Why Chasing Returns is a Sure Way to Lose: A Lesson From History

By Jimmy Turner, MD
The Physician Philosopher

Editor: Everyone LOVES talking about the winner, while the losers get a lot less attention.  It is fundamental to understand why simple investing wins, and this is a great example from history about the CGM Fund as an example.  If you aren’t familiar with the meteoric rise (and fall) of this fund, this post will really drive home a crucial investing point – chasing returns is a sure way to lose.  The importance of understanding reversion to the mean cannot be understated. 

This guest post was witten by Ryan Kelly, CFP, an advice-only financial planner at RFK Capital Management.  We share no financial relationship.

Why Chasing Returns is a Sure Way to Lose

Most physicians that turn to respected investing blogs for financial advice know that high investment fees have a negative impact on one’s ability to achieve financial independence. I am yet to have a physician with a base level of financial literacy hire me for a financial planning project that does not understand this important investing concept. 

There is another essential investing concept that I’ve found is not as well understood by physicians, even those with a high level of financial literacy. I believe many have a basic understanding of the concept but may not fully understand its applicability to the investing world. 

The concept is Reversion to the Mean (RTM). Vanguard founder John Bogle has written: 

“This principle from the theoretical world of academe has proven to be wholly pragmatic in the very real world of the financial markets. Reversion to the mean represents the operation of a kind of “law of gravity” in the stock market, through which returns mysteriously seem to be drawn to norms of one kind or another over time. This application of the universal law of gravity might even be described as Sir Isaac Newton’s revenge on Wall Street.” (Common Sense on Mutual Funds, Page 225). 

Bogle’s Beginnings in the Mutual Fund Industry 


John Bogle, who passed away in 2019 at age 89, was a fierce advocate for the individual investor and championed passive investing using low-cost index funds. Passive, low-cost investingadheres to the reversion to the mean concept. 

However, Bogle had to endure a difficult and prolonged experience before he learned to adhere to this important concept when managing investments. 

In the summer of 1951, at the age of 22, Bogle began working for Wellington Management Company, a mutual fund company. At the time, Wellington managed only one fund—the Wellington Fund—with assets of $194 million. The mutual fund industry was still in its infancywith less than $3 billion in total assets, representing just 1% of American savings. The Wellington Fund was a balanced fund that invested in both stocks and bonds, a unique approach at the time. Due to the fund’s focus on balance and diversification, it survived the 1929 crash and the 1930s depression. Managed assets grew to $600 million by December 1957. 

In the 1960s, newer investors emerged with a greater inclination to take on risk in the hopes of higher returns. With the stock market booming in the 1950s and 1960s, investors dreamed of earning high returns and looked at new “high performance” funds. 

Bogle became convinced that Wellington should add high performance mutual funds to compete effectively in the industry. His partners agreed. Wellington eventually merged with an investment counseling firm called Thorndike, Doran, Paine & Lewis (TDP&L). The firm and its four partners managed the hottest mutual fund in the business, the Ivy Fund. In short order, it had grown to over $200 million in assets under management and had a stellar track record. 

In 1967, Bogle became the president and CEO of the newly merged firm. Wellington’s crown jewel was now the Ivest Fund managed by these “talented” investment managers from TDP&L. The Ivest Fund continued to generate strong, market beating returns and grew to $340 million in Assets Under Management by the end of 1968. Wellington added new stock funds and adopted this more aggressive approach to investing. 

Bagels and Donuts

Nearly 50 years later, Bogle would use an analogy to explain why he strayed from Wellington’s prudent and balanced investment strategy. He shared the analogy in this 2018 interview with Andrew Low, a Professor at the MIT Sloan School of Management. https://youtu.be/3uJbHREmUs4

“I’ve got this nice little bagel shop. And it’s nutritious and good for you. And all around are these donut shops. They offer nothing in the way of nutrition. But if nobody’s buying bagels, the bagel shop owner has one option: start selling donuts.” 

The decision to “start selling donuts” and merge with TDP&L was a business decisionimplemented to gather more assets under management, and thus increase profits for Wellington Management Company’s outside shareholders. But it was also an investment decision. Bogle and his partners believed that the managers of the Ivest Fund possessed investing talent that made them superior to market averages. 

The passage of time proved otherwise. The Ivest Fund proved to not be the shining star they hoped for, but rather a shooting star that lit up the night sky for a moment and then faded into darkness. 

Over the next several years, the Ivest Fund had very poor returns. Reversion to the mean began to take hold. Bogle now deeply regretted the merger decision and even discovered that the IvestFund’s long-term performance record had been inflated by attaching to it the results of a predecessor private fund. 

The S&P 500 Index Fund

Bogle learned from his mistakes and in 1975 founded the Vanguard Group. In creating Vanguard, Bogle made three key decisions that would make Vanguard a force for good in the investing world. 

First, he formed Vanguard under a mutual structure where there would be no outside shareholders. This structure minimizes the “no man can serve two masters problems” that afflicts the entire money management industry. All profits would be translated in the form of lower mutual fund fees. Second, he made the funds no-load. This meant the funds wouldn’t be sold by brokers working on commission. To quote the movie Field of Dreams, the approach would be “if [we] build it, they will come.” 

With these two key decisions, Bogle was empowered to make the third key decision. That decision was to launch the first index mutual fund. Instead of hiring talented investment managers to pick winning stocks, the fund would merely buy all the stocks that comprised the S&P 500 index. 

The decision to focus on indexing was certainly about lowering investment costs. But it was also about adhering to the reversion to the mean concept. An investor in an S&P 500 index fund is not trying to find the needle in the haystack; rather, he is buying the entire haystack. By buying every stock in the S&P 500 index at a very low-cost, and sticking with that strategy over the long run, the investor can capture the market’s return over the long run. 45 years later, the data is overwhelming: the longer the investment time period, the higher the likelihood that low-cost index funds will outperform their higher-cost, actively managed peers. 

Sir Isaac Newton’s Revenge on Wall Street

John Bogle authored many books on investing, including Common Sense on Mutual Funds.Chapter 10 is titled “On Reversion to the Mean—Sir Isaac Newton’s Revenge on Wall Street.” It explores reversion to the mean and how it applies to the mutual fund business. I think it’s one of the most important chapters any investor can read. The chapter displays this chart showing how four quartiles of funds, ranked by fund performance relative to the S&P 500 Index in the 1970s, regressed toward the market average during the 1980s:

Mutual funds that performed in the top quartile in the 1970s outperformed the S&P 500 index by an average of 4.8% per year. However, this same group of mutual funds then underperformed the S&P 500 index by 1.0% per year in the 1980s. Interestingly, the worst performing mutual funds in the 1970s also underperformed the S&P 500 index in the 1980s, they just underperformed less bad. Bogle writes the following:

“There is a profound tendency for the returns of high-performing funds to come down to earth, and, almost as inevitably, for the returns of low-performing funds to come up to earth, as it were. (In fact, bottom performing funds tend to remain there because of high expenses. Since these expenses persist, upward moves to these funds are impeded.) Reversion to the mean is the dominant factor in long-term mutual fund returns.” 

Modern Day Example


Reversion to the mean is still alive and well in the investing world. Famous mutual fund managers like Bill Miller, Marty Whitman, Chris Davis, and Bruce Berkowitz have all been recent victims of Sir Isaac Newton’s revenge on Wall Street. But the most striking and powerful example of reversion to the mean in recent memory is Ken Heebner’s CGM Focus Fund.

CGM Focus Fund

On April 3, 2008, a Wall Street Journal article was published with the headline, “CGM Focus is No. 1 – Again.” The article highlighted the extraordinary success of the CGM Focus Fund run by Ken Heebner. I remember seeing Heebner as a frequent guest on CNBC in the mid-2000s. 

Heebner earned an MBA from Harvard Business School in 1965 and worked as an economist for several years before entering the investment management business. In 1990, he co-founded The Capital Growth Management (CGM) Funds and has been its general partner and portfolio manager ever since.  

Kenneth Heebner. Portfolio Manager, CGM Focus Fund

Heebner’s track record at the time of the 2008 Wall Street Journal article was truly extraordinary. CGM Focus generated an annualized return of 24.6% for the 10-year period through January 1, 2008. The fund was the best performing U.S. stock mutual fund for the period. In contrast, the S&P 500 generated an annualized return of just 5.8% over the same period. 


Heebner’s investment performance kept getting better and better. In 2007, when the S&P 500 returned 5.5%, CGM Focus Fund returned an astonishing 79.1%. 

CGM Focus has very high portfolio turnover—in a typical year, the portfolio turns over every three to four months—as well as concentrated positions, both in individual stocks and in certain stock sectors. But even after considering the higher-risk approach, Heebner’s track record at the time was still extremely impressive.  

In May 2008, Heebner appeared on the cover of Fortune Magazine. He was highlighted as “America’s Hottest Investor” and “Barry Bonds without the steroids.” Heebner’s analyst said,“He’s a rock star—he’s Bono.” 

Investor Returns

Investors chased these hot returns and poured $1 billion into the CGM Focus Fund in 2007, and another $2.6 billion in 2008. Unfortunately, their timing was horrible. They missed out on the incredible returns in the early to mid-part of the decade but participated in heavy losses as the fund went into a nosedive. 

Going into the financial crisis, CGM Focus was invested heavily in commodity-oriented stocks.As a result, the fund did substantially worse than the overall market during the financial crisis. From December 31, 2007 through the market bottom on March 9, 2009, the fund fell 61% while the S&P 500 fell 52% over the same period. That may not seem like a big difference. But to get back to even, a 61% loss requires a 156% return, while a 52% loss requires a 108% return.

As the markets rebounded powerful from the March 2009 low, CGM Focus lagged the overall market. The fund increased 47% over the 10-month period of March 1, 2009 through December 31, 2009 while the S&P 500 increased 68% over the same period. 

Despite the poor absolute and relative returns during the financial crisis, CGM Focus still managed to be the best-performing U.S. diversified stock mutual fund for the 10-year period through the end of 2009 (thanks to the extraordinary returns from 2000 to 2007). It rose more than 18% annually in the decade and beat its closest rival by more than three percentage points. 

Unfortunately, the typical CGM Focus investor lost 11% annually in the 10 years ending November 30, 2009. That’s right: the fund generated an 18% annual return, but the typical investor incurred an 11% annual loss. This is referred to as “investor returns” or “dollar-weighted returns” and incorporates the effect of cash flowing in and out of the fund as shareholders buy and sell. Investor returns are often lower than total returns because investors tend to buy after a fund has done well and sell after it has done poorly. This makes logical sense. But the gap between the investor return and the total return for CGM Focus for the 10-year period is still hard to believe. 

Patience Required

The problems with CGM Focus continued. It had a horrible year in 2011. The fund declined 26% while the S&P 500 increased 2%. In the 2011 shareholder report, President Robert Kemp and Portfolio Manager Ken Heebner wrote, “the Fund suffered substantial losses from investments in the airline, automotive, oil service, mining and financial services industries. Additionally, the fund did not have major investments in economically defensive industries which appreciated during 2011.” 

The fund bounced back somewhat in 2012 and 2013. On April 12, 2013, Heebner was interviewed on WealthTrack, a well-respected investing program aired on PBS. The program’s host, Consuelo Mack, highlighted the fund’s extreme volatility and poor performance over the prior five years but emphasized that the fund’s 15-year track record still placed it in the top 1% of its U.S. stock mutual fund peers. Here’s a link to the video interview: https://youtu.be/zKm9oAU6QSg

The implication? Extreme volatility was the price to be paid for exceptional long-term performance. CGM Focus was still a long-term winner because Heebner was at the helm.

Free Fall


After a strong year in 2013, CGM Focus’s returns deteriorated from 2014 through 2017. Then, beginning in 2018, the fund went into an absolute free fall. In 2018, the fund declined 24.7% while the S&P 500 declined 4.8%. In 2019, the fund declined 13.1% in a year when the S&P 500 rose 31.4%, lagging the index by an astonishing 44.5% in a single year. In 2020, the fund has declined 28.7% year-to-date through June 29, while the S&P 500 is down 4.6% over the same period. 

Here are three charts that show the fascinating performance history and powerful mean reversionof CGM Focus. 

This first chart shows the performance of CGM Focus in its glory days. A $10,000 investment on September 30, 1997 (the fund’s inception date) was worth $86,810 on December 31, 2007. Comparatively, a $10,000 investment in the Vanguard Total U.S. Stock Market Index Fund over the same period would have grown to just $18,706. 

September 30, 1997 to December 31, 2007

This second chart shows the performance of CGM Focus during the second period of 12+ years of horrible investment performance. A $10,000 investment on December 31, 2007 was worth only $4,792 on June 29, 2020.  That’s right: more than 12 years after the initial investment, the fund had lost more than half its value. Alternatively, a $10,000 investment in the Vanguard Total U.S. Stock Market Index Fund over the same period would have grown to $27,211. 

December 31, 2007 to June 29, 2020

This third chart shows the performance of CGM Focus over its entire history since inception through June 29, 2020. For the nearly 23-year period, a $10,000 initial investment in CGM Focus has grown to $41,599 while a $10,000 investment in Vanguard Total U.S. Stock has grown to $50,902. It would have been hard to imagine in late 2007 that 12 years later CGM Focuswould have given back all its huge excess returns, and then some. 

Entire Period—September 30, 1997 to June 29, 2020

When Ken Heebner was interviewed on WealthTrack in April 2013, after his initial stumble, CGM Focus’s 15-year track record still placed it in the top 1% compared to its peers. Today, CGM Focus’s 15-year track record places it in the bottom 1% compared to its peers. Bogle said that “Reversion to the mean represents the operation of a kind of “law of gravity” in the stock market.” CGM Focus has not just fallen back to earth; it has landed in the ocean and is sinking to the ocean floor.  


 Markets are Unpredictable

In the fund’s first 10 years, Heebner generated incredible returns because he made correct predictions, such as investing in commodity-oriented stocks during a boom in commodities. Since 2008, Heebner has made numerous incorrect predictions. 


In late 2008, Heebner stayed invested in commodity-oriented stocks which were hammered during the financial crisis. In 2011, he made poorly timed investments in the airline, automotive, oil service, mining, and financial services industries. In 2014, his fund suffered heavy losses on short positions in U.S. Treasuries. In 2018, his fund incurred large losses from investments in oil refining, oil and gas production and cruise lines. In 2019, he shorted information technology stocks in a year when information technology stocks appreciated 48%. In 2020, the fund has been hurt from investments in Brazilian stocks. 

Former President George H.W. Bush once said that life is unpredictable and fragile. Heebner’slong-term track record is a reminder that financial markets are also unpredictable and fragile. The wise investor recognizes this and invests based on the timeless investing principles of broad diversification, low costs, and long-term discipline. Low-cost index funds allow an investor to stay true to these timeless investing principles.

Net Dollar Gains

During my research for this article, I was curious to determine how much money the CGM Focus Fund had earned for its investors, overall, since it launched in September 1997. What is the amount of “net dollar gains” generated by Heebner for CGM Focus investors since he launched his fund? 


To calculate this amount, I needed three pieces of information:1. The total amount investors have invested into the fund since inception2. The total amount investors have withdrawn from the fund since inception3. The current amount of assets under management

The first item is the amount investors have put into the fund; items two and three are what investors have received back from their investment—the cash liquidation value from redeeming their shares and the total amount of assets still invested in the fund which investors have claim to. By subtracting items two and three from item one, I would know the total amount of net dollar gains generated since inception. 


I found this information in the 23 separate annual shareholder reports (from 1997 to 2019)available on the SEC website. On each shareholder report, there is a “Statement of Changes in Net Assets.” In that statement, there is a figure that shows “proceeds from the sale of shares” for the prior year. This is the amount investors put into the fund. There is also a figure that shows “cost of shares redeemed.” This is the dollar amount shareholders withdrew from selling shares. Here’s an example from the 2008 shareholder report:

I calculated that CGM Focus investors had invested $12,896,259,046 into the fund since inception through the end of 2019. Most of these inflows came in the 2005 to 2008 period when the fund was on top of the mutual fund world. I then calculated that CGM Focus investors had withdrawn a grand total of $11,679,673,436 since inception through the end of 2019. Most of these outflows came from the end of 2008 through 2012, but outflows remained steady and consistent until today. On the 2019 shareholder report, I found assets under management as of 12/31/2019 to be $439,058,696. 

Using the three pieces of information, I calculated that CGM Focus investors, overall, have lost $777,526,914 since inception through December 31, 2019. If we include the additional losses from poor performance in 2020, the figure is likely a loss of roughly $900 million. It’s hard to imagine that a mutual fund that has invested in stocks for the past 23 years has lost so much money for its investors. 

Many of the investments made at the peak were liquidated by shareholders from 2009 to 2013. These investors bought at the peak and sold after performance lagged. They could be accused of buying high and selling low. But had they held onto their investments through the present, they would have lost a lot more money given the fund’s subpar performance from 2014 to 2017, and horrible performance in 2018, 2019, and 2020 year-to-date.

The House Always Wins

In reviewing the annual shareholder reports, I also calculated the total amount of management fees that CGM Focus has generated for Ken Heebner and his partners. Since inception, CGM Focus shareholders have paid over $319 million in management fees. The fund has also generated tens of millions of dollars in fees for the fund’s accountants, bookkeepers, attorneys, and administrators. CGM Focus investors have done poorly, but the portfolio managers, administrators, and outside shareholders in the management company have done very well. 


To be fair, an investment in CGM Focus on the fund’s inception date in 1997, and held through today, would have made money. The fund has generated a 6.5% annualized return since inception (versus a 7.5% annualized return for Vanguard Total U.S. Stock over the same period). The fund’s prospectus also clearly states that CGM Focus is a non-diversified fund that has much higher risk than the overall market. CGM Focus investors have done poorly because they invested in a speculative strategy. They chased fire and got burned. 

Lessons Learned

Not every high-flying mutual fund or other hot investment will revert to the mean as powerfully and dramatically as CGM Focus. An extremely small percentage of investment professionals“may” continue to outperform the market due to real talent and skill. However, it’s important to be extremely skeptical when analyzing a mutual fund or other investment that has substantially beaten the overall market in the past. The great majority do so from a combination of luck, good timing, and risk-taking, rather than talent and skill. With time, they will very likely become new victims of Sir Isaac Newton’s revenge on Wall Street. 

On page 243 of Common Sense on Mutual Funds, Bogle writes the following:

An investment program that carries the theoretical armor of RTM, the mathematical armor of regular investing, and the protective armor of a balanced strategy, combined with the powerful weaponry of compound interest, deferred taxes, and low cost, would be applauded by Sir Isaac Newton. Newton’s law of gravity, applied to the manifold mean reversion of returns in the financial markets, should also help you to think through and develop an intelligent financial plan and to implement it with simplicity and common sense, the better to accumulate a retirement fund of generous proportions. Powerful evidence of reversion to the mean in the financial markets is found not only in academic studies, but in pragmatic experience. As you accumulate capital, be sure to use the concept to your benefit.” 

By sticking with index funds, an investor can broadly diversify, keep costs low, stay the course, and make steady progress towards the goal of financial independence. The index fund is the most important financial innovation created for the individual investor saving for financial independence. If tempted to stray from index funds, be sure to remember reversion to the mean and Sir Isaac Newton’s revenge on Wall Street. 










  1. PrudentPlasticSurgeon

    Wow…great article with tons of research. Appreciated!

    If you read this and are convinced that index fund investing is the way to go, I’m not sure what to say!

    The Prudent Plastic Surgeon

    • Ryan Kelly

      Glad you enjoyed it!

  2. James

    I think an important thing for all of us to remember about ourselves is our psychological weaknesses and biases that make accepting this whole premise so hard. For one, we are wired to extrapolate past patterns into the future. We are also extremely greedy. The allure of being able to achieve extraordinary results is extremely powerful and the reason why so many investors have a hard time resisting, despite mountains of evidence that it’s a losing game. This is a great anecdote to help remind us all. Thanks for sharing.

    • Ryan Kelly


      That’s an excellent point. Thank you for sharing that.



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