Written by North Carolina Treasurer Brad Briner
Basketball players spend countless hours perfecting their free throws. They adjust their stance, refine their release and study every detail of their form. Yet one of the most effective techniques in the history of the game is also the one almost nobody wants to use: the underhanded free throw, better known as the “granny shot.”
NBA great Rick Barry used it throughout his career. It looked unusual — and probably earned him plenty of teasing — but Barry retired with a 90 percent free-throw percentage, then the best in NBA history. The technique was not stylish. It was simply effective.
Investing has its own version of the granny shot: indexing.
An index fund does not try to identify the next great company or predict which part of the market will perform best. Instead, it owns a broad group of investments designed to track a market index, such as the S&P 500. When you buy an S&P 500 index fund, for example, you are buying 500 of America’s largest companies (but actually 503 different stocks… that’s a conversation for another day though).
That approach can sound almost too simple. Wall Street has built an enormous industry around research, forecasts, trading strategies and highly paid experts trying to beat the market. Surely a professional manager with a large staff and sophisticated technology should outperform a fund that simply owns the market?
Most of the time, however, that is not what happens.
S&P Dow Jones Indices has compared actively managed funds with their benchmarks for more than two decades. Its research consistently finds that most active managers underperform, and the odds generally get worse as the measurement period grows longer. Over the 15 years ending in 2024, a majority of active managers failed to beat their benchmark in every equity category measured. In many categories and over longer periods, roughly 90 percent or more fall behind.
Why is beating the market so difficult?
First, investing is a competition. Before costs, all investors together must collectively earn the market’s return. For one investor to outperform, another must underperform.
Second, active investing costs more. Managers must be paid, research teams must be supported and frequent trading creates additional expenses. Those costs are deducted from the investor’s return every year. An active manager does not merely need to identify better investments; the manager must outperform by enough to overcome those higher costs.
Third, yesterday’s winner is difficult to identify in advance. A fund may outperform because of genuine skill, favorable market conditions or simple luck. Even managers with excellent records can struggle when the market changes. Investors who chase the latest top performer often arrive after the best returns have already occurred.
Indexing takes a different approach. Rather than trying to find the needle in the haystack, it buys the haystack. It offers broad diversification, low costs, low turnover and a return that should closely resemble the market it tracks. Indexing is also generally much more tax-efficient, meaning you get to keep more of your gains after paying taxes as well.
Jack Bogle, the founder of Vanguard and creator of the first retail index mutual fund, spent much of his career promoting this idea. His argument was not that markets are perfect or that nobody can ever outperform them. Clearly, some investors will. His point was that consistently identifying those winners in advance is extraordinarily difficult — and that costs are one of the few parts of investing we can control.
Indexing does not eliminate risk. An index fund will fall when its market falls, and different funds may track very different investments. A narrow technology index, for instance, is not the same thing as a broadly diversified total-market fund. Investors should still consider their goals, time horizon and tolerance for market declines.
Nor does indexing guarantee that you will never regret your decision. There will always be a stock, fund or investment strategy that performed better last year. The temptation to abandon a sensible plan and pursue the newest winner can be powerful.
That is where the granny-shot analogy matters most.
The hardest part of using an effective strategy is sometimes accepting that it does not look impressive. Indexing can feel boring. It gives you few exciting stories to tell at a party. You will never be able to say that you discovered the next great stock before everyone else.
But investing is not a style competition. The objective is not to look sophisticated. It is to build wealth steadily over time while avoiding unnecessary costs and mistakes.
Rick Barry was willing to look different because he cared more about making the shot than impressing the crowd. Investors can benefit from the same attitude, and many of the largest investors in the world have come around to this strategy as well.
Sometimes the least glamorous strategy is the one most likely to put points on the board.
Brad Briner was elected North Carolina Treasurer in 2024 after working as the co-chief investment officer for Willett Advisors and has held positions at Morgan Creek Capital, the UNC Management Company, ArcLight Capital and Goldman Sachs. He started writing “Bottom Line with Brad” as a way to educate North Carolinians on complicated financial matters in the Department of State Treasurer’s monthly “Finance Fridays” newsletter. The column is published in partnership with Chapelboro and is not a sponsored series.
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