As a small investor who only manages my own fund, using my own knowledge of the market, it is important to learn not to overestimate my own investing abilities.
Lately, I have been thinking about my own investment in the long term. Just like any other people in an existential crisis, I asked myself “Where do I want to see myself in 30 years’ time?”. I then visualised about myself working leisurely from home as a freelancer, or being my own boss of my own company, or retiring and taking care of my grandchildren while I collect a steady stream of dividends from stocks that I own.
The last scenario seem more like the one I am working towards, with my financial blog and investment journey. The question is “How do I get there?”.
Well, we have to recognise that there is only this much we know about the market, and this much luck that we can have. Anything beyond that, we have to face other market players such as the institutional “big boys” who have far more money, far more talent, far more precise financial information and far more time to reach their goals.
However, we do not have to outsmart these players. We just have to achieve the goals that we set out in the first place. I used to think that it is important to buy stocks that are undervalued, likely to grow in the long run, and pay out huge dividends. However, I must admit that it is not easy to do the analysis day by day, as an individual, on top of your daily work and life. Unless you work at a hedge fund, chances are that you are likely to play alone on the economic market.
No doubt, you can join investment communities, or subscribe to investing ‘gurus’ who are able to provide stock tips and recommendations. However, being a wise investor, you will also need to take time to absorb the information given before making your own investment decision.
Here’s why I think this is not a good idea in the long run…
Too much good stocks to buy!
As the title says, there are just too many ‘good’ stocks that your friends and people online recommend to you! This often leads to not knowing which one to buy exactly, and how much. If you intend to buy all instead, it then defeats the purpose of buying individual stocks in the first place. You might as well buy an index fund which consist of many representative stocks in the market.
Too much transaction cost!
Purchasing individual stocks usually incur a lot more transaction costs as your investment capital tends to be split up to buy many many different stocks. This incurs higher percentage of transaction costs as there is minimum commission. Unless you are buying more than $8000+ worth of stocks, each counter will incur higher costs compared to if you just invest all your capital into say, an index fund.
Too much effort!
Well, for a retail investor to stock pick and buy individual stocks, it usually means that one expects to get a return higher than the market return. However sadly, 9 out of 10 ‘big boys’ investors don’t even get to beat the market consistently in the long run, what sorcery do you have that makes you think that you can do better than them?
Even if really, you are a natural at this game and you can beat the market consistently throughout the years, will the margin be large enough to worth spending so much more effort?
Too much time!
Honestly, it is no doubt, interesting and good knowledge to learn how to value a company, compare P/E ratios, cashflows, assess management team quality and more. But, analysing so many promising companies, in order to make an investment decision, requires time. As the saying goes ” Time is money.” This cannot be any more true in investment.
If you are indeed so pro, so capable to beat the market by arbitrarily 1% or more, consistently, year to year, for 30 years, is it worth the time?
What if, instead of spending all your time deciding which stocks to buy and when, you focus on your money-making skills instead. It could be your full-time career, side job, side hustle or writing books, songs or art pieces to earn royalties. Becoming the top in your field can garner more funds to be put into say, an index fund.
Despite getting marginally less percentage of return, you may have greater absolute return by earning more money, saving the hassle of stock picking, and probably more time available to spend with your family or do what you love. It will also do your mental health good by worrying less about the performance of your stock picks.
Efforts ≠ Performance
Honestly, this is the true deal breaker for me. Time and time again, it has been proven by history that the more you meddle with your stocks, the more likely you will underperform. In fact, a study by Fidelity Investments has interestingly shown that accounts that performed best came from people who were either dead or have forgotten about their investment accounts. I’m not at all surprised about this as I have learnt about the reasons in “The Intelligent Investor” by Benjamin Graham. It is indeed an art to appreciate the counter-intuitiveness of investing well in the long run.
In a nutshell, I have this profound realisation that the advice Warren Buffet gives to the individual investors is really admirable. It is so straightforward and simple. Simply focus on your comparative advantage to earn more money, then put them all into a passive index fund like S&P 500. For a long enough period, you will do much better than an active trader. For the longest period, you will almost always beat the traders fair and square.
If you can beat the traders at what they are doing at 1/1000th time and effort spent in the long term, that will be the real money success that the traders would have wanted in the first place, yet they themselves cannot make sense of.