's it's it's a more complex business than that it couldn't be that easy when you think about it uh so if you are buying an index fund you are protecting yourself against the fact that you don't know the answers to those questions but that you think you can do well over time without knowing the answers to those questions as long as you consciously recognize that that fact and um you know I would if you're a young person and you intend to save a portion of your income over time I just say just pick out a very broad index and I would I would probably use the S&P 500 because I I think if you start getting beyond that you start starting to think you should be in small caps this time and large caps that time or this foreign side and as soon as you do that you you know you're in a game you don't know you know you're not equipped to play in all cander U that would be my recommendation on Charlie uh I think his second worry is that Common Stocks could become so high priced that if you bought index funds you wouldn't expect to do very well uh I didn't think I'd live long enough to think that was likely to happen but now I think that may happen but probably what you're saying there is that you they could get to a level and be they'd have to be at a sustained level like that for a long time it could be there and stay there for a long time in which case you might make 3 or 4% but would there be anything way better than that around under those circumstances anyway and Pass the Pain brittle please well in in in Japan where something like this happened uh the return from owning a nice index over the last 13 years or so is negative can something as horrible as that happened here I mean is it conceivable I think the answer is yes but the option in Japan of course is is to have uh deposits in a bank or or own Japanese bonds at somewhere between zero and one or one and a half% so if if if rates on everything get very low which means stocks sell very high you know then it just means that you live in a different world than existed 20 or 30 years ago when generally Capital got paid better I must say that we have very good packaging yeah yeah
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