Institutional Investor had a look at David Einhorn's struggles in recent years after outstanding returns earlier in his career. He's been short some very high fliers including Amazon (AMZN). Read the article for more details. Similarly Bill Ackman has had a lot of trouble in recent years being loudly short Herbalife (HLF) as the stock went up among other bad trades.
Where both have had outstanding returns in their respective careers it would easy to envision they will have strong returns again but in one short period cited by Institutional Investor, Einhorn investors lost 25% depending on when they got in as the broad market was going up.
When I read articles like these I tend to think that these guys are making much harder than it needs to be. That is not really an accurate statement. A better way to phrase it is that these stories are great lessons for individual investors about unnecessary risks swinging for big returns.
if you have an adequate savings rate, then just owning a broad based index fund can get the job done in terms of having enough money when you need it, presumably when you retire. While simply owning an index fund is a perfectly valid way to go, it is not my preference for how I mange client accounts, but it must be understood that provided you save enough money, the long term growth provided by an index fund can get it done (repeated for emphasis). This needs to be considered in terms of risk taken, cost and viability for whatever strategy you end up implementing. Hedge funds are expensive and the strategy (depending on the fund chosen) can be much riskier than an index fund.
The reason I don't think owning a single index fund is the best way to go is that the volatility that sometimes goes with investing in stocks gets in the way of life (taking withdrawals, sequence of returns nearing retirement) and it can trigger emotional responses which can lead to panic selling at the worst possible time.
In the chart below, the black line is the S&P 500 over the last 25 years and the green line is what I think everyone might want in their portfolio which is a linear return to the same result (keep in mind that just owning an index fund can get the job done).
If you could somehow get the same return like that every year, life events like simple withdrawals or timing retirement would not be issues and no one would ever panic sell.
Achieving the green line is not possible but pursuing it is. My preference is to try to smooth out the ride, to reduce the volatility of the portfolio versus the market so that life and portfolio needs are less disrupted by market volatility.
My reasoning probably reads pretty easily (easy to follow), it may not be what you're interested in of course but it is easy to follow. I imagine the pitch from Einhorn or Ackman or any other hedge fund manager is easy to understand as is the argument for owning one index fund. I'm going to tell you it doesn't have to be as difficult as Einhorn and Ackman appear to make it but regardless of whether you agree with me, once you pick a strategy you've got to stick with it.
Last week we had a wildfire here, the Bluff Fire. I was very involved in fighting the fire, I was first on scene. We had a lot of help from the Forest Service, Arizona Department of Forestry and Fire Management as well as several neighboring departments.
The news reported that this house burned down. It didn't, no structures lost.
A couple of days later, the Overland Expo was held in Flagstaff with all sorts of sweet offroad rigs and motorcycles including this;
It was a good week.