Successful Investing is so Random

This essay first posted in August, 2007

When I think of successful investors, I think of George.

George became wealthy by his own efforts. He began investing at a young age and had amassed a portfolio valued in the millions by the time he retired, moved to my village and became my brokerage client. He always made his own decisions. Twice a year, he would call with a list of companies he was interested in. I would assemble the research, send it to him, and study it myself. We would get together to discuss the research over lunch. A few weeks later, he would call with his list of buys and sells.

He generally bought blue chip stocks that paid dividends and reinvested the dividends. Although it was hard to fault him, there was nothing special about his strategy. I was puzzled by what,  to me, was extraordinary success from a rather mundane approach to investing until I reflected on his history as an investor.

He had begun investing in the late 1940s when he was twenty. Being young and eager to make money, he was predisposed to ignore the advice of his elders, all of whom inveighed against buying stocks. The accepted wisdom was that a post war depression was coming. Pessimism was rampant. The public had liquidated years before and there was little interest in investing. The market was cheap, of course. Blue chip stocks were available paying dividends of 8-10%. The Dow Industrial Average was barely off the 1942 low of 90 (nine-zero).

Without knowing it, George began his investment career in the most sold out market of the century. Thus, everything he bought went up. Everything. Every year, for almost twenty years the stocks he accumulated went up. His stock selections were plain vanilla, but anything he did worked out and, because he was successful, he stayed with his strategy. Wouldn’t we all?

I mean no disrespect, but the principal reason for George’s success as an investor was the random accident of his birth date, which was about twenty years before a new bull market got underway. While experienced investors in 1947 were certain that stocks should
be avoided, George the newbie heedlessly bought. When the public finally started buying stocks again it was 1966 and the market was now up ten fold (nine-zero-zero plus). The average investor spent the next six years throwing money into a market top and then got creamed in 1973-74. George took a hit in his portfolio, too. But, during the 70s his continued confidence in stocks, born out of twenty years of non-stop success, enabled him to ride out the bear market, actually accumulating more stocks during the decline while the average investor who came to the party late and bought expensive stocks was getting discouraged and getting out. Lucky George.

Observations

 Long term returns for the major investment styles (value investing, growth investing, small cap and mid cap investing) are remarkably similar (see sources). They all hinge on buying cheap, holding for long periods of time-decades, usually-and then selling dear. Because time is involved, individuals have to start young. The catch is they have to be young when stocks are cheap, and dumb enough to go against the crowd. There are plenty of young investors today, but stocks are not cheap and they are definitely not bucking the crowd.

I will end this screed with some advice: Start young if you wish to become wealthy by investing. Don’t worry about what you buy; anything will work just fine if you arrange to be born twenty years before the bottom of a bear market.

Addendum, October 6, 2011: Show this essay to your children or grandchildren who may be coming into their twenties soon. 2016 and beyond will be an excellent time to begin investing. Tell them not to listen to anyone over fifty. They will all be telling them to avoid stocks like the plague.

Cheers,

Rod

Sources: Slater, Robert, John Bogle and the Vanguard Experiment

The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

 

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