Learning from the Mistakes Made by Legendary Investors
Today's grativibe is about finding ways to worry less about investments.
I read finance articles not so much for stock tips or other opinion-esque information, but for the big lessons that allow me to get the basics right when managing our retirement nest egg. An article from my favorite monthly finance journal, the AAII Journal, "Learning From the Mistakes Made by Legendary Investors" by Michael Batnick, had a few items that really struck me as important to share.
For a long time I thought if I worked hard enough I could be a good stock investor. My dad used to subscribe to Standard & Poor’s monthly stock booklets, and he had financial knowledge and insights that I think helped him be confident. He studied before he invested. I, on the other hand, do NOT study! I am a terrible stock picker! I have slowly given it up but still keep a little Schwab IRA that I play with. Given my performance over the years I might as well be buying scratch-offs! But I am evolving, and this article helped me evolve a little more.
Batnick starts out by pointing out that you and I are like everyone else – we all try to beat the market, but it's hard. REALLY hard. We all make mistakes, and it is also hard to avoid the mistakes - even if you are aware of them. (Batnick actually wrote a book about it – Big Mistakes: The Best Investors and Their Worst Investments). He explains that investors are not rational creatures and are filled with biases. Batnick himself was a professional investor who tried many different screens and styles to beat the market. He points out that, due to the sheer difficulty of investing, we must all understand that we will make mistakes, because even those famous investors like Bogle and Buffett do as well.
So – how does this help you and me, you ask???? Once you grasp the fact that mistakes are part of investing, we can move to a few facts that will help you be less stressed and become better without much extra work. Knowing this is especially important as we approach retirement, because if you are like me, you have dreams that some really good investing will give you a magical retirement boost!
Fact #1. This one comes from my dad: Saving is the strongest factor in your investing success. Spend more time saving that you do investing. "Pay yourself first" is the old saying, meaning make 401ks, IRAs and ‘rainy day funds’ the most protected part of your monthly budget. Nothing more need be said.
Fact #2. Lots of stocks – LOTS – don’t deliver very good returns. The majority of the market’s gain over the years are driven by a very small percentage of stocks. From 1926-2015, just 30 stocks were responsible for 31.2% of total market wealth creation. Similarly, on lifetime-return basis, just 42.1% of all stocks have a return in excess of a one-month Treasury bill.
Well, I’ll just pick from that 31.2%, right? Tread carefully!
Fact #3. From 1983-2006, 39% of individual stocks had a NEGATIVE return. In fact, even Apple and Amazon had their share prices cut in half during 2007-2009 recession.
Well, diversification can help with some of these big losses and swings, right?
Fact #4. 86.7% of all domestic stock mutual funds underperformed their benchmark over the trailing 5-year period.
It’s SO HARD even to be an AVERAGE investor! Maybe you knew these things already. I know I started using an investment advisor a long time ago. If you do too, I hope he’s as good as mine; wisely, he refuses to give out stock tips! And he tells me what HE is invested in, and we talk about trends, economics, safety, saving. I have come to value his help a great deal in the last 10 years, and this article really brought it home.
So at the end of the day, what did I take away from all these stark facts? These lessons:
- I am totally good with index funds and Berkshire Hathaway. My little ‘play IRA’ has more of those now. This prevents me from doing worse than the market, because the index will contain that 31.2% of winners!
- I no longer worry about beating the market because I now know that that is simply not realistic. I focus on saving more, or working longer, or creating other earnings via blogging or working part-time in retirement.
I still can’t help myself – I will always try to find the next Apple or Google or Amazon – but I do it with very small amounts in my ‘play IRA’ that don’t risk more than a teeny bit of our savings. And I AM doing more studying like Dad did.
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