 Good day, fellow investors. Welcome to the stock market news with a long-term fundamental twist. The biggest news of this week is the SAP 500 reaching new record highs surpassing 2900 points and really delivering a great return for index fund investors over the last 10 years. However, I think given that most financial institutions, YouTubers are promoting index fund index funds index funds. I feel that I have to be the voice of reason and say that I think index funds and this point in time are very dangerous. And I'll give you five reasons why I'm not investing in index funds. And that might lead you to not invest anymore in index funds and diversify a little bit on something that includes thinking about your investments. Let's start. So let's start with the SAP 500. Each time I mention index funds I get at least 10 comments how the SAP 500 did better than Berkshire over the last 10 years and that therefore there is no point in putting any effort into investing, thinking, poor Buffett. He's really doing a bad job. I would say here Berkshire's goal now is to do 10% per year business return. That's exactly what the SAP 500 is doing. However, that's a stock market return versus Berkshire's business return. Keep that in mind. The difference will be seen over 20, 30 years over market cycles. So if we look over two cycles over the last 20 years Berkshire's performance is two times better than the SAP 500. If we look over 45 years Berkshire is up 104,000% or 1,000 times. The SAP 500 still did very good over the last 45 years is up 2,700% or 27 times. So Berkshire did just a little bit better. And this is also my message depends on what you focus on. That's what is what you will get in life. So if you focus on the average on index funds on the market return, you will get the market return that I would argue will not be 10% like it was in the last 35 years. It might be 45% due to valuations. I'll come to that in a moment. So it's up to you on what you want to focus on. Let's discuss the reasons why I think index funds are dangerous now. The first reason is that on one side you have thinking and common sense and on the other side you have laziness and stupidity. And to quote Buffett from his 1985 Letters to Share Holders, we are enormously indebted to those academics, efficient market academics that have spurred the whole index fund passive you can't beat the market investment thesis. So they are indebted to those academics. What could be more advantageous in an intellectual contest, whether it is bridge chess or stock selection than to have opponents who have been taught that thinking is a waste of energy. So you must understand that index fund investing is think less. You're not thinking actually you're thinking that thinking is a waste of energy. So if you want to do something in life, just do it passively. Let somebody else do it. Let's just an algorithm that some academic somewhere invented, take the stocks and put it into an index fund. Then that is your decisions. But if you want to be an investor, not just in stocks on all asset classes in your life portfolio, learn to analyze the risk, which is the key when it comes to investing and then compare it to the reward, then you have to put some effort in it. And we have seen on Berkshire's example how it really pays. And I really think that it pays if you start slowly doing it now, start learning about your financing, you educate yourself financially. And then the difference over the long term will be something like Berkshire and the SAP 500, especially starting from now because of this long term value beats growth because value implies managing risk. Growth doesn't think about risk. If we look at again academics, Eugene Fama, the founder practically of the efficient market hypothesis and index fund investing, if we look at his data, he shows that value does risk management has beaten growth investing for 90% of the years since 1926. It didn't beat growth in the last 10 years somewhere in the 1990s during the dotcom bubble and early prior to the World War II. All other times, value did outperform growth because value gives you a margin of safety in the form of the assets. And this value investing is again from Eugene Fama is thinkless. So they buy also the low price to book values that will go bankrupt. So if you apply common sense, if you avoid bad sectors like textiles in the 1970s that warren did invest in, then you can do even better by investing with a margin of safety and focusing on risk first. So don't lose money, don't lose money and then let the upside come to you from the value, not from exuberance and growth. Over the last 10 years, we have seen exuberance, we have seen a frenzy of buying stocks, buying index funds, buying ETFs that has created a situation where growth outperformed value. But again, we have to see how that works over a cycle. The reason number three is that you are buying expensive things when you buy an index fund. If you look again, index fund academics, they found out lately that the market is not so efficient that if you buy smaller businesses, you get higher returns. And if you buy value, also you get higher returns. To get away from this complicated formula, let me show you what this actually means. These are the top 10 components of the SAP 500, the largest companies today on the American market. And if you go back 40 years, only Exxon is still in the top 10. All the other companies, you see General Electric did the wonderful job over the last years, all the other companies are not included in the top 10. This means that you are always buying the hottest, the largest, the most expensive stocks and you buy less of the smaller stocks if those stocks are even included in the SAP 500. Apple, Amazon, Facebook, all recently just included in the SAP 500. So you wouldn't even have owned them 20 years ago. Number four, this is extremely important. Valuations increase the risk of investing in index funds. Nobody thinks about investing, nobody thinks about what they are investing in and nobody thinks about valuations. But valuations are key. This is the chart for SAP 500, price to earnings ratio. That's the business yield that you get when you invest. And you can see how valuations have expanded since 1980 till now from around 7.8 to 22. What does this mean? This means that the business yield, the business return went from 15% in 1980s to the current 4.5%. If the SAP 500 would have the same valuation as in the 1980s, begin 1980s, it would be below 1000 points at the PE ratio of 7. So the expansion in valuations really added to the return over the last 45 years. And this is something to really keep in mind because history and long-term history shows us that whenever valuations expand in a period of exuberance, things get dangerous. And this is the result. So let's just take a look at this. Valuations had been expanding in the late 1800s, 1920s, 1950 to 1962 and then 1980 to 1999. Really fast expansion and then declined but long-term still expansion since 1982. If we look at the market, how it performed after a period of expansion, look at the performance from the 1900s. So after the expansion in the 1800s, 22 years of zero returns. Then we had the 1920s expansion, 25 years of zero returns. Then we had the 1950s 62 expansion of valuations, 17 years of zero returns. Then we had the 1980s expansion to 1999. Then 12 years of zero returns. And now we have again a huge expansion from 2009 to 2011 to now. And I expect long-term, perhaps we'll have another year, two, three years of good returns. But long-term I expect 10, 15, 20 years of zero returns. And this is why I think it is dangerous to invest in the SAP 500 now. And number five, the reason why not to invest in index funds, it is just up to you. Whether you want to put the effort and start learning, start understanding about your finances. You work 40 years, probably eight, 10 hours a day with three to five years of holidays per year. You work to get to money. 99% of people work for money to put food on the table. And then they don't even invest. So you invest 40 years of your life to work for money. You don't even invest an hour a week to learn about that money, to learn about how that financing works, how that investment work, how the risk reward is there. And that is very dangerous from my perspective. So if you want to learn about investing, start reading books, start subscribing to this channel would be a great idea because here we talk about risk reward, and we try to find common sense, good long-term investments. We are here, investors, and we like to think. So my conclusion is start educating yourself. You don't have to sell your index funds now. You probably made a lot of money on them, but start diversifying the new money that you're putting into, start really thinking, okay, start finding those small investments, start looking at real estate, start understanding how business works. And that would be the message of this video. If you continue to blindly put money into index funds, you might get burned. You might really see a much poorer retirement over the next 10, 20, 30 years, or you might not reach your financial goals because nobody thinks about the risk. And that's the key core investment principle. First, think about the risk to put Buffett again. The first rule on investment is don't lose. And the second rule on investment is don't forget the first rule. And that's all the rules there are. I mean that if you buy things for far below what they're worth and you buy a group of them, you basically don't lose money. So I think I can close with that. Thank you for watching. Don't forget to subscribe. Looking forward to your comments. You can send me an email if you have any questions about portfolio that you don't want to share in the comments. Thank you and I'll see you in the next video.