The So-So Path to $100 Billion
March 16, 2023
"The two most powerful warriors are patience and time." Leo Tolstoy
I often hear people say, "the stock market is rigged," and they are 100% correct. It is rigged. The market is designed to take money from the inpatient and transfer it to those who have patience. There is an old joke about a boy who asks his father "Dad, how exactly does the stock market work?" The father responds "well, you put your money into it, and for some reason you lose money, and then you panic and sell. And someone who's smarter than you makes your money instead." That's how it works.
The So-So Path to a $100 Billion Fortune
Warren Buffett delivered his much-anticipated shareholder letter a couple weeks ago. With 10 pages he managed to reprimand our leaders in Washington and provide timeless insight into how we should manage our own investments. In his letter he wrote, "most of my capital allocation decisions have been so-so." "Our satisfactory results have been the product of a dozen truly good decisions." Those twelve decisions over Buffett's 58 years as CEO average out to 1 every 5 years. Think about that. Two decisions per decade produced a return of 3,787,464% vs. 24,708% market average. Stated differently, Mr. Buffett's Berkshire Hathaway could fall 99% this year and he still would have produced a better result than the S&P 500. One of the greatest fortunes ever built isn't the product of a revolutionary invention. It was made with patience and time.
When Average isn't the Average
Mr. Buffett starts every annual letter with his scorecard vs. the S&P 500 which is widely regarded as the proxy for the average market return. This year he went out of his way to point out that most of his decisions produced average results. The S&P 500 is comprised of the 500 largest publicly traded companies in the US covering approximately 80% of the aggregate value of the stock market. However, its results too are not average. Over the last 20 years, less than 10% of professional money managers produced a return that exceeded the S&P 500. What is even worse is the result for the average investor. In a study by market research firm Dalbar, the average return for the S&P 500 from 1993-2003 was 9.28% and for the average mutual fund investor it was 2.54%. The reason most people have poor results are lack of patience from buying high and selling low and paying excessive fees to Wall Street. Suddenly, the so-so doesn't seem like average.
In my 15 years of professional money management experience, I can attest that it is incredibly difficult to deliver average results trading frequently. The self-imposed pressure by Wall Street to act frequently, incurs additional fees and taxes are what gives the passive S&P 500 a tremendous advantage. After leaving that rat race, I am free to build a portfolio that delivers average. That means not risking savings that could be needed in a downturn. It also means minimizing management fees, trading expenses and taxes. It also means making less decisions because fewer decisions lead to fewer mistakes. Occasionally markets will panic and that will produce genuine opportunities for financial gain. Profiting from those infrequent opportunities requires being calm and insulating your thoughts from the swirl of emotions that drive quoted prices to irrational levels both high and low.
Thoughts on the Market - All we need is just a little patience
It seems to me that investor attention span is getting shorter which I take as a sign for caution. For more than a year now, the market has made sharp moves based on the potential actions of the Federal Reserve. A flurry of trading is unleashed following every press release, speech or sneeze made by Jerome Powell. Interest rates are an important input into the investment equation, but trading based on parsed out details of every press release is a sign investors do not have their priorities straight. I once had an opportunity to join a Zoom meeting with former Fed Governor Richard Fischer where he made it clear that a lot of what the Fed does is make educated guesses about the appropriate action. I believe they are doing the best they can, but we have to be realistic, the economy is a complex ecosystem and they only have blunt tools to work with.
Making investment decisions based on the Federal Reserve is likely an exercise of futility. If you are making an investment decision based on the change in short-term interest rates in 2023, ask yourself what are the chances of it being one of those truly good decisions? The Federal Reserve has nothing to do with investing in good businesses. Remember that the long run rate of return on the stock market is nearly identical to the profits generated by the underlying businesses.
Puny yields since 2009 have pushed investors into riskier assets. Economic growth has been juiced with abundant liquidity and low interest rates. Over the past year the rise in interest rates has been hostile to the market. It's something we must adapt to. It is not at all clear to me that what worked in the last 40 years and exacerbated in the past 13 with abundant money printing will be the same over the next decade. Falling rates propelled the standard 60/40 portfolio to success and it was an outright disaster in 2022. Rates are still rising, and liquidity (M2) is being drained from the economy for the first time. It seems to me like a time for cautious adjustment. Ask yourself what is the harm of having a little extra caution when safe government bonds are yielding more than 5%? Having a portfolio that is overweight patience remains the sensible outlook for me.
Cautious Investing,
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