Simplifying simple

I was recently asked to give a presentation about investing to a local civic group. I’m sorry to report it didn’t go well. At all.

Honestly, it should have never happened in the first place. I arrived to find out I was listed as an “investing guru.” I’ve been called a lot of things in my time. (Yes, including a few things not fit for print.) But I assure you, I am no guru. Investing, or otherwise.

Had I any common sense I would have turned and walked back to my car immediately. But I did not. And the talk at least for a while was going reasonably well. I rambled about waves, hoping the audience didn’t realize I still don’t have a boat. I talked about the importance of focusing on the long term, and not getting caught up in the emotion of the moment no matter how powerful that emotion was. In other words, I sang the greatest hits. And, at least in my estimation, I didn’t butcher the tune.

I got lucky. It was a crowd very into investing, likely hoping to hear about the next big thing. This is a bull market, after all.

It was during the Q&A that things really went downhill. Early in the Q&A. I tried to select my questioners carefully, focusing on those who looked timid or polite in hopes of not falling into a confrontation. (Palantir shareholders are everywhere!) 

A very kind looking young gentleman stood up and asked what seemed to be an innocent enough question: To maximize returns, what percentage of investments would I recommend putting into individual stocks, instead of mutual funds and ETFs?

“To be honest,” I said. “Probably, none of it.”

I have never seen the air sucked out of a room so fast. It was one of those silences that is so heavy that your heart goes out to the poor speaker in the front of the room. Only this time, that speaker was me.

And now a brief (paid) endorsement:

To the extent that this content is intelligent, it is so because I use tools like Koyfin to make sure I have the best charts, data, analysis, and transcripts available. Koyfin provides a lot of the same tools you get with a Bloomberg terminal or Capital IQ at a fraction of the price.

Interested? Click the button below to get 10% off your first year using Koyfin.

The great thing about writing as compared to speaking is writing gives you the space and the time to split hairs. Or, more politely, get nuanced. It is a luxury you don’t have in the moment, during a conversation.

For example: I didn’t mean to say don’t buy individual stocks. I did mean to say, not buying individual stocks is probably, for most all of us, the best way to maximize returns.

You see, stock picking is hard. We joke about it around here a lot (and rightfully so), but we should also learn a lesson from the fact that most active managers lose to the market. And very few of those who win do so consistently over time. In investing, the easy solution is also the best solution. So why do anything other than buy index funds?

It is the equities paradox: Investing is easy, but stock picking is hard.

I can only imagine the emails I will get. Yes, yes, I know. One winner can go a long way towards cancelling out a bunch of losers. If you bought Amazon and four dot-bombs in 1998 you were both 80% stupid and comfortably wealthy. But realize the Amazons and Nvidias (and TransDigms!!!!) of the world are few and far between. There is no guarantee the next Amazon is one of your five. Opting out all together and just buying low-cost index funds is, at worst, good enough.

This is a pretty weird thing to read from a guy who owns 80-something stocks and spends a good bit of time writing about them. And begs the question… Why bother?

If it is for the money, it is probably time and energy that could have been better spent on something else.

I try to track all of this. I don’t know how well I do, but if you look at all of my buys and all of my sells going back more than a decade, it appears I have beaten the S&P 500 by about 136 percentage points. Total. Or maybe a few percentage points per year, on average.

Of course, for some of those years there were transaction costs to factor in. It is also not total return, which could work against me or for me given the stocks I buy. And I’m not really sure how good my record keeping is going back that far. But even if true, I’ve spent a lot of time and gone through a lot of ups and downs for very little excess return. And with a “win” rate of 41% (again, not sure I totally trust my scorekeeping so could be worse), it took a few big winners to get there.

I’m also reporting this at a pretty spectacular moment for stocks, with the market up 16% for the year. It is a time when we all feel like “gurus.”

I dare say that even if on a purely mathematical basis I am up, I still would have been basically as wealthy and probably a lot healthier taking the easy option. The market is up substantially over the past dozen or so years.

Which isn’t to say you shouldn’t invest in individual stocks. By my logic here, I should never drink, never gamble, never eat fatty foods, never do a lot of things. I invest mostly because it is fun. I like markets. I like stocks. This is the world I enjoy being a part of. And it is fun to find the TransDigms and the XPOs and the Nelnets and those sorts of stocks before everyone else does. I have no regrets.

But just as with gambling and drinking, moderation is important. Only about 30% of my equity portfolio is in individual stocks. And less than 15% of our household net worth. MercadoLibre is my largest individual holding. It is maybe 5% of the total equity portfolio.

In other words, I put a lot in low-cost funds.

I have enough faith in the “easy” part, the simple and steady compounding of the market over time, that I am ok with carving out a piece of the pie for something I enjoy and which potentially could be profitable. That’s fine. I’m sure gamblers say the same thing. But back to the original question, it isn’t the same as doing it because it is the best strategy to maximize returns.

Know the game you are playing, understand the commitment it requires to play, and don’t get in too deep. Remember there is an easier alternative that works just as well.

If not for the pitchforks and torches, I might have eventually been able to explain all of this to that kind-looking gentleman. Oh well. With any luck, he subscribed to the newsletter.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.