The floating bridge, which crosses from Seattle on one side of Lake Washington to Bellevue on the other, has been rebuilt and is almost completed. To finance the new bridge, a toll has been placed on its use. The other bridge, the I-90 bridge, requires no toll but takes you much farther out of your way. It is also jammed by cars wishing to avoid the toll. As a result, the floating bridge is a much more attractive option when traveling to Bellevue because there is less worry about losing time to traffic jams.

A wonderful business to own in the stock market is one which functions similarly to a toll bridge. It is a business with many customers who need to cross over the path and are willing to pay a premium to do so. The neat thing about owning toll-bridge companies is that their success is not built on momentum or pyramiding. Therefore, very few investment decisions need to be made and the portfolio sees very low turnover. In other words, you can, for the most part, just sit there and not have to do much of anything to accumulate wealth over the years.

Three years ago, a study was done on trading costs and their effect on U.S. equity mutual fund performance. In our large-cap value domain, turnover and its costs were using well over .80% or 80 basis points of annual return. Turnover across all large equity portfolios averaged 62%. Your common stock portfolio is like a bar of soap. The more you rub it, the smaller it gets. Just sitting there has significant benefits. In fact, we believe it is the main advantage the S&P 500 Index has over most active equity managers.

In his books like The Millionaire Next Door, Dr. Thomas Stanley taught us that keeping annual expenses low was as important to building wealth as creating high income. By averages, folks in the U.S. who built high net worth had lived in the same house for 25 years, had driven the same cars a long time and had stayed married to the same person. In other words, in their day-to-day life, they practiced low turnover.