John Healy
Hi, I’m John Healy, chief investment officer of Healy Wealth Management. Today, I want to talk about something that many professional investors and financial advisors don’t often address head on. And that’s the subject of indexing. They don’t address it necessarily because it’s a taboo topic, but I think it’s rarely addressed because indexing- the whole topic quietly undercuts the very premise of what many of us in this industry are here to do for you.
Indexing promises, low fees, broad diversification, and market matching returns, and those are all good things. But what’s often left out, is the human side of the equation. How investors behave when markets fall. How do investors respond to fear, to volatility, to uncertainty, especially when they don’t work with an advisor. How do they do? How can they think clearly in those moments without help?
And that’s where the conversation gets a bit more complicated. And that’s what I want to explore here today. I grew up in Princeton, New Jersey. Princeton, as you might imagine, is quite a unique town. Of course, with the University being the primary employer, there are many smart people walking around town. Growing up as a kid, when I would ride my bike to the pool in the summer, I remember going past the house where Albert Einstein lived.
My best friend’s name was a French American. His name was Pierre. His father was a prominent romance language professor at the university, also an assistant dean, and lo and behold, a member of the French Senate. Quite a unique situation there. I also had classmates whose parents were heads of departments at Princeton, like the math department and the physics department.
So I was surrounded by intellectuals. Our neighbors were Burton Malkiel and Lana Peters. You may have heard of Burton Malkiel. He is famous, he was an economics professor famous for writing about the market at Princeton. And he wrote a book called A Random Walk Down Wall Street that was published in 1973. Lana Peters, Lana Peters, I’ll say she wasn’t associated with the university, our other neighbor. But she lived in Princeton largely because of a man named George Kennan, who was a former ambassador to the Soviet Union and a prominent lecturer at Princeton.
And, Mr. Kennan, he helped Lana defect from the Soviet Union. What’s really quite unique about Lana is that wasn’t her real name. Our neighbor Lana, her real name was Svetlana Stalin. Yes. The daughter of Joseph Stalin. Yes. The brutal and evil communist dictator responsible for an estimated 10 to 20 million deaths. So you might understand that she was a very, very private person.
We rarely saw her, and we never very rarely saw anybody ever bothering her. She really flew under the radar. But there was one time I remember when, my dad ran off a pair of photographers in the bushes of our front lawn. They were peering over her fence, from our bushes to get a photo of her. That was the one time I remember something odd happening around her house.
So very quiet neighborhood. But anyway, those were my neighbors. And you’ll see how this all ties in with indexing. Burt Malkiel, he wasn’t so private. He wrote that book of course. And when I was seven, when he published the book, I was just beginning to learn about money at the time. That was when we had a big crash in the stock market, 1973, ‘74.
The Nifty 50 blew up. If you remember the Nifty 50, that was, you know, the 50 stocks that was the most popular stocks in the market, caused the market to be highly concentrated, much like it is today. And at that time, that crash convinced investors that, you know, experts were all caught up in it too. And they were just really no more than high rollers in a bull market.
And people became disenchanted with Wall Street, of course. And that made the book very popular, particularly among academics. But it also, you know, moved on to Wall Street in future years after that. And Malkiel was a big influence in that regard. He wrote in the book, quote, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
So again, I didn’t have any money to invest back then. I didn’t start my career in professional investing until the late 80s. If I had had money back in the early 70s, I’d like to think that I would have recognized the Nifty 50 as being risky and that I would have, you know, not been hurt by the market at that point.
Warren Buffett was out of the market. So he’s come to be someone I highly regard, obviously, as a great investor. I’ve been a value investor my whole career since the very beginning. And then the major crashes I’ve experienced, like the bursting of the tech bubble in 2000 when the NASDAQ fell by 78%, and then the financial crisis of 2008 when the S&P was cut in half.
I’ve managed to avoid the carnage by not being heavily exposed to the risk that was presented at that time. So how is that possible? I think it’s possible because I’ve never believed that the market is always right. In fact, I’ve spent my career doing the opposite, avoiding the crowd when the crowd stops asking questions. What matters to me is not whether a stock is included in some index, but whether it represents a business I’d be proud to own, and at a price that makes sense for me to buy it.
That mindset looking at value, understanding risk, and staying patient has kept me out of trouble in the worst markets. Today, passive investing has become the dominant approach, and so I think it’s worth pausing to ask whether following the crowd into stocks, into indexes is really as safe or sensible as it seems. Index funds by design, don’t make judgments about quality or value.
They simply allocate capital to the biggest companies, regardless of whether those companies are actually worth owning. There’s no analysis, no attention to risk, just a mechanical process that feeds money into the same names over and over again. It’s efficient, yes, but it’s also mindless. That’s not really investing. That’s crowd behavior, packaged neatly and sold back to us as wisdom.
And if history teaches us anything, it’s that the crowd doesn’t always get it right. The same mentality that fuels bubbles and panics now drives billions of dollars into companies without asking whether the price makes sense. What’s the business worth? Is it durable? Is it ethical? In an index, none of that matters. Our free market system works best when it reflects a deeper partnership between owners and businesses, between savers and the future.
But that relationship only works when it’s grounded in judgment and character. The founders of our democracy warned that freedom without virtue leads to ruin. I’d argue the same is true of markets. If we let our capital follow the crowd with no thought, no standards, and no conscience, we shouldn’t be surprised by where it takes us. That said, let’s be fair.
Index funds do some important things very well. They protect investors from emotional mistakes. They keep costs low. They give people a way to participate in economic growth, especially those who don’t have the time or training to evaluate businesses on their own. In a world of noise, there’s something to be said for keeping it simple. So yes, the index is blind, but it’s not always unwise.
It’s just indifferent. The real question is what kind of owners do we want to be if investing is how we shape the future, if it’s how we allocate not just our money, but our values, then we ought to be thoughtful about it. Because markets like democracies reflect the character of their participants. And when capital flows without scrutiny, when price is separated from value, when popularity becomes the sole criterion for ownership, we begin to resemble not a system of free individuals, but a kind of collective machinery.
In that sense, mob rule may not look like a tyrant, but it sure can act like one. Unaccountable, unreflective, and capable of great harm, all while claiming the banner of efficiency. Today, not every stock in the market is overvalued. There are still individual businesses today trading at reasonable prices. Businesses with strong, durable competitive advantages and fundamentals that remain sound.
But those opportunities are easy to miss when all the attention is focused on the broad averages. And while the market as a whole may continue rising in the short term, no one can say how far sentiment may carry it. Short term movements are often driven less by value and more by emotion and momentum and whatever narrative is in vogue.
So we are finding value in some businesses, not every business. There are many businesses we think that are highly overvalued and leading the indexes. Our portfolios look nothing like the index, and that’s by design. And we follow a totally different approach of value than the indexes are constructed. We wouldn’t invest at all if we couldn’t find enough high quality companies trading at sensible prices
that would allow us to build a diversified portfolio of at least 25 stocks and we can do that today. And we are doing that today. If we couldn’t do that, we wouldn’t invest. You have to invest with discipline and patience and a clear understanding of what you’re actually owning. But you don’t have to predict the market. You just have to stay anchored in value.
Buffett has said that index funds are, quote, “The most sensible equity investment for the great majority of investors.” He says that not because they’re superior in strategy, but because they keep these low and they prevent over trading. They offer broad diversification, and they’re simple and automatic. But I think Buffett’s advice on this overlooks a really massive assumption, and that is that the investor in the index fund will stay with it.
Value investors are more likely to stay invested for the long run than index investors. Value investors understand the underlying business. They’re more mentally prepared for the declines as a result. They see price drops as opportunities, not verdicts, on the soundness of the fundamentals of the business. Index investors don’t have that perspective. They lack that grounding. So in volatile times when prices are falling, they tend to look more at the price and fear is more likely to take over with index investors.
So if you look at the end result of how the index investors do over the long term, I don’t think they do as well as people who have advisors following a value approach. So let’s go over a chart that I think would be helpful. But here we see the behavior factor and how it differs between the value investor and the index investor.
So the framework for a value investor is anchored in intrinsic value. Whereas for the index investor the framework is anchored in market performance. Conviction is high for a value investor as long as the value is still intact with each business they own and the price is still reasonable. For the index investor, the conviction is more variable I would say. It just depends on faith in the system.
You know, the mechanics of indexing is much less solid ground to stand on in a bear market. The panic tendency with value investors is lower because they have the perspective of a business that they’re valuing, and it can see it as an opportunity. If prices go down, they have a handle on the value of a business, long term value of a business where the index investor, the panic tendency is high because when markets are falling, news is terrible.
Everyone’s saying terrible things about the market. If you own the market, you’re going to be more likely to panic. Portfolio flexibility. That means what you can do with your portfolio. A value investor in a bear market can rebalance and increase stakes in underpriced stocks. So they’re looking for value that’s more flexible. Whereas an index investor, it’s either in or out.
You’re limited to buying the market and that’s it. There’s no flexibility. And finally, from an emotional standpoint, the value investors thinking like an owner. A business owner. Whereas the index investor is just looking at the market movement. And so there’s much more anchoring of emotions when you’re a business owner. Your perspective is not just movements in the market. You’re thinking about your own business, and you tend to be more committed and more emotionally centered, if you will.
Whereas if you’re just emotionally connected to the market, the market is going to be a whole lot more volatile than a business. So having grown up in Princeton, I’ve seen how different minds leave very different legacies. Svetlana Stalin, the daughter of a tyrant, defected from a regime built on control and conformity. She came to America seeking independence and freedom.
The freedom to question, to think for herself and to live by conviction rather than propaganda. Burt Malkiel, on the other hand, spent his career teaching that markets are efficient, that prices are right, and that the best course of action is to surrender your judgment and follow the index. One fled groupthink, the other helped to institutionalize it. While I respect the shrewd calculation of Malkiel’s theory, I reject the surrender it asks us to make of our responsibility as investors.
We’re not called to be passive passengers in life. We’re called to think, to weigh risk, to measure value, and to act with intention. That is what Svetlana chose, and that’s what we choose at Healy Wealth Management. Every time we build a portfolio business by business, rooted in reason, not groupthink.
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