One of the reasons I feel so passionate about empowering people to invest is because of the advantage you have over institutional, or professional investors. You and I don’t have high-speed networks, don’t pay for research, and certainly don’t have insider information. There are people on Wall Street whose job is to analyze and predict how much money a company will make next year. The stock market is a zero-sum game (one person’s victory is at the expense of someone else), which puts us competing against people who have those edges. It may seem like the odds are stacked against you but the reality is, we as individual investors have the biggest edge of all; time.
Having time on our side gives us three unique advantages. The first is that a long time horizon aligns our thinking with how true long-term wealth is created. If you take a look at the richest people in the world, there isn’t a single one of them that made their fortune overnight, in a year or even a few years. It’s a lifetime of work that goes into building a business that compounds over time.
For fun, here’s the Top 5 billionaires and where they got their money:
Jeff Bezos - 187B, Founder of Amazon
Elon Musk - 172B, Founder of Tesla and SpaceX
Bernard Arnault - 146B, CEO of LVMH (Louis Vuitton)
Bill Gates - 120B, Founder of Microsoft
Mark Zuckerberg - 94B, Founder of Facebook
While we aren’t building the next Amazon, we can take the approach of building our wealth over decades like these people. The goal of investing your money involves looking to gain the highest percent return over a long duration. Institutions that manage money are throttled by customer withdrawals/redemptions, quarterly performance metrics, and are constantly at risk of losing their job. We retail investors are not subject to the same constraints. You put money away for YOUR future, not anyone else’s.
The second advantage time gives us is the freedom to not have to “time” the market. What happens in big downturns in the market is customers, like us, get scared of losing additional money and request to withdraw their money from an institution. The institutional investors are then required to sell assets at the worst possible times to meet customer’s requests for withdrawing funds. This is a huge downfall of money management because the big market downturns are the best times to be buying!
Let’s take a look at some charts! The following charts are all of the SP500 index, which is by far the most popular and what most people will refer to as “the market”. This first chart reflects the last month of price-performance - we haven’t really gone anywhere, but it looks like we are going downhill.
Now let’s zoom out a little bit. Here’s the SP500 for the last 5 years.
Doesn’t that make the downturn early last year, at the height of COVID, seem small? While the economy and the stock market are not the same, the stock market does reflect the forward expectations of the economy. Let’s zoom out a little further. Here’s the SP500 for the last 40 years.
If you look closely you can see some of the bigger crises like the 2000 dotcom bubble, the mortgage crisis in 08, and a few others. What the comparison of these charts shows is that the narrative changes based on how closely you’re looking. A close-up view of the last month will tell you a different story than the last 40 years will. While looking through a microscope will make something small appear large, a telescope can bring something large and far away come into focus. Looking at the large far away picture shows us that despite setbacks, the economy will return to normal and continue to climb.
I don’t make this point to say that everything always goes up, but with a long time horizon, you don’t have to time putting your money in and taking it out over the worry about pandemics or other crises that will inevitably happen. Nobody knows when the market will resume an uptrend after it turns south, not even the professionals. Why not set it and forget it? It’s not worth the stress.
Here’s one last representation. The current value of $100/month put into the SP500 beginning at various points in time.
We are long term investors who don’t get scared out of the market. Get invested, and stay invested.
The third and final advantage time offers is that it makes day to day market “noise” seem trivial. When I say noise, I mean the big headlines of something drastic happening that seems to be on the tip of everyone’s tongue. Business news, like any other news, thrives on viewership and will do whatever it takes to get your attention and steer it in a certain direction. When your attention has diverted, you’re more than likely to let your emotions dictate your response rather than the true long term logic you want to adopt.
There is always some kind of noise happening. In the last week or so, there has been a lot of chatter about the company Gamestop. While the cause of this event is technical in nature, I’ve putten together a brief synopsis of what is happening for anyone unfamiliar.
If you watch any amount of news or are under the age of 30, you’ve probably heard the word “Gamestop” a couple of thousand times in the last few weeks. To give a brief rundown of the situation, Gamestop is a publicly-traded company in the video games and collectibles business. The company has been in somewhat of a decline for several years due to mismanagement and lack of innovation. Most people have had the business pegged for death because of people not requiring physical copies of video games anymore. Financially, the company was sound with low debt, a large cash pile and at no risk of bankruptcy however, Wall St. thought otherwise.
Due to a lack of faith in the future of the business, several large hedge funds “shorted” the stock, which is a bet that the stock price will decline. There are some technical nuances to this process, but to “short” the stock, these funds borrowed shares from other people in order to make this bet. In this particular case, there were more shares borrowed than were actually available to own the whole company, around 160% of total shares were sold short at one point.
Late last year, Ryan Cohen, the founder of Chewy, took interest in the company because he believed it could be turned around. The share price began to rally in the hopes that he could right the ship. Fast forward to a few weeks ago when an online forum on Reddit called “r/wallstreetbets” also picked up on the story and began to all corroborate on buying shares to drive the price up. What this began is what’s called a “short squeeze” whereas people drive up share price, the people who were short the stock are forced to then buy to cover their loss and prevent from losing more money. This creates a vicious whirlwind of buying at essentially any price because the higher the price goes, the people short the stock is losing more and more money. This resulted in the stock price rising from around $20 in late December to $468 last week.
While it’s currently unclear if any further regulation will be instituted, there has been a massive outcry from individual investors that they have been harnessed from continuing to drive the price up while several institutions are being protected. My personal opinion is that there is fault on both sides and that while there should be regulation against the corroborating, interfering with the market to protect any party is a blatant attack on the free market. While I’m thrilled at the idea that more young people want to get involved in the market, this is not the way to do it. Lots of people are going to lose money over Gamestop and spillovers into other struggling companies like AMC and Blackberry and my worry is that they will be burned on investing in the market forever. Don’t let that be you.
The takeaway this week is to use the one advantage you have when investing, your time horizon. Don’t be swayed by market noise or short term events that send everyone running for the exits. Warren Buffett is quoted as saying “If you’re not willing to own a stock for 10 years, do not even think about owning it for 10 minutes”. While many people may think that thought process is outdated, Buffett’s true long term investing strategy has proved him as one of the greatest investors of all time. There is not only one strategy to build wealth, but the one consistent theme in each strategy is time. When in doubt, zoom out and have time on your side.
Talk next week