We think every private investor should have a listen to this podcast episode because it really gets to the heart of the strategic choices we have to make when we invest in the stock market.

https://commonstock.com/post/5044a9a4-9246-4521-a322-665c5d68357e by @marketmusician

We're going to add some of our own thoughts to this. We've spoken at length to our investor circle about this very topic. Most of us are getting on in age, so our realisations have the benefit of hindsight.

First of all, when a private retail investor decides to invest in the stock market, it's very important to know your base rates. This sets your long-term expectations if you decide to invest using one of the least effort, positive-expectancy processes: dollar-cost average into a low-fee, broad market index fund. This is as close to zero effort as you get and still pretty much guarantee an excellent outcome over the long term.

This graph shows the long-term compound annual return of stocks and Government bonds in the United States for the 97 years spanning 1926 to 2022. The data tells us on average, we can expect stocks to rise 10.1% per year over the long-term. We know that growth is not linear. The stock market is very volatile - some years the market will go up 30%, some years it will go up only 5%, and one out of every 4 years on average we’ll experience a drop of at least -10%.

An investor buying units in a market index fund will capture this long-term return as long as they remain invested. However, when we're in our 20s and sit down to think about how much cash savings we can invest and do our calculations using a 10% average annual return, it soon becomes very clear that it's going to take us 3 to 4 decades to reach our financial freedom number. We'll be almost 60 before we can free ourselves from our slave jobs and reap the rewards of financial freedom. We feel the need to expedite our journey to the wealth we desire. All we have to do is hop on the next Apple or Microsoft and that rocket will take our portfolio to the moon. This is how we get interested in buying individual stocks. T he rewards are lucrative if we get it right.

But individual stock investing takes work. If you don't do your research, you soon find yourself falling into "normal" behavioural errors that won't serve you well. You jump on board the most popular stocks in herd-like manner because they're the ones going up the fastest. They soon come crashing down because their valuations were stratospheric. Alternatively, you might buy stocks trading at a 52-week low because they seem cheap, only to fall victim to the value traps. You soon realise you must do your homework, and homework takes time and effort.

We personally don't believe there is a reliable "lazy" method to invest in individual stocks. Individual stocks requite ongoing monitoring because empires rise and fall. Availability bias has us thinking about Apple, Microsoft, Amazon, Netflix and all the other long-tenured businesses that made investors rich. But the reality is they represent the tiny minority of the universe of stocks. Finding the next Apple is not going to be easy. We know from the research by Professor Hendrik Bessembinder of Arizona State University that the median lifetime of a stock between July 1926 to December 2016 is only 7.5 years. Only 36 stocks were present in the CRSP database of 25,967 stocks

for the full 90 years. Most companies eventually go bust, get acquired or de-list.

You could try and apply a "Lindy" strategy and only buy individual companies that have survived 50 or more years on the assumption these companies possess an enduring business model that will continue to survive. But these types of companies like Johnson & Johnson ($JNJ), Bristol Myers Squibb ($BMY), Coca Cola ($KO) , Boeing ($BA) etc aren't going to make you rich anytime soon. These are steady eddies, probably giving you not much more than broad market returns.

You could also outsource your stock selection by investing in an active fund or subscribing to a stock picking service. This will save you from having to do your own homework. But you risk underperforming market returns for the chance to outperform it. The inconvenient truth is you can't know in advance which outcome you're going to get.

Making a strategic choice is quite vexing. When it comes to the game of investing, there really isn't any free lunch. It's a well-deserved cliché because it's true. There's always a trade-off ... there's only ever a probabilistic bet ... there's never any guarantees. If you get a guarantee, you're getting scammed.

There' one thing that our investing circle all agree on. As you get older, you tend to get more passive as an investor. When you're in your late 50s, you value your time so much more than when you're in your 20s. You don't really want to be wasting hours and hours of your leisure time sitting in your home office researching companies. You won't be lying in your death bed wishing you researched more stocks to uncover more hidden gems. You get the sudden realisation that you're closer the end of your "health span", so you want to get out and do what's in your bucket list while you're still physically able. You've reaped the benefit of being invested in the stock market for multiple decades, so you become more comfortable accepting slower, steadier growth. Putting in the effort to grow your portfolio 15% - 20% per annum isn't such an imperative anymore when you can quietly accept a passive, no effort 10% per annum. If you think you can outperform the broad market over the long-term without putting in the effort, we have a bridge to sell you.

On another note, the podcast mentions the "non-existent" study claiming the deceased who still have an open investment account do much better than the living, because the living tended to fiddle with their portfolios to their own detriment. We've heard of this study numerous times as well during our 35+ years of investment and also never seen the source research paper. Neither the podcasters or us dispute the story, we've just never seen the source material to verify it.

This is similar to the story we hear all the time about investors in Peter Lynch's Magellan Fund. The story goes:

"Peter Lynch, who formerly managed the high-flying Fidelity Magellan Fund from 1977 to 1990, is a legendary investor. Under his management, the fund averaged an astounding annual return of 29%. It would seem all you had to do was ride along with Lynch and you would earn phenomenal returns. But that didn't happen. According to Fidelity Investments, the average Magellan Fund investor lost money during Lynch’s tenure there"

Jonathan Dash

Forbes Councils Member

"How Investors Are Costing Themselves Money"

Another account recounts a similar story using a similar metric:

"During his tenure Lynch trounced the market overall and beat it in most years, racking up a 29 percent annualized return. But Lynch himself pointed out a fly in the ointment. He calculated that the average investor in his fund made only around 7 percent during the same period. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery"

Spencer Jakab

Author: "Heads I Win, Tails I Win"

So the average investor lost money, or the average investor only made 7% per annum. "Average" is not likely calculated using a different methodology in each story. We've never been able to track down the source research paper from Fidelity to verify it for ourselves. Every link we've followed refers to someone else saying the same thing. Follow the links long enough and it because circular ! Once again, we're disputing it happened. We just can't verify it. Maybe someone else knows?