One of my favorite things about writing this blog is getting to choose topics that interest me. It’s fun to be a beginner, to go from novice to basic competence in a variety of areas, and I get a kick out of how random it all is.
This month I’m taking a little break from writing and all things creative to sink my teeth into something completely different – the stock market.
I bought my first stock when I was 23; 5 shares of Procter and Gamble (I just learned that William O’Neil, author and founder of Investors Business Daily did the same exact thing, which I took as an excellent sign.)
The years that followed consisted of buying and selling stocks without much research or analysis behind it. Sure, I benefited from many good trades, but I’ve lost a lot of money too.
I realized that since I wasn’t putting in the time and effort to actively manage my portfolio, I was better off investing in the index funds, which is where a large chunk of it sits today (I also have a chunk in Facebook, which I bought because my brother told me to, and it’s up over 100%).
Set it and Forget it?
Over the past 40 years, more than 2/3 of professional portfolio managers have been outperformed by index funds. These professionals, mind you, are a very smart bunch. They have teams of analysts, high tech trading platforms and access to the latest research, technology, and often the company executives themselves.
In 2008 Warren Buffet went so far as to wager $1 million of his own dollars against a hedge fund firm that over a ten year period, “the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” That bet is two years away from being over, but so far, the S&P is up 65.7% compared with the hedge fund’s 21.9% gain.
That’s why sticking with the major index funds like the S&P 500 is a sound strategy for the average Joe. Often referred to as the “buy and hold” or “set it and forget it” strategy, index funds match the performance of major stocks (and bonds) without all of the trading fees, commissions, and constant management. You simply let the markets and compound interest do their jobs.
Is it foolish, then, for the individual investor to attempt what the even the best of the best cannot master? Perhaps, but I’m doing it anyway.
I’m doing it because I enjoy the markets, I think there is an opportunity to squeeze a few extra percentage points out of my portfolio, and have a genuine desire to become a more knowledgeable investor.
Do Your Homework
In 1949 Benjamin Graham said “investigate, then invest,” and that’s exactly what I plan to do.
I have little interest in being a speculator or a gambler. Watching the markets rise and fall every day is exciting, but stressful, and as tempting as it is, I’m not looking to outsmart it or take advantage of quick price changes. I’m pretty sure I’d be on the losing side of many of those bets. I’m far more interested in making longer term investments.
This is a sit on the couch and read a lot of books type of month, where my only job is to absorb as much information as possible. To dive into the investing philosophies of the top dogs. To read charts, drill into financials, spot trends, and understand the companies behind them. To ask questions from people who have been doing this stuff for years, like my dad and my brother. I want to know exactly why Facebook is crushing it, and I want to have the same level of understanding for other companies I choose to invest in.
For those of you who are interested, here’s what I’ve got on my nightstand:
- A Random Walk Down Wall Street, Burton G. Milkier
- Buffett: The Making of an American Capitalist, Roger Lowenstein
- Beating the Street: Peter Lynch
- One Up On Wall Street: Peter Lynch
- The Intelligent Investor, Benjamin Graham
- Reminiscences of A Stock Operator: Edwin Lefevre
- How to Make Money in Stocks: William O’Neil
- The Little Book of Common Sense Investing: John C. Bogle
