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Time in the market vs timing the market
If you're itching to time the market, here's a cautionary tale: If you had invested $10,000 in the S&P 500 and left it untouched, it would have grown to $64,000 in 20 years.
But missing just the best 10 days – out of 7,300 days – would drop your return to $29,000.
- If you missed the best 20 days, you'd lose out on $47,000 worth of profit.
- If you miss the best 30 days, you just break even.
- If you miss the best 40 days, you flat out lose money.
Here's the kicker: The best days often occur during bear markets, when investors are at their most fearful.
By cashing out and buying back in, even 0.13% of the time, you can damage your long-term wealth.
Investing and sitting tight is the simplest strategy to think of but the hardest to pull off.
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You can do everything right and still lose
The most common argument against picking stocks is that you can make a lot of mistakes if you don't know what you're doing. But professor Aswath Damodaran had another interesting idea:
What he said was that You can do everything right and still lose. You can read your Ben Graham, do your homework, read security analysis, go through the 10-k reports and do everything you're supposed to. But one policy change or war or earthquake or just plain bad luck can change how your stock picks perform.
The tricky thing about the market is that it's a Keynesian beauty contest – You don't get rich by just predicting the winners, you have to predict what other people will pick as winners. And that's incredibly hard.
Even in the case of Warren Buffett, who is no doubt one of the smartest and most hard-working investors of all time, there's a huge amount of luck that made him who he is. If Buffett was born today and repeated his strategy from scratch, he might be successful, but nowhere near the force of nature that he was when most people hadn't caught on to the idea of value investing – and venture capital wasn't a thing.
Here's a thought experiment for you to think about, from professor Aswath: Imagine you're 85 years old and somebody shows up with a record of all the investing decisions you made, your entire track record, and compared that with just buying and holding S&P 500 index funds.
Would you regret all that time – decades spent studying stocks?
If the answer is yes, you have no business picking stocks now.
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The guest who became an owner
Real estate prices in New York are insane. Everyone knows that. But whatever solution you've thought in mind, I bet you haven't heard of one as crazy as this – Check into a hotel as a guest, refuse to leave, and finally turn the entire hotel over to yourself as an owner of the hotel.
That's what Mickey Barreto did. He squatted in the New Yorker hotel for five whole years and only paid $200.57 in room rent. Some time in between, he found a clever loophole in the Rent Stabilization act that let him request for a lease at a lower rent in the room he was staying in, Room 2565. Surprisingly, the court ruled in his favor.
But it also gave him a bonus. By wording the judgment saying he had "possession of the building", it gave Barreto an idea. He tried to register ownership of Room 2565, but the records office said that wasn't possible – he could only register the entire hotel in his name!
After six failed attempts, on the seventh attempt, Barreto filed a successful claim that gave him ownership rights to the 1.2 million square foot building. By this time, the owners were scrambling to fight back, and after a lengthy legal battle, they finally managed to get Barreto arrested on 24 different counts.
So while it was a wild ride, Barreto might face a long time in prison. What do you think? Was Barreto a genius or a fraud or a bit of both?
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That's it for this week. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)
Stay safe, stay invested and I will see you next week – Graham Stephan.
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