Just Keep Buying - The New 3 Most Important Words in Investing
Buy the dip…
Put all your eggs in one basket and watch that basket…
Wait for the fat pitch...
The world of investing is full of colorful words and nuggets of wisdom.?While it sounds good, it may not always work in practice.
Nick Maggiulli is one of my favorite writers in finance (alongside Morgan Housel).?In his recently published book, he added another catchy investment words of wisdom:??Just Keep on Buying.???
However, unlike other nuggets of wisdom, this catchy phrase has basis in data.?Nick, creator of the popular blog Of Dollars and Data, found a unique voice in the investment space by masterfully combining numbers with narratives.?
Just Keep on Buying is a rare investment gem in the crowded world of investment books.?It is unique for its clarity and brevity.?It is unique for debunking some of the “common-sense” nuggets of wisdom that turn out to have no basis when tested against the rigour of data analysis.
Below are the key lessons I learned from the book:
1. Saving is for poor, investing is for rich
Charlie Munger, my irreverent lifelong hero, famously said: “the first $100,000 is a bitch”. Like his hero Benjamin Franklin, he advocates frugality “spend less than you make”.?I have been practicing FIRE (Financial Independence Retire Early) for a long time since I read Vicky Robin’s book Your Money or Your Life.?
However, as you age and accumulate more wealth, savings matter less than investment.?If you build a portfolio of USD 10 million, a 10% market movement would result in a loss of USD 1 million – a loss that cannot be saved away. There is limit as to what savings can do at a later stage. ?As we build larger investment portfolios, we should spend a lot more time thinking about investment choices.?Saving matters early in life.?Investment in later life.
2. Investing is the only weapon against time and human capital decay
There are many reasons why one should invest. The most commonly cited one is protection against inflation. From 1926 to 2020, investing in US Treasury gives a return that is 13x inflation and investing in stocks – 729x!?Investment is the only weapon of retirees against rising prices.
However, what is most motivating reason for investing is this chart (keep on looking this chart to remind you of the urgency of investing):
If let's say you have to work for the next 10 years, this means that you are losing 10% of your earnings power (human capital) every year!
Let's not talk about inflation. Just by mere passage of time, you are losing this per year.
This is why investing is the only way to fight against the march of time. Build up financial capital before you ran out of human capital.
We cannot work forever. Our skills become less relevant over time. And we are not even talking about AI and other forces that could disrupt our ability to continue to rely on human capital. Behind every tragic story of highly paid athletes undergoing bankruptcy at the later stage of their life is a failure to replace human capital with financial capital.
3. Have some perspective on why we invest: to fund the life that we want to live
To avoid doing stupid things in investing, remind ourselves why do we invest. We invest to fund the life that we want to live.
Having this perspective reminds us not to gamble our lives away through foolish investment decisions. This perspective also helps us see the bigger picture. When we want to replace human capital with financial capital, we should work on developing a diverse set of compounding machines - income producing assets.
4. There are many ways to win. Explore all paths to build wealth.
As a lifelong student of Warren Buffett, I have been guilty of turning a blind eye on other asset classes and just solely focus on stocks. Never mind that I know that Warren Buffett once took a strategic position in silver. Never mind that I know that Charlie Munger started building his wealth through real estate.
In the quest to continually buy a diverse set of income producing asset, the book emphasised that there are many ways of winning, the world is uncertain and therefore, explore all paths to build wealth.
?5. Stock selection is futile - it's hard to find winners, winners are not winners forever
Many classic finance books were written about this – Jack Bogle, Charles Ellis and Burton Malkiel all shouting that stock selection is futile.?“Don't look for the needle in the haystack, buy the haystack!” has been the battle cry of index investors.?
And we all heard the financial reasons not to do so:
6. Stock selection is futile - the existential reason
A unique reason why stock selection futile is the existential reason against stock picking.
Unlike in other professions (coding, selling, accounting, lawyering), it is easy to measure whether a person is good at what he or she does or not. The output will quickly reveal your competence in a particular profession.?
However, in stock selection, it will take at least multiple years to find out whether you are correct or not.?And even if you wait for multiple years, you do not know for sure.
Nassim Taleb recounted the story of a Chicago based trader who made millions over the course of his trading career only to lose more 10x of what he made in his entire lifetime in a single trading day!
There is little linkage between the decision and the result is not so obvious for stock picking.
A powerful question to ask all aspiring stock pickers:?why would you play a game that you cannot prove whether you are good at it or not?
7. Invest now and keep on investing because most markets go up most of the time
Buy now and keep on buying!? Why? Most markets go up most of the time.?This is not true all the time but this is true most of the time.?
To better understand this, there is no better explainer than the most successful investor in history - Warren Buffett. I will listen to this video every time I lose perspective in investing. I let my students watch this over and over again to gain that perspective.
“I bought my first stock in, probably, April of 1942 when I was 11. And since then, I mean, actually World War II didn’t look so good at that time. I mean, the prospects, they really didn’t. I mean, you know, we were not doing well in the Pacific. I’m not sure I calculated that into my purchase of my three shares. But I mean, just think of all the things that have happened since then, you know? Atomic weapons and major wars, presidents resigning, and all kinds of things... massive inflation at certain times. To give up what you’re doing well because of guesses about what’s going to happen in some macro way just doesn’t make any sense to us.”
According to Buffett - between two world wars, military conflicts, Great Depression, recession, oil shocks, flu epidemic, resignation of a President - the Dow rose from 66 to 11497!
8. Do not buy the dip, invest regularly
Market is overvalued. I wait for the next market crash and I will buy on the dip.
Buying the dip is one nugget of investing wisdom that everyone seems to believe. When Nick looked at the data, buy the dip is not an effective strategy.
Thought experiment: let's say you are in 2017. Market is exuberant. People are talking about how overvalued the market is having been on a bullish trajectory since March 2009. Let's say you are God and you can predict the market crash on March 2020 due to the pandemic. And you decided to wait for the dip. What will happen?
Even if you buy the dip, you purchase at a level that is 7% higher than 2017!
What's the score between buying the dip (wait until a market crash) and investing regularly (buy over time)? Buying the dip can work but most of the time it doesn't.
Buy the dip only works in prolonged severe bear markets.?1996-2019 and 1928-1957.?Because severe market declines are so rare (1930, 1970, 2000, 2020) that buying the dip is a bad investment strategy.
If you are God and can predict the dip perfectly, buy the dip underperforms in more than 70% in the 40 year period from 1920 to 1980.
And let's say you are not God and you cannot time the market, missing the bottom by just 2 months lowers the chance of outperformance from 30% to just 3%!
9. Bad luck can happen, protect against bad luck
One of my students in a value investing courses I teach asked me - "that is true for the US stock markets, but what about other markets? What about Japan?" Since it peaked in December 1989, it has not recovered until recently. This is a valid question.
Nick's book gave me perspective. He cited a study of 39 developed equity market returns from 1841 to 2019 where the researchers cited the real danger of equity markets losing versus inflation over a 30-year horizon. The probability is 12%.
12%! This means that the probability of winning against inflation is 88%. I don't know about you but this seems to be a good trade to make. 88% chance of beating inflation over a 30-year horizon is the nearest thing we have to certainty.
Depending on which decade you were investing, you will either:
To appreciate the importance of when you started investing, if you have beaten the market by 5% each year from 1960-1980, you would have made less money than if you had underperformed the market by 5% each year from 1980-2000.
Sequence of risk - the order of returns also matter if you are adding money over time. Negative returns later in life when you have most money in play leaves you worse off than negative returns when you first started investing.?The end is everything?
The lesson we should learn from the Japan stock market experience is not to be discouraged from investing (12% vs. 88%!) but reinforces the need to diversify given that things can go wrong.
10. Volatility as the price of admission to wealth creation
Volatility is the price of building wealth. Owning pieces of great businesses is still one of the best ways to create wealth. However, you should expect to see declines of 50% a couple of times in a century, 30% once every 4-5 years and 10% every other year.
Avoiding too much downside can severely limit your upside.
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A powerful question you should ask yourself:
how much the stock market will be down at its worst point in the next 12 months - how much would the market have to decline in the next year for you to forgo investing in stocks altogether and invest in bonds instead??
Since 1950, the average maximum intrayear drawdown has been 13.7% with a median drawdown of 6%.
Bad news: the worst decline was 48% in Nov 2008.
So what if we adopted the strategy where you set to avoid 5% market drawdown? What is the score?
Avoid 5% drawdown from 1950-2020- by 2018, you would have 90% less money than if you do buy and hold.?Simply because you are out of the market too often.?
If you want to maximize wealth, according to Nick's analysis, avoid 15% drawdown.
11. Going all in during a market crash - reframe the problem
Market crashes are good buying opportunities.
Every dollar invested during the crash will grow to far more than one invested in months prior assuming that the market eventually recovers.
The reason is mathematical: every percentage loss requires an event larger percentage gain to back to breakeven.
Losing 10% requires 11.1% gain just to recover
Losing 20% requires 25% gain just to recover
Losing 50% requires 100% gain just to recover
How to use this to build confidence during market crashes? Reframe the upside. If on March 2020, the market tanked by 33%, this means that it requires a 50% gain just to restore to pre-pandemic levels. The question is, when do you think the market will recover?
If in 1 year = 50% per annum
If in 2 years = 22% per annum
If in 3 years = 14% per annum
If in 4 years = 11% per annum
If in 5 years = 8% per annum
12. Sell as late as you can and only to rebalance, reduce concentration and fund your needs
Last night, I attended a party with colleagues where I met a 9-year old investor (2 years younger than Warren Buffett). He asked this question that is hard for most long term investors to answer: when to sell.
With Warren Buffett saying, "my favorite holding period is forever". The value investing community struggle to answer this question (with some exceptions - Mohnish Pabrai, in his book Dhandho Investor, answered this in an entire chapter but even this is not as developed as his buying philosophy).
Nick's book offered the underlying premise for selling. Since most markets go up most of the time, waiting to buy means losing out on the upside and the same reasoning applies to selling. Since market go up most of the time, sell as late as possible.
Sell only for 3 reasons:
To rebalance
To get out of a concentrated position
To meet your financial needs
On the matter of rebalancing, it is important to remember that rebalancing is not about enhancing returns. Rebalancing is about reducing risk.
If you don't want to sell but want to rebalance, you can do so via accumulation. Accumulation rebalancing is about buying more of what you lack. Buy more of your most underweight asset.
13. Invest now, invest whatever you can
Average in underperforms 76% of the time (based on 12 month rolling periods from 1997 - 2020) versus investing in lump sum.
The only time average in overperforms lump sum is in major market crashes (1929, 2008, etc.) but major market crashes are rare.
This is not only in equities but also in other asset classes:
Bitcoin :?96% underperformance, 67% of the time
UST:?2% underperformance, 82% of the time
Gold: 4% underperformance, 63% of the time
DM Equities: 3% underperformance, 62% of the time
EM Equities: 5% underperformance, 60% of the time
60/40: 3% underperformance, 82% of the time
S&P: 4% underperformance, 76% of the time
US Stocks: 4% underperformance, 68% of
14. Time is Your Most Valuable Asset - We Begin Our Lives as Growth Stocks and End as Value Stocks
Jadav Payeng, the Forest Man of India, planted an entire forest that is as big as Singapore over 30 years. Dashrath Manji, the mountain man, carve a path over 22 years that reduced travel distance from 55km to 15km.
With enough time, you could move mountains. Archimedes said that give me a lever long enough and I can move the world. Give yourself enough time and you will see the power of compounding at work
One of my favorite investing stories is the story of two great investors. One is Jim Simons (founder of the most successful quantitative hedge fund - Renaissance Technologies) and one is Warren Buffett.
Jim Simons track record is impressive. He performed 66% per year. Warren Buffett is also impressive but less so. He performed 20% plus per year.
But who is richer?
Jim Simons net worth is USD 30 billion. Warren Buffet is USD 120 billion. 4x higher. Why?
Buffett has accumulated USD 84 billion of his net worth after age 50
Buffett has began investing since Age 10/ 11
Jamie Simons started investing at age 50
Buffett has been investing for 80 years now!??
At the age Simons is investing, Buffett has been investing for 40 years
One of my favorite metaphors in this book (and there are many) is this: we begin our lives as growth stocks, we end as value stocks.?Like growth stocks, we may have set our expectations too high.?We grow old thinking that the world will be worse than it is.?
Things, however, usually go better than expected and like value investors, we may be in for a positive upside surprise.
Conclusion:?Just Keep on Buying
Nick developed this philosophy - Just Keep on Buying from his life experience. He had a grandfather who retired at age 55, getting few thousand dollars per month of pension. When he died at age 77, he gambled all these away and died with no assets in his name.
Based on Nick's calculations, if he had spent half of his monthly income and invested the other half, he would have been a millionaire.
He could have built wealth by following a simple algorithm: JUST KEEP BUYING.
ING Senior Banker + 25 yrs Experience I C-Suite Access I FIG & Corp I Origination I Lead & Diversity
2 年I am saving cash Philip...i guess i am poor...i broke Rule 1
Head of Investment, Australia & Korea at Vena Energy
2 年Well said. Thanks for sharing!