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welcome to the best interest podcast
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where we believe Benjamin Franklin's
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advice that an investment in knowledge
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pays the best interest both in finances
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and in your life every episode teaches
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you personal finance and investing in
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simple terms now here's your host Jesse
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Kramer hello and welcome to episode 96
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of the best interest podcast my name is
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Jesse Kramer today we've got a fun one
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for you it's going to be a little uh end
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of year year in review of the podcast
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shouldn't take us too long just a few
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minutes but then I'm going to dive into
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an evergreen topic an important topic
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one that a lot of people ask questions
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about and really this is going to be an
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episode that I hope that people can
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point back to and say ah there's a
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really comprehensive answer to the
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question of well is now the right time
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to invest in the stock market whether
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it's because the stock market is doing
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really well or on the opposite side of
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the coins there will be periods when the
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market will go through a bare Market
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we'll have a a recession we'll have some
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of pullback and people will be fearful
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of investing during those times is now
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the right time to invest in the stock
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market so I hope to tackle that today
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and uh to explain a few interesting
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Concepts that are all interwoven into
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that question so that we can walk out of
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here not only knowing the right answer
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of of how and when to invest but also
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why that's the right answer and and how
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all these different puzzle pieces fit
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together before we get to that we do
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have a customary review of the week
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today this one is from ljb ljb gave gave
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us a five-star review on Apple podcasts
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and wrote in and said great listen this
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is a podcast I'm glad I finally stumbled
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on to Jesse does a great job of taking
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the everyday mundane and common topics
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and making them applicable to his
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listeners this is an easy add to the
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queue every time a new episode pops into
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my feed well ljb thank you for the kind
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words feel free to reach out to me send
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me an email to Jesse best bestin
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interest. blog we'll get you hooked up
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with a super soft t-shirt okay let's get
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into a little bit of a year in review
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like I said short and sweet we had 51
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new blog posts as of this recording it's
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December 12th right now when I'm talking
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to you 46 weekly newsletters you know
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since the baby was born sometimes I
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missed a week or I combined two weeks
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into one newsletter but still 46 weekly
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newsletters you can subscribe to that on
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the blog homepage at bestin interest.
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blog about 2500 new subscribers to that
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newsletter when this episode comes out
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we'll have had 26 new podcast episodes
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every other week and total podcast
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downloads fantastic
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41,000 downloads as of this recording we
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only had 12,000 downloads last year so
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that's more than a 3X growth with dozens
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of five-star reviews very very kind
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reviews uh lots of smart and exciting
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guests with all manner of financial
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expertise dozens of your questions
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answered on our AMA episodes so thank
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you thank you thank you engaging with
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you listeners that that's probably the
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best part about this project so please
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keep the emails coming keep the
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questions coming they're great uh it
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gives me something fun and interesting
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to talk about sometimes something that's
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fun and interesting to learn something
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new for me that I get to dive into and
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learn about to preempt a common question
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that I get no I don't collect any
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donations or subscriptions from you guys
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but instead what you can do is quite
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simple if someone in your life wants to
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learn more about personal finance
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investing financial planning send them
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this podcast or send them the blog send
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them a blog post or better yet albeit a
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little hypocritical of me please share
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my work to your network whether it's
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social media Facebook Reddit LinkedIn
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whatever hypocritical cu I don't really
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spend much time on Facebook myself or
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anything like that I try not to at least
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but if you're willing if you're so
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inclined that's wonderful or another big
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source of 2024's growth here on the
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podcast was my appearances on other
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Financial podcasts you know stacking
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Benjamin how to money choose fi catching
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up toyi a bunch of other podcasts so if
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you listen to other podcasts where you
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think you know gez Jesse would be a
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great resource for that audience I'd
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love it if you let me know about that or
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if you recommend me to that podcast host
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what will next year bring here for the
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podcast well for starters some more of
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the same I think a lot of the episodes
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are going to be you know similar I'll
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I'll do some chitchatting I'll do some
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monologuing I'll explain some some
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thoughts to you guys we'll bring on some
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expert guests to go deep on some things
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that I'm less familiar with I will say
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though I get a solid amount of feedback
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saying in short you know hey the more
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you talk Jesse the better I tend to like
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the episode it's very flattering thank
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you very much I do appreciate it and so
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I might sprinkle in a few more solo
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episodes we definitely do more ask me
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anything episodes I think those are some
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of the best received episodes out there
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or at the very least I do want to make
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sure that the outside guests who I bring
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in I want to make sure they can really
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bring the Firepower because I want to
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make sure that listening to this is
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worthwhile for you guys and hopefully
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the the 41,000 and Counting downloads
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that we have so far this year will
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continue to grow and I do also want to
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address one of the other goals of the
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podcast and that is the symbiosis with
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my professional life working here at a
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fiduciary F only financial planning firm
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in Rochester New York in 2024 so far
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about 25 listeners have reached out to
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inquire about working with me and for
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probably 20 of those people 20 of those
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families they just wanted a simple
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review a couple hours of my time they're
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DIY planners they don't want any sort of
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ongoing relationship with me they just
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want to pay me hourly or pay a planner
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hourly really just do a simple review
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and that's about it now I don't do the
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hourly model I do ongoing work for an
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annual fee with people who want an
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ongoing relationship with their
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financial planner ideally they want that
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for years if not decades to come uh
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generally I work with people who
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understand you know a financial plan
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isn't a static onetime thing but instead
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it's a dynamic plan and therefore it's
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more than just a one-time engagement I
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generally work with people who either
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don't want to be diyers anymore you know
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there's just twoo much for them to lose
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or perhaps they never really wanted to
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be a diyer in the first place they just
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kind of stumbled into it I work with
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people who they want a third party to be
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involved on behalf of their spouse
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that's a very common one one one spouse
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I work with will be a pretty Die Hard
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DIY but for the sake of their
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potentially surviving spouse if
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something were to happen to them they
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want to bring me into the relationship
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as far as you know the finances go I
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work for people who no longer want to
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drive their own bus but instead want to
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focus on many of the other aspects of
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their life of their limited time left on
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this Earth and so they'd rather
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Outsource their financial plan their
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Investment Management to me of course I
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get that many people listening here
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probably most people listening here are
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diyers and I think that's wonderful I'd
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be happy to refer you if you do want a a
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planner to help check your work I'd be
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happy to refer you to one of many hourly
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planners who I know who I trust who do
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great work for their clients but
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ultimately yes this year many of the
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people who approached me they wen't a
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good fit I was able to refer them to
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someone who is a much better fit for me
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but five families this year who came
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through the best interest podcast they
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did reach out to me and we started an
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ongoing financial planning engagement
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together what's interesting I think is
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that three of those families Yep they're
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dedicated listeners whereas the other
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two were referrals from listeners in
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other words a listener said to
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themselves thanks but no thanks Jesse I
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don't need you personally but this
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person in my life who I know they don't
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listen to your podcast but they do need
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your help and I trust you to help them
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so to me that's a huge win-win they're
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getting the help they need it inspires
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me to keep putting this podcast out into
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the world you know helping people is my
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job it puts food on my table and it
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proves out the business model if you
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will of the best interest podcast share
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knowledge for free prove your expertise
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make it so valuable that people can't
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help help but share it the audience will
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naturally grow as the audience grows
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yeah some percentage even a small
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percentage of people might say you know
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what I need some professional help I
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trust Jesse at this point he seems to
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know his stuff the snowball grows so
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thank you thank you thank you for
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listening thank you for your questions
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thank you for sharing this podcast with
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others and helping it grow thanks for
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reaching out to ask for help for
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reaching out to refer others who are
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seeking help one of my go-to sayings
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here is that a rising tide lifts All
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Ships and I believe that the best
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interest is one of those Rising tides
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that is helping everybody involved and
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now I want to present such a cool uh a
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very meaty investing financial planning
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topic to you today my hope is that I'm
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able to do enough of a complete
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discussion on this topic today that it's
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going to act as an evergreen monologue
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that will always be able to point back
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to and say oh you've got questions about
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this topic well you should go listen to
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episode 96 of the best interest podcast
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and that topic is this question is now
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the right time to invest in the stock
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market as I said I'm reping this you
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might be listening to this in December
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of 2024 hopefully many of you are
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listening to this well after December of
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2024 and heck for all I know the market
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might crash next week but whether the
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market continues its Relentless climb or
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whether it crashes tomorrow what I'm
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about to say here will still apply in
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other words the advice that I'm giving
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here is if I may say so Timeless right
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it's going to apply it's just sound
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investing principles that apply in a
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bull market and a bare market and
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everything in between if you're a diyer
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you'll probably know the struggle and
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the complexity with this question is now
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the right time to invest in the stock
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market you might have some of the
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answers such as well you can't time the
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market or just lump sum your money as
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soon as possible or you might know that
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picking stocks is hard and yes all of
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those statements are absolutely true but
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what I want to do today is explain and
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ideally explain really well why all
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those things are true and how all those
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ideas fit together into one cohesive
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investing framework because in my
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experience if you don't understand why
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the truth is the truth in financial
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planning or investing if you don't
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understand the why and if you don't
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understand how those truthful facts all
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fit together like a puzzle then you
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might be setting yourself up for a
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slippery situation when the world starts
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to cast doubt on the truth as you
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understand it you'll be more likely to
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abandon your beliefs or put more
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directly you can say things like don't
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time the market or diversify your
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Investments when the market keeps on
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hitting all-time highs it can cast out
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onto that you know are you sure you want
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to stay invested right now despite the
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crazy all-time highs or when Nvidia
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keeps on compounding higher and higher
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are you sure you want to diversify your
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assets away from Nvidia when US Stocks
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compound higher and higher are you sure
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you want to own International markets
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when stocks in general are just crushing
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bonds like they have been are you sure
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you want to own bonds understanding the
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why and the how Behind these types of
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questions will make you what I believe
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is an invulnerable investor you know
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that is an investor who will not succumb
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to fear who will not let short-term
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concerns overwhelm them who will not
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make short-sighted decisions that end up
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causing a long-term impairment of their
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Capital with that Preamble I want to
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start with Lynn and I want to thank Lynn
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Lynn is a dedicated listener and a
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reader Lynn inspired me today and kind
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of Lynn is one of my Muses here in 2024
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inspiring articles about social security
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and the stock market and now inspiring
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this monologue today back in August Lynn
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wrote to me and she said I'd like to
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move some of my money market funds into
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an S&P 500 ETF but I'm waiting for the
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market to drop I don't want to buy in at
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the all-time high especially because I'm
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earning so much in my money market fund
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I wrote back to Lynn this is back in
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August I sent her some articles and just
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some thoughts in general and I explained
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to her hey Lynn in short it might be
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correct for you to wait right now but
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historical probabilities dictate it's
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probably not correct for you to wait and
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even getting the timing correct the
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gains that you're likely to make are
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going to be probably pretty small and
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since that email well sure enough the
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S&P is up 8% not including dividends and
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Lynn wrote to me again last week and she
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said Jesse it seems like you were right
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with this market and I should have
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invested I'm personally against moving
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anything into the market right now
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though the financial Independence
00:11:41
Community it's all about being Frugal
00:11:43
and buying into this super high stock
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market feels like it's not Frugal at all
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for me how do you square that so that
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sets the table for what follows here
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listeners in the remainder of this
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episode I want to explain two massively
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important topics to you the first one is
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I want to explain why we invest in
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Diversified indexes like the S&P 500 in
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the first place and why we try not to
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invest in individual stocks we'll take a
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sidebar on the idea of beating the
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market and another sidebar into
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something called the efficient market
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hypothesis maybe these are terms that
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are familiar to you but I want to go
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deep on them today and explain them well
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so that you can walk away going okay now
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I really get it and then second I want
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to explain the concepts around timing
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the market the explanation will include
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these little sidebar min explanations of
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terms like Lum suum investing and dollar
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cost averaging and the cape ratio so
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first why do we invest in Diversified
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indexes like the S&P 500 in the first
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place and why do we not try to invest in
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individual stocks so one of the first
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lessons in long-term investing involves
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the challenge of picking single stocks
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we're told to avoid searching for the
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needle and the Hy stack and instead just
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buy the whole hay stack you know that's
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a John Bogle aism because it's amazing
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just how rare the needles are the
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there's a study by uh Arizona State
00:13:01
Professor Henrik bessom binder and it
00:13:03
perfectly illustrates the Rarity of the
00:13:04
needles the needles being you know
00:13:06
winning stocks and we'll cover some of
00:13:08
the highlights of that study today now
00:13:10
we recently discussed on the best
00:13:12
interest this idea of a risk-free rate
00:13:14
uh short-term us treasury notes provide
00:13:17
that risk-free rate which is why T bonds
00:13:19
treasury bonds are frequently used as a
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benchmark against which other
00:13:22
Investments are measured so in the study
00:13:25
that I'm going to cite here this
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professor Henrik bessen binder he asked
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himself how do individual stock returns
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compare against treasury notes the the
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risk-free investment the risk-free rate
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and the answer is not well since 1926
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four out of every seven stocks so over
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50% four out of every seven stocks that
00:13:43
have existed have underperformed
00:13:45
treasury notes the majority of stocks
00:13:47
lose to the risk-free rate despite
00:13:48
stocks having significantly more risk
00:13:51
than bonds so that's not a good thing
00:13:53
right if we're taking on more risk in
00:13:55
stocks we sure hope to get better
00:13:57
returns in bonds and for most stocks
00:13:58
that simply not the case if you want to
00:14:01
outperform the risk-free rate picking
00:14:03
individual stocks is a hard way to do so
00:14:05
so we know that for out of every seven
00:14:07
stocks or about 57% have historically
00:14:10
underperformed the risk-free rate and if
00:14:12
we owned all those underperformers our
00:14:14
portfolio would look awful so let's
00:14:16
start adding in some winners and trying
00:14:18
to get back to even right how many
00:14:20
winners do we need to balance out all
00:14:23
those losers that 57% of losers and the
00:14:26
answer is well we need the next best 30
00:14:29
9% of stocks to get back to even if we
00:14:32
take the bottom 57% which we're all
00:14:34
losers and then we add in the next best
00:14:36
39% of the stock market then we would
00:14:39
get to a point where stocks a
00:14:41
diversified stock portfolio of those
00:14:42
stocks would have provided the same
00:14:44
exact return as treasury bonds as the
00:14:47
risk-free rate so that's 96% of the
00:14:50
total Market okay that's the bottom 57%
00:14:53
plus the next 39% giving you 96% of the
00:14:56
total stock market for the past 100
00:14:59
years and you only would have received
00:15:01
the same return as someone holding zero
00:15:03
risk treasuries so despite those
00:15:06
sobering stats though we all know we've
00:15:08
talked about it here many many times
00:15:10
that stocks in general the full stock
00:15:12
market well it's crushed bonds over the
00:15:15
long run so far in this little part of
00:15:17
the monologue we're certainly not seeing
00:15:18
it though are we well it turns out that
00:15:21
the remaining stocks okay the top 4% of
00:15:24
all stocks account for all of the stock
00:15:27
outperformance in the past 100 years
00:15:29
years as compared to treasury notes if
00:15:31
you didn't own that 4% sliver if that
00:15:34
wasn't part of your portfolio you missed
00:15:36
out on all of the magic of the stock
00:15:39
market that 4% sliver that's the needle
00:15:42
in the hay stack the other 96% is just
00:15:44
the hay most of which is actually
00:15:46
rotting hay if only it was easy to
00:15:48
identify those 4% of stocks that are
00:15:51
needles or at least maybe the the 39% of
00:15:54
stocks that are better than the
00:15:55
risk-free rate but it's not easy it's
00:15:57
quite hard in fact and we'll get into
00:15:58
some this later academic studies of
00:16:00
mutual fund performance again these are
00:16:02
professional stock Pickers those studies
00:16:05
show that only about onethird of fund
00:16:07
performance shows repeatability or skill
00:16:10
the rest of fun performance tends to be
00:16:12
just luck most Professionals in other
00:16:14
words don't necessarily discover their
00:16:16
needles it's more like they stumble upon
00:16:18
their needles and stumbling Upon A 4%
00:16:21
needle a one in 25 stock that's
00:16:24
improbable in and of itself the only way
00:16:27
as far as I'm concerned to rely ibly
00:16:29
stuff your portfolio full of the
00:16:31
valuable needles is to buy the entire
00:16:33
Hast deack you don't necessarily need to
00:16:36
find the needles and you certainly don't
00:16:38
hope that you accidentally stumble upon
00:16:40
them instead you need to guarantee to
00:16:42
yourself that you own all of the needles
00:16:44
and that's by buying a small sliver of
00:16:47
every single stock out there and yes
00:16:49
buying that whole Hy stack does mean
00:16:51
you'll also be buying the bottom 96% of
00:16:54
stocks too with returns only as good as
00:16:57
the risk-free rate but you're certain to
00:16:59
capture the sought after 4% of stocks as
00:17:02
well providing all of the outperformance
00:17:05
of the stock market and you might ask
00:17:07
yourself like really is it that hard to
00:17:08
find the needles well commenting on Bess
00:17:11
and biter study Jason zag of the Wall
00:17:13
Street Journal wrote traditional advice
00:17:15
on diversification says you should own
00:17:17
at least 15 to 30 stocks in order to
00:17:19
reduce your risk but in a sequel to his
00:17:22
research paper Professor Besson binder
00:17:24
found that a portfolio of 25 stocks
00:17:26
still has a 64% chance of under
00:17:28
performing the total Market super stocks
00:17:31
the needles are so scarce that you need
00:17:33
to hold hundreds even thousands of
00:17:35
companies to be near certain of matching
00:17:38
the Market's return in other words
00:17:40
listeners small portfolios they miss too
00:17:42
many needles the odds are stacked
00:17:44
against you you need to own hundreds or
00:17:46
thousands of stocks to ensure you own
00:17:48
those needles but by the time you own
00:17:51
hundreds or thousands of stocks you're
00:17:53
essentially building your own Index Fund
00:17:55
so why bother going through the time and
00:17:57
effort to do so when you can simply buy
00:17:59
an index fund with a single click that
00:18:01
in short is the argument behind index
00:18:03
investing especially in more efficient
00:18:05
markets like the US Stock Market the
00:18:07
stock market has very few needles
00:18:09
missing out on them negates the purpose
00:18:10
of Stock Investing in the first place
00:18:12
your best bet literally is buying the
00:18:15
whole hay stack here's a quick ad and
00:18:17
then we'll get back to the show did you
00:18:19
know my written Blog the best interest
00:18:22
was nominated for 2022 personal finance
00:18:24
blog of the year and it's been
00:18:26
highlighted in the Wall Street Journal
00:18:27
Yahoo finance on CNBC I love writing
00:18:31
especially when that writing is to share
00:18:33
financial education and I usually write
00:18:35
one or two articles per week you can
00:18:37
read them all at bestter interest. blog
00:18:41
again the web address is bestter
00:18:43
interest. blog check it out I want to
00:18:46
read you from an article about this
00:18:48
phrase uh beating the market the whole
00:18:50
Hy stack that's the market and many of
00:18:52
us have heard before that you can't beat
00:18:54
the market so I want to dive into that
00:18:56
statement because on its face and to
00:18:58
Fair it's a wrong statement but again
00:19:01
understanding why and how it's wrong and
00:19:03
understanding the better ways to phrase
00:19:05
that statement is going to help each of
00:19:07
you listening to be better long-term
00:19:08
investors you cannot beat the market we
00:19:11
hear this warning all the time let's say
00:19:13
it's the S&P 500 Index or the dowo index
00:19:15
or the NASDAQ or a total stock market
00:19:17
index fund or something similar to that
00:19:20
these people who say you can't beat the
00:19:21
market what they're saying is you cannot
00:19:24
outperform a diversified pool of stocks
00:19:26
but if we peel back the onion on that
00:19:28
guidance we Face two logical issues the
00:19:31
first is there's an averaging problem
00:19:32
the Market's return is an average of
00:19:34
many different stocks you can't have
00:19:36
every individual stock losing to an
00:19:38
average of those stocks the logic of
00:19:40
that just doesn't work second if my
00:19:42
stock picking strategy loses to the
00:19:44
market as people might suggest then my
00:19:47
anti- strategy should beat the market
00:19:49
you know if one person is losing well
00:19:50
just do the opposite of them if they're
00:19:52
going long on certain stocks just go
00:19:54
short on certain stocks those same
00:19:55
stocks and voila if I lose you'll win
00:19:58
thus at least one of us has beaten the
00:20:00
market so that was a quick little
00:20:02
logical aside that shows that clearly
00:20:04
it's not true to say you can't beat the
00:20:06
market it's an incomplete statement it
00:20:08
needs more details it needs more backup
00:20:10
and it leaves people a little bit
00:20:11
misinformed it's one thing I want to fix
00:20:13
today so yes you can beat the market but
00:20:16
you need to understand how and when and
00:20:18
why and answering those kind of
00:20:20
questions today will lead us to the
00:20:21
following conclusion the question isn't
00:20:23
whether you can beat the market or not
00:20:25
you can the question is why bother cying
00:20:29
see thousands of people beat the market
00:20:31
every day every month every year some
00:20:33
investors have beaten the market for
00:20:34
decades it doesn't take prodigious
00:20:36
intelligence it only takes the right
00:20:38
temperament so anyone who says you can't
00:20:40
beat the market they're misinformed but
00:20:42
the first truth is it's quite hard
00:20:45
consistently beating the market is hard
00:20:47
that's what the needle in the hay stack
00:20:48
has to do with right you need to find
00:20:50
those 4% stocks or at the very least you
00:20:52
need to ensure that you're in that 39%
00:20:55
part of the stock market that beats the
00:20:56
risk-free rate and you need to really
00:20:58
maximize your time spent there now
00:21:01
consistently beating the market though
00:21:03
after any fees you pay well that makes
00:21:05
it extra hard if fees aren't involved
00:21:07
it's possible to beat the market not
00:21:08
easy but certainly possible when someone
00:21:11
else is managing money for you if they
00:21:12
charge you a fee well that fee eat into
00:21:14
your profits and since those profits
00:21:16
have been eaten well beating the market
00:21:17
becomes even harder it's like in golf if
00:21:19
you begin your round with a few Strokes
00:21:21
already on your scorecard it's still
00:21:23
possible to shoot under par but much
00:21:25
much harder now truth number two about
00:21:28
beating the Market is it's not 50/50 and
00:21:30
what I mean is you might think at this
00:21:32
point so without fees 50% of stock
00:21:35
Pickers would beat the market and 50% of
00:21:37
stock Pickers would lose to the market
00:21:39
that is a logical conclusion assuming
00:21:41
though that stocks performances follow a
00:21:43
normal distribution or a bell curve
00:21:46
human height as an example forms a nice
00:21:47
natural bell curve you get a standard
00:21:49
distribution with an average most people
00:21:51
relatively close to the average and far
00:21:54
fewer people who are multiple standard
00:21:56
deviations away from that average but
00:21:58
stock performances do not follow a
00:22:00
normal distribution this is an
00:22:02
interesting exciting and an important
00:22:04
fact instead stock performance more
00:22:06
closely follows a longtail distribution
00:22:09
most individual stocks perform worse
00:22:11
than the average but a small number of
00:22:13
high performers beat the average to
00:22:15
explain what I mean by that imagine I
00:22:17
have 10 stocks in front of me nine of
00:22:19
those 10 stocks are worth $100 the 10th
00:22:22
stock though it's worth
00:22:24
$1,100 so I have nine stocks at 100 I
00:22:27
have one stock at $1 00 what's the
00:22:29
average value of these stocks well if
00:22:31
you followed my math the average value
00:22:33
of those stocks the total value is 2,000
00:22:35
and I have 10 of them so the average
00:22:37
value is 200 nine of those 10 are only
00:22:40
worth 100 nine of those 10 are
00:22:41
underperforming my average the one
00:22:44
that's worth $1,100 well it's
00:22:46
outperforming my average so if I'm going
00:22:48
to build a portfolio from those 10
00:22:50
stocks and I hope to quote unquote beat
00:22:52
the market I really have to hope I have
00:22:55
some ownership of the one that's
00:22:57
outperforming the average
00:22:59
that in a nutshell is the way that the
00:23:00
stock market works and always has worked
00:23:03
there's some interesting data I I cite
00:23:04
some data in this particular article
00:23:06
from 1983 to 2006 tracking 8,000
00:23:09
individual stocks over that time it
00:23:11
showed that about 40% of stocks lost
00:23:14
money over that time yikes 64% of stocks
00:23:18
though underperformed the average okay
00:23:21
64% underperformed the index got beat by
00:23:24
the market the remaining 36% of stocks
00:23:27
outperformed the market so it wasn't
00:23:29
quite like my example of having nine
00:23:31
underperformers at $100 per stock
00:23:33
against one outperformer at 1100 per
00:23:35
stock but the same idea applies you have
00:23:37
64% of stocks that do pretty poorly you
00:23:40
have 36% of stocks that do so well that
00:23:43
they bring the average up a couple other
00:23:44
interesting stats from that particular
00:23:46
study for what it's worth is that the
00:23:47
mean average annual stock return over
00:23:50
that period was negative 1.06% per year
00:23:53
and that the bottom 75% of stocks had a
00:23:56
cumulative Total return of 0% in this
00:23:59
particular study all of the positive
00:24:00
performance from the stock market in I
00:24:02
think it was a 27 24 year period came
00:24:04
from the top 25% of stocks okay so what
00:24:07
does this have to do with beating the
00:24:08
market well the research tells us that
00:24:10
beating the market is not a 50-50
00:24:12
proposition over this particular time
00:24:14
period a single stock only had a 36%
00:24:16
chance of beating the market there are
00:24:18
many bad to mediocre stocks there are
00:24:21
far fewer good to Great stocks so again
00:24:24
if you're only picking a few stocks
00:24:26
you're likely to miss out on the big
00:24:27
winners you're going to lose to the
00:24:29
market if you're picking many stocks
00:24:31
well then you're simply going to mimic
00:24:32
the average return neither beating nor
00:24:34
losing to the market you've just created
00:24:36
your own index fund and that's why it's
00:24:38
hard to beat the market there's also a
00:24:40
Luck versus skill problem in picking
00:24:42
stocks the stock market as we've already
00:24:43
covered here it's a mixture of luck and
00:24:45
skill it's notoriously difficult though
00:24:47
to discern between those two skill being
00:24:50
a repeatable thing luck being the
00:24:52
opposite something that's not repeatable
00:24:54
if you invest via active stock picking
00:24:56
you'll face some scary questions like
00:24:58
have you recently beaten the market if
00:25:00
not why are you investing in that way
00:25:03
assuming you have beaten the market is
00:25:04
that skill or are you just lucky and
00:25:07
then last I mean do you really have the
00:25:08
knowledge and the skill to accurately
00:25:10
assess those other two questions it's a
00:25:13
pretty convoluted spaghetti logical mess
00:25:15
in your head now the stock market is a
00:25:17
notoriously efficient market and we
00:25:19
should talk about what that means it
00:25:21
means that there are so many different
00:25:23
investors who are armed with so much
00:25:24
information about various companies
00:25:26
their stocks their earnings their
00:25:27
futures
00:25:28
that any single person cannot
00:25:30
consistently know enough to know whether
00:25:32
today's stock prices are right or wrong
00:25:35
whether the market is overvalued or
00:25:36
undervalued whether today's smarter
00:25:38
decision would be to buy or sell it's
00:25:41
just too hard to know that consistently
00:25:43
to know more than the market
00:25:44
consistently that's what an efficient
00:25:46
market means and thus the efficient
00:25:48
market hypothesis essentially States
00:25:50
there's no such thing as skilled stock
00:25:52
picking because that so-called skill
00:25:54
would suggest that someone does know
00:25:57
more about today's prices whether
00:25:58
they're right or wrong or at least that
00:26:00
some investor can outsmart the rest of
00:26:02
the market with some sort of consistency
00:26:05
now the efficient market hypothesis has
00:26:07
a lot of research behind it it's won
00:26:08
Nobel prizes it's part of the backbone
00:26:10
of index investing that said it's not
00:26:13
necessarily this iron law of Nature and
00:26:15
there are many smart people out there
00:26:17
who find some pretty serious flaws in it
00:26:19
Warren Buffett and Charlie Munger
00:26:20
perhaps most notably among them
00:26:22
personally I think that at least here in
00:26:24
the US Stock markets are mostly
00:26:26
efficient and that at least most of us
00:26:29
those of us listening diyers simple
00:26:31
investors we would do better by
00:26:33
believing that markets are efficient in
00:26:35
other words you and I we don't have the
00:26:38
time the resources the knowledge or in
00:26:40
other words the skill to consistently
00:26:42
know more than the rest of the market
00:26:44
and any such skill is likely to be found
00:26:46
in those who put in the most time in
00:26:48
other words the 80-hour weeks of a Wall
00:26:51
Street Pro are likely to be more skilled
00:26:53
than the 20 minutes that you spend
00:26:55
watching my Uncle Jim Kramer on CNBC now
00:26:58
are you you sure you want to play that
00:26:59
game against those Wall Street experts
00:27:01
wouldn't the average return from an
00:27:02
index fund be simpler easier less
00:27:05
stressful and more dependable to
00:27:07
reiterate all this saying nobody can
00:27:09
beat the market is like saying nobody is
00:27:11
taller than average it's a little bit
00:27:13
dumb but you'll notice that my tone has
00:27:15
kind of changed over these last few
00:27:16
minutes because yes you can beat the
00:27:19
market it's just a logical necessity but
00:27:21
it's also complicated it happens less
00:27:23
than 50% of the time it's hard to repeat
00:27:26
sometimes it's just luck you're invest
00:27:28
ing fees are probably going to reduce
00:27:29
your likelihood of beating the market
00:27:31
that's just basic math and even if you
00:27:33
do beat the market was it skillful was
00:27:35
it just lucky if you're a DIY investor
00:27:38
is the time that you commit to that act
00:27:40
of investing is that worthwhile and then
00:27:42
last are you smart and unbiased enough
00:27:44
to even answer all these questions in
00:27:46
the first place these kind of
00:27:48
complications all point in the same
00:27:50
direction namely why bother trying to
00:27:52
beat the market in the first place it's
00:27:54
not that you can't beat the market it's
00:27:56
just not worth trying so one thing I
00:27:58
haven't really touched on quite yet so
00:27:59
far in this monologue is why picking
00:28:02
stocks is such an interestingly Hard
00:28:04
Exercise in the first place I mean it's
00:28:06
fine and dandy to say okay most stocks
00:28:08
underperform it's fine and dandy to say
00:28:11
only the 4% needles lead to all the
00:28:13
outperformance over the risk-free rate
00:28:15
why is it so hard to find those 4%
00:28:17
needles I mean surely there must be a
00:28:19
way to do so because simply who's to say
00:28:21
whether a Stock's price is too high or
00:28:23
too low or fair and for that we need to
00:28:25
understand how are stock prices reached
00:28:27
in the first place they're BAS based on
00:28:28
two simple things how a company is
00:28:30
performing its earnings and how much
00:28:32
investors are willing to pay for those
00:28:33
earnings sometimes that's called the
00:28:35
multiple the multiple can be thought of
00:28:37
as How likely do I believe that this
00:28:39
company's earnings will continue into
00:28:40
the future a simple example let's say a
00:28:42
grocery store is earning a million in
00:28:44
profits last year how much would you pay
00:28:46
for that store uh $3 million $5 million
00:28:49
$10 million well that's a three or a
00:28:51
five or a 10x multiple and that number
00:28:53
is going to be related to how confident
00:28:55
you feel that you could take over the
00:28:57
store keep keep its earnings at a
00:28:59
million dollars per year or ideally even
00:29:01
grow those earnings for enough years in
00:29:03
the future so that you can get your
00:29:05
money back and then some a Stock's price
00:29:07
works exactly the same way it's just a
00:29:09
business just like the grocery store is
00:29:12
but it's easy to forget that fact and
00:29:13
that leads me to a wonderful question I
00:29:15
once got from a client here who had
00:29:16
about 20% of her money in Starbucks now
00:29:20
20% of your money in one company that's
00:29:22
a lot you could say it's a latte in one
00:29:24
stock I'll see myself out after that
00:29:26
joke and for comparison Starbucks
00:29:28
comprises about 0.20% of the S&P 500 now
00:29:32
the S&P 500 should only be a portion of
00:29:34
an individual stock Holdings which are
00:29:35
only a portion of an overall portfolio
00:29:38
so to have 20% of your total assets in
00:29:40
one stock that's just way too much when
00:29:42
I started explaining that thought
00:29:44
process the client understandably
00:29:46
protested and she said Jesse there's a
00:29:48
Starbucks on every corner in America why
00:29:51
would we sell it that logic totally
00:29:54
understandable after all she's right
00:29:55
there is a Starbucks on just about every
00:29:57
corner in America the premise is true
00:29:59
but the client's conclusion therefore
00:30:02
why sell Starbucks that doesn't follow
00:30:04
the premise and that's the logical
00:30:06
misstep I'll dive into a good company
00:30:08
doesn't always make a good investment
00:30:11
Now My Hometown Pride Kodak was once one
00:30:13
of the most visible companies in the
00:30:14
world it would have been easy to sit
00:30:16
there in 1985 and think man codak is
00:30:19
everywhere they own the global film
00:30:20
Market the same way that GE owns
00:30:22
consumer electronics and Sears owns
00:30:24
department stores why would I ever
00:30:26
diversify out a Kodak well the share
00:30:29
price went from $90 per share to zero in
00:30:32
about 17 years the stock market and
00:30:34
economic history are littered with good
00:30:36
companies going broke it's called
00:30:38
creative destruction and it's essential
00:30:39
part of a healthy economy but it's
00:30:41
terrible if you happen to own those
00:30:43
specific stocks now investor Peter Lynch
00:30:46
is known for many quips but perhaps none
00:30:48
is more famous than his saying invest in
00:30:50
what you know know what you own and know
00:30:53
why you own it unfortunately many
00:30:55
investors interpret that quote as invest
00:30:58
in what you've heard of and own it
00:30:59
because you've heard of it and what
00:31:01
they've heard of naturally are popular
00:31:03
consumer Brands and companies with a
00:31:05
high frequency in society you know those
00:31:07
with many stores with many products with
00:31:09
long histories but what Lynch actually
00:31:11
meant in his quote was the more familiar
00:31:13
you are with a company the better you'll
00:31:16
understand its business and its
00:31:17
competitive environment the better
00:31:18
chances you'll have of finding a good
00:31:21
story that will actually come true you
00:31:23
can't just know Starbucks because you
00:31:25
enjoy a latte or because you see it on
00:31:27
every corner you must know its business
00:31:30
fundamentals its competitors its
00:31:31
potential future Pathways the market
00:31:33
doesn't care about popularity or
00:31:35
frequency of its stores it only cares
00:31:37
about popularity and frequency in so far
00:31:40
as those factors positively or
00:31:41
negatively affect the objective
00:31:43
Financial fundamentals of the business
00:31:46
riffing on that previous stanza Concepts
00:31:48
like popularity and frequency they're
00:31:50
both Hallmarks of a company's past right
00:31:52
the stores you see the brands standing
00:31:54
in our culture the companies here to for
00:31:57
investment returns are all a function of
00:31:59
what the company has done in the past
00:32:01
but the stock market is forward-looking
00:32:02
the thousands of investors who buy and
00:32:05
sell stocks and determine their daily
00:32:06
prices they don't care about the past
00:32:08
they are quite literally trying to
00:32:10
predict a company's future they're
00:32:12
pricing in that anticipated future into
00:32:14
today's fair value quite understandably
00:32:16
most investors or at least many
00:32:18
investors don't understand that they
00:32:20
don't do that they either shape their
00:32:21
opinions based on the past popularity
00:32:23
frequency past investment returns or
00:32:26
they react to current day new news and
00:32:28
those are both mistakes the intelligent
00:32:30
investor thinks about the future but any
00:32:32
statement akin to Well Company ABC will
00:32:35
be great in the future that's a pretty
00:32:36
challenging statement to make accurately
00:32:39
nothing against Peter Lynch but most of
00:32:40
you know I'm a pretty big fan of Uncle
00:32:42
Warren Buffett who is famous for saying
00:32:44
it's far better to buy a wonderful
00:32:46
company at a fair price than a fair
00:32:48
company at a wonderful price even if
00:32:50
Starbucks is one of Buffett's wonderful
00:32:52
companies is it trading at a fair price
00:32:55
most people including many investment
00:32:57
professionals are terrible at
00:32:58
determining what a fair price truly is
00:33:01
and price is a defining feature of any
00:33:03
investment I frequently use the Honda
00:33:05
Civic example to explain that idea is a
00:33:07
Honda Civic a fair car sure is it a good
00:33:10
to Great car maybe would you be happy
00:33:12
owning a new Honda Civic many of you
00:33:14
would say yeah sure I'd own a Honda
00:33:16
Civic but would you pay $100,000 for a
00:33:18
new Honda Civic no way it's not enough
00:33:21
to say Starbucks is a good company
00:33:22
perhaps a great company that's a
00:33:24
challenging enough statement on its own
00:33:26
we must go further and ask ourselves is
00:33:28
Starbucks trading for a fair price and
00:33:30
quite simply most of us are terrible at
00:33:33
determining what a fair price truly
00:33:34
means at least when it comes to stocks
00:33:36
and play along with me let's assume for
00:33:38
the sake of argument that my client was
00:33:40
correct because Starbucks is everywhere
00:33:42
it must be a good stock to own and it's
00:33:44
trading at a good price if that's true
00:33:47
does it necessitate that Starbucks
00:33:48
should still comprise 20% of their
00:33:50
portfolio or put another way is
00:33:53
Starbucks one of the top five companies
00:33:55
in America right 100% divided by five is
00:33:57
20 % are there only five good companies
00:33:59
in America right I bet you could rattle
00:34:01
off 10 equally recognizable publicly
00:34:04
traded companies in the next 30 seconds
00:34:06
try it they're everywhere any way you
00:34:08
cut the cake or the biscotti a 20%
00:34:11
position in one company is severely
00:34:13
overweight in financial planning we want
00:34:15
to reduce our range of potential
00:34:17
outcomes that's why we diversify in the
00:34:19
first place having 20% of your money
00:34:21
tied to one single stock leads to a wide
00:34:23
range of potential outcomes for what
00:34:26
it's worth that client did listen to our
00:34:27
compy Council and has been divesting out
00:34:29
of Starbucks at least as tax efficiently
00:34:31
as possible and that listeners concludes
00:34:34
the first part of today's idea the idea
00:34:37
of why we invest in Diversified indexes
00:34:39
like say the S&P 500 in the first place
00:34:42
and why we try not to invest in
00:34:44
individual stocks here's a quick ad and
00:34:47
then we'll get back to the show serious
00:34:49
question why do podcasters constantly
00:34:52
ask for ratings and reviews yes they do
00:34:55
help highlight our shows to new
00:34:56
listeners they help straighten just find
00:34:58
us on Apple podcast and Spotify it's
00:35:00
totally true and a good reason to ask
00:35:02
for ratings and reviews but I have
00:35:04
something more important at least more
00:35:06
important to me I want to know if you
00:35:08
like this stuff I want to know if you
00:35:10
like my podcast episodes my monologues
00:35:12
my guests the information I share with
00:35:14
you and the stories I tell I want to
00:35:16
improve and make your listening more
00:35:18
enjoyable in the process so yeah I would
00:35:20
love to read your reviews and sure if
00:35:22
you throw a rating in there too that's
00:35:24
great if you like what I'm doing please
00:35:27
share it with me me it's such a great
00:35:28
feeling to read your feedback I'd love
00:35:31
to read your review or see a rating on
00:35:33
Apple podcasts or Spotify thank you now
00:35:36
for the second part of today's idea I
00:35:39
want to explain the concepts around
00:35:40
timing the market this explanation will
00:35:43
include little sidebars like lump sum
00:35:45
investing dollar cost averaging the PE
00:35:47
Ratio or the cape ratio so going back to
00:35:50
Lynn's question Lyn's original question
00:35:52
it makes so much sense right with the
00:35:54
market at all-time highs right now like
00:35:56
it is here on December 12 of 2024 why is
00:36:00
right now a good time to invest right
00:36:02
surely we should be buying low and
00:36:03
selling high but you want me to buy High
00:36:06
you want me to buy at an all-time high
00:36:08
okay first I want to explain the cape
00:36:09
ratio Cape cyclically adjusted price to
00:36:13
earnings it's very much related to the
00:36:14
price to earnings ratio which I think we
00:36:16
touched on before it's a way of
00:36:17
measuring what stocks are selling for
00:36:19
their price against how well those
00:36:21
companies are doing financially their
00:36:23
earnings and the cape ratio is smoothed
00:36:26
out over time to account for inflation
00:36:28
that's the cyclically adjusted part of
00:36:30
it capap cyclically adjusted price to
00:36:33
earnings ratio now logically speaking
00:36:35
Lynn has a pretty good point here we
00:36:37
know that the S&P 500 price is at an
00:36:39
all-time high and we know that price is
00:36:41
one of the great equalizers in
00:36:43
determining if an investment is good or
00:36:44
not right our Honda Civic example or the
00:36:47
hamburger example are Burgers good yeah
00:36:49
hamburgers are good would I pay $100 for
00:36:51
a hamburger no I wouldn't price matters
00:36:54
okay quality is one thing but price is
00:36:56
important too torically the S&P 500 Cape
00:36:59
ratio oscillates between 10 and 25 and
00:37:03
generally though not always the lower
00:37:05
the PE the better the forward-looking
00:37:07
investment opportunity that makes
00:37:10
intuitive sense or at least I think it
00:37:11
should the lower the price that I'm
00:37:13
purchasing my investment the better my
00:37:15
long-term returns will be but does that
00:37:18
mean that we should avoid investing in
00:37:20
any sort of stock market altogether
00:37:23
simply because the PE the price to
00:37:25
earnings or the cape ratio is high the
00:37:27
answer there's no not really just
00:37:29
because the cape ratio is high it still
00:37:31
might be smart to invest and we're going
00:37:33
to link something in the show notes an
00:37:35
article I wrote called timing the future
00:37:37
Market Cape versus future returns and in
00:37:40
that article you'll see some pretty
00:37:42
interesting graphs that I put together
00:37:43
where we could point to plenty of times
00:37:45
where the cape ratio was 25 or 30 very
00:37:48
much on the high end and the future
00:37:50
inflation adjusted 10 year returns or 20
00:37:52
or 30 year returns were a perfectly
00:37:55
normal and acceptable five six 7 8% just
00:37:58
because the cape ratio is high there is
00:38:01
no Golden Rule stating that you must
00:38:03
avoid investing for reference right now
00:38:06
as of this recording the cape ratio is
00:38:08
at 38 which is very very high by
00:38:11
historical standards and again going
00:38:13
back to Lynn's point if I'm paying a
00:38:15
very very high price for the stock
00:38:17
market compared to historical standards
00:38:19
surely that can't be a good thing surely
00:38:21
I must be spending $100,000 on a Honda
00:38:24
Civic right now well I hear you Lyn now
00:38:28
the cape ratio hasn't been below 25
00:38:30
since the year 2014 and that has some
00:38:33
people seriously concerned are we in
00:38:35
this massive 10-year bubble of high
00:38:37
valuations and at some point is that
00:38:39
bubble going to pop maybe I might not
00:38:42
know enough to have an answer that
00:38:43
question but I do know the
00:38:44
counterargument here I think it makes a
00:38:47
lot of sense and I'm going to try to lay
00:38:48
it out Simply 100 years ago the American
00:38:50
economy was pretty Hands-On
00:38:52
manufacturing production factories
00:38:55
buildings stuff that is expensive to
00:38:56
make and expensive to scale meaning if
00:38:59
Ford let's say Ford wanted to double its
00:39:01
car creation capacity it had to buy new
00:39:04
land and build new factories and train
00:39:07
new people and put in new assembly lines
00:39:09
and all of that is really expensive for
00:39:11
a company to do and It ultimately eats
00:39:13
into that company's earnings and growth
00:39:15
in other words it was really hard for
00:39:17
those kind of companies to rapidly
00:39:19
expand their profit margins but today
00:39:23
many of our biggest companies work much
00:39:25
differently than that if Microsoft wants
00:39:27
to sell 20% more office licenses they
00:39:30
don't need any additional Capital
00:39:32
overhead to do so they just sell more
00:39:34
licenses many companies in today's
00:39:37
digital age they work the same or at
00:39:39
least very similar ways to Microsoft
00:39:41
right they don't have these massive
00:39:42
Capital requirements to grow like the
00:39:44
ones that existed 30 or 50 or 100 years
00:39:46
ago and as such those companies can grow
00:39:49
their earnings much faster than
00:39:50
historical standards and if that's true
00:39:53
maybe I am perfectly okay to pay a 38
00:39:55
times Cape ratio today because I believe
00:39:58
the earnings portion of that equation is
00:40:00
likely to rapidly increase in the coming
00:40:02
years turning today's price into quite
00:40:04
the bargain the point being that while
00:40:06
the cape Ratio or the PE Ratio is
00:40:08
generally helpful it's not necessarily
00:40:11
smart to believe that the PE ratios of
00:40:12
the 1950s ought to instruct how we
00:40:15
invest today and then going back to the
00:40:17
main point of today just because a PE
00:40:19
ratio is high we can still have strong
00:40:22
long-term future returns going forward
00:40:25
it's hard to time the stock market based
00:40:26
on PE r ratio alone instead there are a
00:40:29
couple simple tried andrue techniques
00:40:31
when it comes to investing your money
00:40:32
into the stock market probably some
00:40:34
things that you might have heard of
00:40:35
before to start I want to tell you a
00:40:37
story from 2022 which was in the middle
00:40:39
of a bad year for both stocks and bonds
00:40:41
and those kind of bare markets they make
00:40:43
you question should I just wait for the
00:40:44
bottom before I invest and reader of the
00:40:47
blog pulson he wrote in during that year
00:40:49
and he said Jesse I'm not tempted to
00:40:51
sell anything in my 401k or Roth IRA but
00:40:54
I don't know why I should continue
00:40:55
buying at least not at this point with
00:40:57
the market doing what it's doing it's
00:40:58
not going up anytime soon can I
00:41:00
contribute money to those accounts as
00:41:02
cash and then wait to invest once the
00:41:03
market hits its bottom it was a great
00:41:05
question and yeah you could try pson you
00:41:08
know that's what I responded to him but
00:41:10
I don't think he should and there are a
00:41:11
few reasons why and these reasons apply
00:41:13
to you listening today because timing
00:41:15
the market in the way that pulson
00:41:16
suggested first it barely affects your
00:41:19
future portfolio second it's really hard
00:41:21
to execute well and third it makes your
00:41:24
life demonstrably worse along the way so
00:41:27
here's a story of three hypothetical
00:41:29
fictional investors mostly they're
00:41:31
identical investors we've got normal
00:41:33
Nick we've got good timing Gary we have
00:41:36
bad timing bill normal Nick good timing
00:41:38
Gary bad timing Bill all three investors
00:41:41
started their investing in 1985 when
00:41:42
they were 22 years old they're now 59
00:41:45
and they're approaching retirement and
00:41:46
some other facts about them all three of
00:41:48
them used the S&P 500 index funds for
00:41:50
their stock Investments all three
00:41:52
invested $200 a month in 1985 and then
00:41:55
increased their contributions by 5% per
00:41:57
year until today so now they invest
00:41:59
around $1,200 a month and all three
00:42:02
invest via dollar cost averaging we'll
00:42:04
dive into that term in a couple minutes
00:42:06
the point being is they invest whether
00:42:08
the markets are high they invest whether
00:42:10
the markets are low and they buy in
00:42:12
between as well except for one time now
00:42:15
during the great financial crisis that
00:42:16
threw a small wrench into their plans
00:42:18
Nick normal Nick well he stayed the
00:42:20
course and continued his monthly
00:42:22
contributions but Bill and Gary they
00:42:24
wanted to try something different good
00:42:26
time and Gary with his good timing he
00:42:28
managed to time the market perfectly he
00:42:30
stopped investing just like Paulson
00:42:32
wants to with the question that inspired
00:42:33
this article Gary stopped investing at
00:42:35
the market top in 2007 he saved all his
00:42:38
cash he then perfectly timed the market
00:42:40
bottom in March of 2009 deploying all of
00:42:43
his cash into the stock market so he
00:42:45
timed the market to Perfection twice he
00:42:48
stopped investing at the perfect top and
00:42:50
then he began investing again at the
00:42:52
perfect bottom bad timing Bill also
00:42:54
timed the market top with Gary but when
00:42:57
the the true bottom hit in March 2009
00:42:59
bill was convinced that there was more
00:43:00
room to drop so as the market recovered
00:43:02
Bill waited and waited and waited he
00:43:04
thought a new bottom would eventually
00:43:06
come so he didn't deploy his cash until
00:43:08
2013 when the market price had fully
00:43:10
recovered to 2007 levels and his wise
00:43:12
wife screamed at him to get back into
00:43:14
the market now fast forward I wrote this
00:43:16
article in 2022 how different were Nicks
00:43:19
and Gary's and Bill's portfolio at that
00:43:21
point well Gary was best after all he
00:43:23
timed the market perfectly twice and he
00:43:25
had 1.46 million
00:43:28
bill was worst after all he missed many
00:43:30
buying opportunities for about 5 years
00:43:32
but he had $1.38 million and then Nick
00:43:35
was right in the middle at $1.42 million
00:43:39
so again Gary with the best perfect
00:43:41
timing 1.46 bill with the worst 1.38 and
00:43:46
Nick in the middle at
00:43:47
1.42 the perfect Market timing around
00:43:50
2008 which was a huge crisis right that
00:43:53
got Gary a 3% Edge over normal Nick and
00:43:56
Bill mess up big time yet Gary only has
00:43:59
a 6% Edge over him in the long run
00:44:02
Gary's perfect Market timing wasn't
00:44:04
actually that important now notably
00:44:07
though Bill and Gary when they chose to
00:44:09
time the market they didn't sell any of
00:44:11
their old Investments all they did was
00:44:14
choose not to buy new Investments if
00:44:16
they had sold their old Investments
00:44:18
though and then re-bought later our
00:44:20
conclusion would be much different bill
00:44:22
would have lost another 20% of his total
00:44:24
portfolio as of today despite perfectly
00:44:27
timing the market top okay he sold at
00:44:30
the perfect time but because he didn't
00:44:32
buy back in until it was three or four
00:44:34
years too late his portfolio would be
00:44:36
down about 20% today and Gary who was
00:44:39
perfect twice at the top at the bottom
00:44:42
his portfolio would be about 50% higher
00:44:44
today so it just goes to show if you're
00:44:46
only perfect once with Market timing you
00:44:50
could be down 20% like bad timing bill
00:44:53
you have to be perfect twice like Gary
00:44:56
to actually be up up a large amount and
00:44:58
that begs a question do you feel that
00:45:00
lucky personally I like where normal
00:45:02
Nick is at he didn't worry at all about
00:45:04
timing the market zero skill zero luck
00:45:07
and also zero stress he just kept on
00:45:09
buying and he's in a great place this is
00:45:11
a scenario where the juice simply isn't
00:45:13
worth the squeeze the squeeze again is
00:45:16
double Perfection you have to be right
00:45:17
twice if you manage to be right the
00:45:19
first time ceasing your buys before the
00:45:22
market bottom you'll likely be plagued
00:45:24
by bad timing bills issue when Market is
00:45:27
at Peak pessimism right when the market
00:45:29
is truly at the bottom that's Peak
00:45:31
pessimism do you have the skill and the
00:45:33
knowledge and the balls of steel to
00:45:35
deploy your money into that market or
00:45:38
are you a dumb wouldbe Market timer like
00:45:40
the rest of us are and then what's the
00:45:42
juice you get for that squeeze well it's
00:45:44
a 3% boost on your final portfolio or
00:45:46
maybe this time will be different maybe
00:45:48
you'll get a five or six or a s% boost
00:45:50
on your final portfolio and while your
00:45:52
money is out of the market sitting on
00:45:54
the sidelines what will you be thinking
00:45:57
are you just going to be chilled out and
00:45:58
relaxed with ice in your veins or are
00:46:00
you going to be a nervous wreck worried
00:46:02
about when to get back into the market
00:46:03
not only can this squeeze cost you money
00:46:06
but its psychological cost is
00:46:07
unavoidable Gary sure he gained 3% but
00:46:10
he also gained some white hair he was
00:46:12
out of the market for 18 months 18
00:46:15
months is a really long time are you
00:46:16
willing to wait 6 12 18 24 months or
00:46:19
more for a bare Market to end now
00:46:22
personally I'm not trying to time the
00:46:24
market over that period of time I don't
00:46:26
want to sit on my thumbs and hope that I
00:46:28
time it perfectly who knows how long
00:46:30
it'll take for us to return to all-time
00:46:32
highs when the next bare Market hits I
00:46:35
don't want to test my skill with timing
00:46:36
the market I don't want to test my blood
00:46:37
pressure by staying out of the market so
00:46:39
that story introduces an idea dollar
00:46:42
cost averaging many of us are doing it
00:46:44
without even realizing it that term
00:46:46
interestingly it it kind of has two
00:46:48
definitions though they're somewhat
00:46:49
related the first definition of dollar
00:46:51
cost averaging is to make a series of
00:46:53
investing contributions on regular
00:46:55
intervals such as the way that many of
00:46:57
us might contribute to our 401K accounts
00:46:59
every two weeks $500 comes out of my
00:47:01
paycheck into my 401k and it's invested
00:47:04
into a Target date fund that's dollar
00:47:06
cost averaging now the second definition
00:47:08
though it involves starting with a large
00:47:10
sum of money and then making the
00:47:11
decision to deploy that money into an
00:47:13
investment over a specific period of
00:47:15
time now that in my opinion is a great
00:47:18
idea for Lynn to consider today rather
00:47:20
than dumping 100% of her new investable
00:47:23
money into the S&P 500 today perhaps she
00:47:26
decides to contribute 10% of that money
00:47:29
every single month for the next 10
00:47:30
months that way if the market does tank
00:47:33
in February or whatever some of her
00:47:35
money will benefit from that future
00:47:37
price drop now both of those definitions
00:47:40
of dollar cost averaging share in common
00:47:42
the idea that you're buying assets
00:47:44
regardless of price that you're willing
00:47:46
to accept that sometimes you might buy
00:47:48
High other times you might buy low and
00:47:50
in the long run it's all going to
00:47:51
average out either way you are not
00:47:53
timing the market that all said we
00:47:56
should cover an interesting piece of
00:47:57
math and a term called lump sump
00:47:59
investing in short if we look back on
00:48:01
Market history would we be better off
00:48:03
taking that Lin approach of 10 deposits
00:48:06
over 10 months or should we invest it
00:48:08
all at once as soon as possible looking
00:48:10
back in history about 34s of the time
00:48:13
you would have wished you made the lump
00:48:14
sum investment upfront that should make
00:48:17
sense I think because if we look at
00:48:18
Market history we can easily see that it
00:48:20
has a terrific habit of going up over
00:48:22
time as such any sort of waiting to
00:48:25
invest that we do well historically it's
00:48:27
worked against us the market goes up and
00:48:29
if we're waiting it's going up away from
00:48:31
us in general if I knew that regret was
00:48:34
not a human emotion I would always
00:48:36
always always recommend that people
00:48:38
invest their money in a lump sum as soon
00:48:40
as possible but regret is a human
00:48:43
emotion and we must be aware of that
00:48:44
fact and it feels pretty bad to lump
00:48:46
suum your investment today only for the
00:48:49
market to go down next week therefore if
00:48:51
you're worried about investing
00:48:53
Everything at Once then dollar cost
00:48:55
averaging can be your friend allowing
00:48:56
you to slowly but surely get your money
00:48:58
into the market over time depending on
00:49:00
your level of hesitancy you could dollar
00:49:02
cost average for months or even years so
00:49:05
that's how and why we should continue
00:49:07
investing even during froy markets like
00:49:09
this one because we don't know whether
00:49:10
it's a bubble that's about to pop or
00:49:12
simply another stair higher on a long
00:49:14
staircase that could go on for years or
00:49:16
decades into the future here's a fun
00:49:18
fact though you know Lyn's thoughts
00:49:20
right now understandably is the market
00:49:22
is so high surely it's not a good time
00:49:24
to invest but I also got messages like
00:49:26
one from Christina in March of 22 where
00:49:29
the major part of Christina's message
00:49:30
was the market is down should I continue
00:49:33
investing humans are natural worriers
00:49:35
and it's funny that whether the market
00:49:36
is up or down people will worry about
00:49:39
whether continuing to invest is smart
00:49:40
Behavior but if we look at the
00:49:42
Historical track record we see that
00:49:43
continuing to plot forward in our
00:49:45
investments is a smart thing to do and
00:49:47
the list goes on as far as reasons why
00:49:49
not to time the market for example in
00:49:51
General market performance comes in
00:49:53
clusters as of this recording the S&P
00:49:56
500 is up 28% so far in 2024 about 20%
00:50:00
of that 28% came from the best four
00:50:03
months this year the remaining eight
00:50:05
months account for the other 8% of the
00:50:07
28% I could point to any Year and that
00:50:10
same pattern would exist market returns
00:50:12
come in clumps and the more I try to
00:50:13
time the market the harder and harder it
00:50:15
gets to make sure that I'm capturing
00:50:17
those infrequent clumps for example if I
00:50:20
look at weeks instead of months I see
00:50:22
that 20 of this year's 28% comes from
00:50:24
the best seven weeks in the market
00:50:27
if I look at days instead of weeks I see
00:50:29
that 20% of this year's 28% return comes
00:50:32
from the best 12 days in the market the
00:50:34
more you try to play around with the
00:50:36
perfect time to buy or sell your
00:50:37
Investments the more likely you'll be
00:50:39
sitting on the sidelines for one of
00:50:40
those four important months or one of
00:50:42
those seven important weeks or one of
00:50:44
those 12 important days and to be fair
00:50:47
because you might have heard a similar
00:50:48
stat like that one before but I've never
00:50:50
seen anyone discussed this that losses
00:50:52
are also concentrated too for example
00:50:55
the worst 12 days days so far in 2024
00:50:58
are down a combined 22% so avoiding
00:51:01
those terrible days that's a good thing
00:51:03
too right it is except for the fact that
00:51:05
we have more good days than bad days and
00:51:07
usually the good days are more
00:51:08
consequential than the bad days and
00:51:11
missing out on those good days it really
00:51:13
really hurts if you don't time the
00:51:15
market you'll always be in the game
00:51:17
during those good months those good
00:51:18
weeks those good days and yeah there
00:51:20
will be bad times too but zooming out
00:51:23
that's an okay trade to take all the
00:51:24
good days to outweigh the bad days
00:51:27
and this final point for you listening
00:51:28
has a bit to do with the efficient
00:51:29
market hypothesis again but I want to
00:51:32
re-emphasize markets are inherently
00:51:34
complex and influenced by a wide range
00:51:36
of factors that interact in
00:51:37
unpredictable ways these factors include
00:51:40
economic data indicators like GDP growth
00:51:42
or unemployment rates or inflation or
00:51:44
interest rates markets often react not
00:51:47
just to the data itself but whether that
00:51:49
data aligns with or deviates from
00:51:51
expectations the market is a function of
00:51:53
geopolitical events political
00:51:54
instability elections intern AAL
00:51:56
conflicts trade policies can all cause
00:51:59
sudden and unpredictable Market swings
00:52:01
corporate earnings and News Right
00:52:03
company specific developments like a
00:52:04
earnings report or a product launch or a
00:52:06
management change can lead to a sharp
00:52:08
movement in stock prices uh natural
00:52:10
events natural disasters pandemics
00:52:12
breakthroughs and Technology can Ripple
00:52:14
effects across Industries and markets
00:52:16
then you just have investor sentiment Mr
00:52:18
market right human behavior plays a
00:52:20
really significant role in Market
00:52:21
movements fear greed herd mentality can
00:52:24
lead to irrational buying or selling and
00:52:26
that just amps up the volatility
00:52:29
nowadays with technology you have Market
00:52:30
feedback loops right reactions to an
00:52:32
initial movement can trigger further
00:52:35
buying or selling due to algorithms and
00:52:36
margin calls investor psychology
00:52:39
compounding volatility and then you just
00:52:41
have random noise daily Market
00:52:43
fluctuations result from minor random
00:52:46
events a rumor a small trade that are
00:52:48
just difficult to predict is a little
00:52:50
bit of the butterfly effect just not
00:52:52
tied to any sort of fundamental change
00:52:54
because those factors are interconnected
00:52:56
and can influence each other in
00:52:57
unexpected ways accurately predicting
00:52:59
short-term Market movements is nearly
00:53:01
impossible even for experts and that
00:53:03
unpredictability underscores why
00:53:05
attempting to time the market is risky
00:53:08
and why a long-term disciplined approach
00:53:09
often yields better results going back
00:53:12
to ly's most recent statement it seems
00:53:14
like you are right Jesse with this
00:53:15
Market I should have invested I'm
00:53:17
personally against moving anything into
00:53:19
the market right now the FI Community is
00:53:21
all about being Frugal and buying into
00:53:23
this super high Market feels like it's
00:53:24
not Frugal at all for me do you square
00:53:27
that well Lynn I'm right for now for all
00:53:30
I know the market could crash 20% in the
00:53:32
first quarter of 2025 wiping out all the
00:53:34
gains since August and actually proving
00:53:36
you right for waiting but more often
00:53:39
than not as I've talked about here today
00:53:41
waiting like you've done won't have been
00:53:43
a smart thing to do and if you are
00:53:45
proved right let's say the market does
00:53:47
crash next month I'm worried it might
00:53:49
teach the wrong lesson and that lesson
00:53:51
will be when my gut tells me not to
00:53:53
invest I won't invest and if there's
00:53:56
anything I know about this world and the
00:53:57
stock market it's that there's always a
00:53:59
negative reason in your gut to make you
00:54:01
hesitate from investing and looking back
00:54:03
in time those gut feelings would have
00:54:05
led to a lot of lost compound interest
00:54:08
so if you've made it this far I hope
00:54:10
I've done a good job explaining why we
00:54:13
invest in Diversified indexes like the
00:54:15
S&P 500 in the first place and why we
00:54:18
try to avoid investing in individual
00:54:20
stocks and second I hope I've explained
00:54:23
the concepts around timing the market or
00:54:25
not timing the market Market really
00:54:27
including dollar cost averaging lump sum
00:54:30
investing the cape ratio and those kind
00:54:32
of things if you ever have doubts in the
00:54:34
future about whether now is a good time
00:54:36
to invest I hope you'll come back and
00:54:38
give this a listen and again I want to
00:54:40
thank you all for tuning in to the best
00:54:42
interest podcast not only today but
00:54:43
throughout 2024 making it the best year
00:54:46
of the podcast yet this is so much fun
00:54:48
for me thank you for all the kind
00:54:49
reviews and ratings on Apple podcast and
00:54:52
Spotify thank you for all the emails and
00:54:54
questions please keep them coming a very
00:54:56
happy holidays to you and here's to a
00:54:58
terrific
00:55:00
2025 thanks for tuning in to this
00:55:03
episode of the best interest podcast if
00:55:05
you have a question for Jesse to answer
00:55:07
on a future episode send him an email at
00:55:09
Jesse bestin interest. blog again that's
00:55:13
Jesse at bestter interest. blog did you
00:55:16
enjoy the show subscribe rate and review
00:55:19
the podcast wherever you listen this
00:55:21
helps others find the show and invest in
00:55:23
knowledge themselves and we really
00:55:25
appreciate it we'll catch you on the
00:55:27
next episode of the best interest
00:55:30
[Music]
00:55:32
podcast the best interest podcast is a
00:55:34
personal podcast me for education and
00:55:37
entertainment it should not be taken as
00:55:39
Financial advice and is not prescriptive
00:55:41
of your financial situation