Investments & Re-learning Lessons (again)

Long-Term-Savings

Years of reading Warren Buffett’s annual letter (which is hugely educational) had taught me a few lessons, and his insistence that reading (and understanding) Benjamin Graham’s legendary book “The Intelligent Investor” was better than most business schools, only reinforced the basics such as:

  • Buy solid companies with an enduring advantage (known as a “wide moat”) at a good price
  • Stop yourself from churning your holdings which simply eats up any gains with transaction costs
  • The stock market can act irrational many times, offering more for your stock one day, offering less the next day when no material changes have taken place – its how you react and only the price you sell at that matters – Warren often talks about buying stocks that you wouldn’t mind owning even if the market stayed closed for a few years
  • You can’t time the market because the market is an irrational beast – don’t even get Warren and Charlie started on the Efficient Market Theory taught in most business schools which they will mock and tear apart.

marketirrational

And I know the stats, for 2012, two thirds of all professional fund managers again failed to match or beat the S&P 500 index…..over a larger period of time, the stats show that for periods of 10 or more years, nearly 90% of all fund managers will lag behind a simple S&P 500 Index fund – that’s crazy – I mean, these are guys that spend all day every day researching stocks with conference calls to CEOs, armies of stock analysts

and yet, I still feel like I can pick solid stocks that should perform better than the overall average – and once again, I find out that I haven’t…and that slays me.  The pragmatist in me feels like “Why buy an index that covers 500 companies – many of which I know are poor investments when I can cherry-pick the ones that should perform the best?” – and I have to keep re-learning the lesson that it just doesn’t work that way.

disappointment

At the start of 2012, I told myself that I would closely monitor how the S&P 500 does against my IRA accounts and against another benchmark – the Berkshire Hathaway stock price which in itself is like an index fund (Berkshire does own sizable chunks of CocaCola, IBM, all of Geico, all of Burlington Northern, etc)

The results for 2012 ?

Gain

S&P 500 (SPX)

13.4%

Berkshire Hathaway (BRK.B)

17.6%

IRA Accounts (where I pick the stocks)

9.7% (doh!)

401k Accounts (that blindly dump money into low cost index funds)

14%

As far as trying to time the market – the below chart really pounds home the dangers (and high costs of trying to time the market and pulling out when fear is at its highest – check out how much of the entire stock market gains you would miss out on if you had missed just the 10 best days in the market – and the problem is that the best days ALWAYS happen at the tail end of bear markets when everyone is fed up with a recession, depression, or market crash – miss out on the big jumps on the ride up dilute your maximum possible earnings

marketgains

So when my sister asked me years ago where she should invest retirement money I told her…the lowest cost S&P 500 Index fund you can find.

And Warren Buffett also recommends a simple S&P 500 index fund for most individuals as well,

And now, I may finally start to follow that advice a lot more in the future – maybe I’ll stick in a few stop-losses and the next time I sell out of a stock, just roll it over into the S&P 500 index fund and let it ride…which I should have been doing along time ago.

Ironically, the best way to get the best returns happens to be the easy way, and yet I keep trying the hard way – it’s time to change.

hardway

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About bradosterloo

.NET Software Developer working for Innovative Systems, LLC in Mitchell, SD
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One Response to Investments & Re-learning Lessons (again)

  1. Pingback: Money Experts | The View from Office 301

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