Why Can't people Accumulate Wealth?
Your thoughts control financial success-not markets
August 9 2023
There are two ways to think about buying stock.
1.“Hi Jill, I just bought a share of Apple Stock.” Jill: “Cool.”
2.“Hey Jill, the CEO and other executives at Apple are offering me part ownership in the company! I will make the exact same profits they do, from growth of sales and profits plus dividends!” Jill: “What? Are you serious?”
One share of company stock is actual ownership. You do NOT “sort of own it;” you are truly, in every way, an owner of the company. As small as the fraction is, you literally own that much of the company. You buy shares the same way and same price that Bill Gates buys Microsoft or Jeff Bezos buys Amazon.
The idea of my work, and other behavioral finance people, is that your returns are determined by your behavior. The markets as tracked by an index, such as the S&P 500, have done fine. It has returned about 10% on average for nearly 100 years. The index is the story of growth of profits and dividends over time, of the great companies in the US. We do not have to “beat the S&P,” we merely have to participate in it. But most won’t.
You must have one thought that is certain and permanent: Quality Equity assets increase in value over time.
There are only 2 strategies when you buy stocks. 1. Buy great companies and wait. 2. Everything else. If you choose door number 2, you open up a door of misery that will create a lifetime of stress and leave you with less money.
This disconnect between market returns and investor returns is highlighted each year in The Dalbar Report. It is an annual report that calculates the returns that investors receive versus the returns of what they invested in. It is pretty dismal as the chart below reveals. It is very stable over time. The numbers from Dalbar highlight what S&P 500 index returned for 20 years versus investors who owned the S&P index during that 20 years. The index grew $100,000 to $655,000. The average investor in that index would have received only $276,000.
Why does the average investor underperform so badly? Because they aren’t prepared for the emotional gauntlet that lies in front of them. Many think, just waiting, doing nothing else, doesn’t sound right. Watching your nest egg gyrate on its march to higher and higher highs is way harder than they thought. “Shouldn’t we be doing something?, this is killing me! No, that’s all you do. It is not killing you. You have forgotten the one thing above that you have to know, Quality equity assets increase in value over time.
Investor behavior is far more important than investment behavior.
“We are haunted by the thought that there may be a better, quicker, smarter way to invest, that is different from what we are doing.”
That thought, is why the investment world has gotten more and more complex and confusing. When you constantly are thinking “I can’t just sit here!,” you are bound not to sit there and may be headed to a job at Home Depot when you “retire.” There is a Chinese sized army of financial salesmen ready to have you cave into that thought with magical solutions, in which you will eventually (or quickly) hear some version of: “We can get you in the market when it is “going up,” and get you out before it is “going down.” And those with itching ears will pounce on it. They have just lowered their chances of growing wealth significantly.
The idea that the market is “going up” or “going down,” is a false concept. We hear those words all the time. In fact, we have no idea where it is going. We only know that it has gone up or gone down since one year ago, month ago, or one second ago. We have NO idea where it is headed in the next second, minute, month, year. Thinking we do, is an expensive thought.
The Conclusion
Complexity in markets has come about for the most part, by the need for people to “self-medicate” the pain of being patient. The medicine taken may be derivatives, annuities, technical analysis, market timing, “swing trading,” and many more. The thought of holding quality equity assets and doing nothing, is just too hard for most people to do. They must be moving; they must feel they are in control. They continue to use strange and unproven strategies to “self-medicate” the pain of exercising long term patience and faith in companies growing over time.
Coming soon: How do we get in this mess? The Fear and Greed cycle. How the media is planted around what happened today. Crypto, Gold, Technical Analysis and more.
Disclaimer: Any mention of a stock or fund in this newsletter is not a recommendation for or against the purchase of that stock or fund. It is strictly for illustrative purposes. Securities offered through Trail Creek Advisors a Register Investment Advisory firm. Website: CraigVerdi.com. Email: craig@craigverdi.com
Olusegun, Thanks.
It is not so much how you manage investments. It is about how you manage your emotions. People tend to get in after they are enthused by returns and their friends bragging about it, while they are getting nothing. So, they jump in. First mistake. Going all in on emotion.
The second and biggest mistake is getting all out as soon as they lose some money. Once you commit to equity investing you stay put. How long? Like Buffett says, "Our favorite holding period is forever."
So, they get out and complain, "we always lose money in stocks." That is actually impossible to do over a long period but that is what happens.
You can get my book on Amazon. If you don't want to pay for the paperback, you can download it for 99 cents. Take care.
Great post Craig,. Lovely read. "Investor behavior is far more important than investment behavior" - this is insightful. In other words, how we manage investments is more important than the investment itself.
What are your thoughts on ETFs?