Does the Tortoise Investor Really Win the Race?

Aesop's fable concerning the race between the tortoise and the hare had always sounded unrealistic to me. How could the hare lose, really? This begs the question: In the case of long-term investing, is it true that the tortoise investor will win the race? The empirical data overwhelmingly suggests the answer is, Yes, most of the time. The masses want to dismiss the fable with regard to investing. The tortoise is slow and conservative and boring and the hare is quick and nimble and more exciting, essentially exchanging a smart and safer strategy for one that is speculative and more risky. To examine some of the reasons why the tortoise wins, first we must define attributes of a tortoise investor versus a hare investor.

Most investors today are hares whether they know it or not, simply by the investment options they choose to accept in their portfolio. A hare investor's objective is to beat the market, like it is some invisible adversary. Hares believe the market is relatively inefficient, creating opportunities to capitalize on security mispricings. The tortoise investor believes the market is a friend and highly efficient, meaning information is free flowing and widely dispersed, so security mispricings are rare and difficult if not impossible to capitalize upon. Tortoises strive to efficiently and reliably accept the returns the market provides.

Hare investors are more likely to move in and out of the market depending on the most recent forecast. Some hares use sophisticated computer models to look at different market cycles and trends to make buy and sell decisions, but many hares succumb to emotions such as fear and greed when making buy and sell decisions. Tortoise investors think the recent past is a poor predictor of future results and buy and hold investments for the long-run, transacting as little as possible. They are more likely to make decisions free from the emotions of fear and greed, relying more on future investment performance over the next decades as opposed to the performance of the recent past.

The biggest reason the tortoise wins is due to costs. It simply costs much more to try and beat the market than it does to accept market returns. A March 9, 2008 article in the New York Times written by Mark Hulbert entitled "Can You Beat the Market? It’s a $100 Billion Question" cites a study conducted by Kenneth French, a finance professor at Dartmouth, which concluded that in 2007 American hares spent over $100 billion in the effort to produce market beating returns.

Many former hare investors have caught on to the idea that a tortoise strategy will ultimately provide the best chances for winning results. In the same article above, Professor French calculates the proportion of the aggregate market cap invested in index funds (a tortoise strategy) has more than doubled to 17.9% from 1986 to 2006.

If you are a hare investor or think you may be a hare investor, you might want to reconsider the odds against you when racing against us tortoises.