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Investors Are Their Own Worst Enemies: Or, The Simple Joy of Buy-and-Hold Investing
"While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster."
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A few weeks ago, I wrote about Lauren Templeton’s appearance on Everything Money — with a special focus on her story about how physical stock certificates instilled an important lesson in her young mind.
Namely, that buying shares in a company meant that you actually owned a small piece of that particular business.
🤯 Templeton’s most mind-blowing anecdote, though, came a bit later in the interview when she pointed out the surprisingly lackluster returns earned by the average investor in Peter Lynch’s high-flying Fidelity Magellan Fund.
Peter Lynch needs no introduction. (But I’ll give him one anyway.)
From 1977 to 1990, Lynch ran the Magellan mutual fund and racked up an insane 29.2% compounded annual return. That is, dare I say, better-than-Buffett territory (albeit over a much shorter period of time) and cemented his place on the investing version of Mount Rushmore.
Let’s step back for a minute. Imagine that you were lucky enough to come across Peter Lynch and the Magellan Fund in the late 1970s. That’s almost like finding a winning lottery ticket — and all you had to do was go along for the ride and collect your riches at the end.
Discovering an investment opportunity like the Magellan Fund is akin to stumbling upon Warren Buffett’s partnership in Omaha back in the 1950s and 1960s. The kind of serendipitous occasion that leads to a Scrooge McDuck-style money bin and generational wealth for all concerned.
So, if you had invested with Lynch early on, don’t you think you’d be a millionaire (or better) now? That you’d be reading this while cruising on a yacht purchased with all of that Magellan money?
For too many, it didn’t quite turn out that way.
And they only had themselves to blame.
Near the end of his remarkable run, Lynch went back and studied how much money his Magellan Fund investors had earned for themselves over the past fourteen years.
The answer was surprising — and depressing.
The average Magellan Fund investor earned only about 5% or less per year. And some even lost money.
How is that even possible?
“It was because people make really bad decisions,” Lauren Templeton told EM. “The fund has a good run up, they invest. The fund draws down, they remove capital. That’s the only way that happens.”
Here’s an example:
Lynch crushed the market in 1980, earning an eye-popping 70% return. Results like that draw a lot of attention, resulting in magazine profiles and television interviews that attract new investors to the fund manager with the Midas touch.
Then, when Magellan struggled a bit the following year and underperformed the market, those same johnny-come-latelies jumped ship in search of the next big thing.
So, in effect, they bought at the highs and sold low at the first sign of trouble — locking in losses and robbing themselves of the chance to participate in the Lynch-led recovery. A bad (and costly) move.
Investors just can’t help themselves.
And it can happen to the very best of us.
Sir Isaac Newton, who I think we can all agree was a pretty smart guy, had his own Magellan moment while speculating on the South Sea Company in 1720.
After successfully flipping his South Sea shares for a 100% profit, Newton was overrun with FOMO as the bubble-induced price soared higher and higher. Not satisfied with his tidy return, he bought back in at a much higher price — just in time to ride the market down with everyone else.
That abundantly human impulse to jump in and out of stocks was too much for even a veritable genius to withstand — and cost Newton somewhere on the order of $3 million.
So, how to solve this conundrum?
Perhaps by embracing another very human impulse: laziness.
As Benjamin Graham wrote in The Intelligent Investor, “Evidently it is not only the tyro who needs to be warned that while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”
When you buy a stock, ofttimes the best thing to do next is nothing at all. Don’t obsess over the daily price quotes, don’t listen to “experts” trying to predict the upcoming macroeconomic environment, don’t plug into the market machine that overhypes and overstimulates investors — and, most importantly, DON’T SELL THE STOCK!
One of my favorite (and funniest) pleas for investors to adopt a lazier approach comes from Fred Schwed’s Where Are The Customers’ Yachts?
In his updated introduction for the 1955 Bull Market edition of the book, Schwed wryly noted that his own hyperactivity in the market had left him decidedly short of the good life.
Probably no reader has ever been so rude as to inquire of a professional writer on financial matters why the writer, who clearly knows so much about money, is not rich. Nevertheless, many a reader probably thinks quietly about this. Such a reader deserves some attempt at explanation, however inadequate.
In my case, I have not only written airily on financial matters, but I have actually been fiddling around with common stocks most of my mature life. And, as of this writing, the common stock market has been going up for fifteen years and is at a new high since Ancient Rome. Yet I haven’t got a Cadillac to my name.
I lay this mediocre result to the impressionableness of my youth. In those days, I used to work at a trading table across from an older man, a cynical Irishman whose cynicism I secretly admired. Oft was I privileged to hear him mutter his favorite bit of logic to himself: “What were securities created for in the first place? They were created to be sold, so sell them.”
Ever since, my tendency has been to buy stocks, all a-tremble as I do so. Then when they show a profit I sell them, exultantly. (But never within six months, of course. I’m no anarchist.) It seems to me at these moments that I have achieved life’s loveliest guerdon — making some money without doing any work.
Then a long time later it turns out that I should have just bought them, and thereafter I should have just sat on them like a fat, stupid peasant. A peasant, however, who is rich beyond his limited dreams of avarice.
Many investors well know that cold, sinking feeling when they realize how much better their results would have been if they had simply done nothing at all.
And I can think of much worse fates than being one of Schwed’s peasants — fat, stupid, and rich.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.