00:00:01
welcome to the best interest podcast
00:00:04
where we believe Benjamin Franklin's
00:00:06
advice that an investment in knowledge
00:00:08
pays the best interest both in finances
00:00:11
and in your life every episode teaches
00:00:13
you personal finance and investing in
00:00:16
simple terms now here's your host Jesse
00:00:21
Kramer hello everybody Welcome to
00:00:23
episode 56 of the best interest podcast
00:00:27
my name is Jesse Kramer I was thinking
00:00:30
about what to talk about this week and I
00:00:31
went back to a presentation a
00:00:33
presentation that I've given before it's
00:00:35
a presentation that I've given to people
00:00:37
who wanted to learn more about investing
00:00:39
and specifically people who wanted to
00:00:42
improve their investing psychology
00:00:44
investing sure there's some math
00:00:46
involved but a huge part of investing is
00:00:48
mindset is psychology because investing
00:00:51
can be stressful we see sometimes our
00:00:54
accounts going down and we worry or even
00:00:57
on the flip side of things sometimes we
00:00:58
see our accounts going up
00:01:00
and we get overconfident and it's
00:01:02
important to have the right
00:01:03
psychological mindset the right Baseline
00:01:06
to be a good investor because usually
00:01:08
the the bad times aren't nearly as bad
00:01:10
as they feel in fact the bad times
00:01:13
usually present this really good
00:01:15
opportunity to invest more and the good
00:01:17
times are when we ought to be maybe a
00:01:20
little bit cautious a little bit worried
00:01:22
but that's not how our brains work
00:01:23
usually the good times they make us want
00:01:26
to invest even more and more and more so
00:01:30
what I'm going to do today is I'm going
00:01:31
to go through this this presentation
00:01:33
seven really cool investing facts really
00:01:36
about the stock market and and stock
00:01:37
market adjacent ideas it might help to
00:01:41
have a little bit of some of the visual
00:01:43
aids right this is a PowerPoint
00:01:44
presentation that I'm going to talk
00:01:45
about but I'm going to talk through a
00:01:47
lot of the visual aids and keep the
00:01:49
numbers fairly straightforward in a way
00:01:51
that I think everyone's going to be able
00:01:52
to understand so let's dive in and talk
00:01:55
through seven fantastic facts to improve
00:01:57
investor
00:01:58
psychology
00:02:00
[Music]
00:02:12
first let's talk compounding and let's
00:02:15
use some really interesting examples to
00:02:17
illustrate how compound interest works
00:02:20
so do you know how the inventor of chess
00:02:23
the game of chess how was the inventor
00:02:25
of Chess rewarded this story about Chess
00:02:28
and rice it might help you learn a
00:02:30
little bit more about compound interest
00:02:31
because it's an old Asian proverb some
00:02:33
say it's Indian others say it's Chinese
00:02:36
that the emperor was was really happy
00:02:39
with this new Tactical board game
00:02:41
brought before him chess was simple to
00:02:43
learn but impossible to solve and and
00:02:46
sure maybe killing the King made the
00:02:48
emperor a little bit nervous but
00:02:49
otherwise he thought it was a great game
00:02:51
so he offered the inventor of Chess a
00:02:54
reward of the inventor's choosing so the
00:02:57
inventor he thought about it a little
00:02:59
bit and he responded bonded I'm but a
00:03:01
simple game maker chess and rice are all
00:03:03
that I require to get me through the day
00:03:06
so would you give me one grain of rice
00:03:08
for this first Square on the chessboard
00:03:10
and then double that for the second
00:03:11
Square two grains and then double it
00:03:14
again for the third Square Four grains
00:03:16
and then continue on for the rest of the
00:03:18
board doubling for each Square could
00:03:21
that be my reward that rice is the only
00:03:24
reward that I would need so the emperor
00:03:27
he felt himself a pretty good judge and
00:03:29
a a decent mathematician and a single
00:03:31
meal he thought might have maybe a
00:03:34
thousand or a few thousand grains of
00:03:36
rice in it so even if the investors's
00:03:38
request summed up to say like a million
00:03:40
grains of rice that's only a few years
00:03:42
worth of meals and the Empire could
00:03:45
easily absorb that loss and and afford
00:03:47
to give that requested reward so the
00:03:51
emperor agreed and in doing so he sealed
00:03:54
his
00:03:55
fate okay let's talk about the emperor's
00:03:58
really big bad mistake the emperor was
00:04:00
not nearly as good at mental math as he
00:04:02
thought he was so I encourage you guys
00:04:04
to break ranks from the emperor if you
00:04:07
want to bust out a spreadsheet and
00:04:08
calculate this rice reward for yourself
00:04:12
I'll give you some of the highlights
00:04:13
right here so after two full rows of the
00:04:15
board are filled and I should pause and
00:04:17
and and inform those who don't know it's
00:04:19
an 8 by8 board there are 64 squares on a
00:04:23
chess board 8 by 8 so really what we're
00:04:25
talking about here is we're doubling the
00:04:27
amount of rice 64 times
00:04:30
so after the first two rows are filled
00:04:32
that's two eight Square rows that's 16
00:04:35
total squares the inventor would have
00:04:38
65,000 total grains of rice and that's
00:04:41
about 3 lbs of rice so we're a quarter
00:04:44
of the way through the board and he has
00:04:46
3 lbs of rice maybe that's a week's
00:04:49
worth of meals not exactly uh a great
00:04:52
reward so far but we need to pause here
00:04:55
because believe it or not even though
00:04:56
we're only a quarter of the way through
00:04:57
the board we're at a turning point
00:04:59
because let's just think about this thin
00:05:01
our heads how much rice would there be
00:05:03
after one additional row is filled take
00:05:06
three lounds and then double it eight
00:05:08
times the answer is about 750 lb or
00:05:13
enough rice for a couple of years after
00:05:16
two rows we had enough rice for a week
00:05:19
after the third row we have enough rice
00:05:21
for a couple of years the emperor's
00:05:24
Throne is probably starting to feel a
00:05:25
little bit uncomfortable because he's
00:05:27
kind of seeing before his eyes how
00:05:29
compound interest Works what happens
00:05:31
when we fill in one more row making it
00:05:33
four full rows the inventor of Chess
00:05:37
would have almost 200,000 lbs of rice it
00:05:41
would take that man that inventor a
00:05:43
thousand years to eat that much rice on
00:05:46
his own and we're only halfway through
00:05:48
the board after the fifth row the amount
00:05:51
of rice equals half the weight of the
00:05:55
Titanic it's it's the if I just said how
00:05:57
many pounds it was it wouldn't really
00:05:59
register right how many millions of
00:06:00
pounds the point is it's half the weight
00:06:02
to the Titanic after the sixth Row the
00:06:05
rice would weigh more than all the
00:06:08
passenger cars on earth right what is a
00:06:11
billion cars weigh after the seventh row
00:06:14
the rice is equivalent to 10 times the
00:06:16
weight of all the stuff on Manhattan
00:06:19
Island including every building and then
00:06:22
after the eighth Row the rice weighs
00:06:24
about the same as Lake eie for those of
00:06:27
you not from the US that's one of our
00:06:29
Great Lakes it's 115 cubic miles of
00:06:33
water that's a lot of
00:06:35
rice okay so this might be the world's
00:06:38
first Legend involving compound interest
00:06:40
it's exactly why for example your
00:06:42
younger years are the best time to
00:06:44
invest starting early allows you to fill
00:06:47
up more of your personal chessboard and
00:06:50
allows you to get further down the
00:06:51
chessboard as you age the early days of
00:06:54
investing they might feel like a slog
00:06:55
every paycheck contributes a little bit
00:06:57
but by the end of the year it feels like
00:06:59
you've put in $5,000 and and maybe your
00:07:02
investment has only given you $100 back
00:07:05
that free money from say a 401k is nice
00:07:08
but you can't retire off of a $100
00:07:11
annual return but remember in this
00:07:13
scenario you're you're just in the first
00:07:14
rows of your chessboard and without
00:07:17
those first rows the last rows wouldn't
00:07:19
be nearly as impactful the calculation
00:07:22
for each Square in this example depended
00:07:24
on the rice from the previous Square
00:07:26
each year of your investing timeline
00:07:28
it'll depend on what you've done in
00:07:30
previous years so there's no better time
00:07:32
to start than right now of course your
00:07:35
Investments aren't going to double every
00:07:36
year if they do you should immediately
00:07:38
send an email to Jesse ATB bestin
00:07:41
interest. blog but they might double in
00:07:43
value every 10 years or so that's a
00:07:45
reasonable and some would even say a
00:07:47
conservative Benchmark so let's consider
00:07:49
a simple worker who puts 10% of their
00:07:51
paycheck let's say that's $5,000
00:07:53
annually into an index fund through
00:07:55
their
00:07:56
401K after 5 years our investor might be
00:07:59
questioning their strategy a little bit
00:08:01
they've consistently invested $5,000
00:08:03
each year but their portfolio only
00:08:06
returns roughly $2,000 of growth during
00:08:09
year five now investing should make your
00:08:11
money work for you yet our investor they
00:08:14
probably feel like they're doing most of
00:08:15
the work but we need to remember these
00:08:18
are the early rows of the chess board
00:08:20
and just like we'll witness around Row
00:08:22
three in that chess example we're about
00:08:24
to hit a turning point at our Investor's
00:08:26
10-year mark their portfolio Grows by
00:08:29
$5,000 on its own essentially matching
00:08:32
the $5,000 that the investor contributes
00:08:34
that year it's not too bad of a deal by
00:08:36
year 16 the portfolio grows at about
00:08:39
$110,000 per year doubling their annual
00:08:43
$5,000 contribution by year 24 the
00:08:45
portfolio grows at more than $20,000 per
00:08:48
year that's a Forex multiplier on the
00:08:50
annual contribution the portfolio is now
00:08:53
working way harder than the investor is
00:08:56
if our investor started at age 22 and
00:08:58
reti hred at age 59 and I use age 59
00:09:01
because that's when they can start to
00:09:03
withdraw their 401K without penalty
00:09:06
they'd have 37 years to invest right age
00:09:08
22 to age 59 and after those 37 years
00:09:12
their portfolio would be returning about
00:09:14
$55,000 per year that's more than their
00:09:18
entire starting salary at the beginning
00:09:20
of this
00:09:21
analysis so will your nest egg outweigh
00:09:24
Lake Eerie I have my doubts but you can
00:09:27
use this parable of Chess and rice to
00:09:29
better understand compound interest to
00:09:31
better understand your investing future
00:09:33
you need to build an investment
00:09:34
Foundation you can let your nest egg
00:09:36
grow and hopefully soon you'll find
00:09:38
yourself in a winning position and
00:09:41
here's another little parable about
00:09:43
compound interest you might know the
00:09:45
name Claude Monae he's a French artist
00:09:47
and one of the favorite things for Monae
00:09:50
he he had two things that he painted a
00:09:52
lot you know he painted the same scene
00:09:54
dozens of times in his life one of them
00:09:56
was I think it's waterl Bridge Bridge
00:09:59
it's a bridge in London long story short
00:10:01
he painted the same bridge in London
00:10:02
looking out his apartment Window many
00:10:04
times but then the other thing he liked
00:10:06
to paint was back home in France it was
00:10:07
his favorite Pond and this Pond had the
00:10:10
lily pads on it so for the sake of this
00:10:12
example imagine Claude Monae watches
00:10:14
lily pads grow on his favorite Pond the
00:10:16
pond is a circle for the sake of his
00:10:18
example it's about one mile across and
00:10:21
he notices because he's a bit math-m
00:10:23
minded that the size of the lily pad
00:10:27
patch it doubles in size every day after
00:10:30
30 days that's when the pond is
00:10:33
completely covered with lily pads so the
00:10:36
question is on what day is the pond half
00:10:39
full of lily pads think about it for a
00:10:42
second maybe you know the answer the
00:10:44
answer is day 29 if it takes 30 days to
00:10:48
completely cover and the lily pads are
00:10:50
doubling in size every single day well
00:10:53
if it's at 100% at day 30 then it must
00:10:55
be at 50% at day 29 then that's the
00:10:59
final answer okay it's a bit of a cheap
00:11:01
answer but the whole idea here is we
00:11:03
have compound interest doubling every
00:11:05
day that's an example of compound
00:11:07
interest and we need to realize that the
00:11:09
first 29 days gets us halfway to the
00:11:12
finish line and then the last day gets
00:11:15
us the rest of the way to the Finish
00:11:16
Line That's the Way compound interest
00:11:18
works it's slow slow slow and then
00:11:22
extremely fast so to give you a little
00:11:25
bit of an example I kind of went back in
00:11:27
time and I estimated the certain size of
00:11:29
a lily pad I looked at the size of the
00:11:31
whole Pond I went back starting at day
00:11:33
30 when the pond was completely covered
00:11:35
and I went all the way back to day one
00:11:38
here are some interesting mile points
00:11:40
along our timeline so at day four that's
00:11:43
about when the first Lily Pad stops
00:11:46
growing or finishes growing at day 10 we
00:11:49
have 100 lily pads or about one one
00:11:53
millionth of the pond is covered by day
00:11:56
17 we have 10,000 lily pads which is
00:11:59
about a 65 foot diameter patch of lily
00:12:02
pads in the middle of the pond at day 24
00:12:05
we hit 1% total coverage 1% of the pond
00:12:09
is covered at day 24 in other words it
00:12:11
takes 3 and a half weeks to make 1%
00:12:14
progress and then in the final week 99%
00:12:18
of the progress occurs again slow slow
00:12:21
slow and then incredibly fast that's the
00:12:23
way the compound interest
00:12:25
[Music]
00:12:27
works
00:12:33
yeah okay our second example today is
00:12:36
called average versus actual average
00:12:40
versus actual now average is okay every
00:12:43
Financial content creator at some point
00:12:46
uses average market returns I use them
00:12:49
earlier today in this episode when I was
00:12:51
talking about the person investing in
00:12:53
their 401K from age 22 to 59 you'll see
00:12:57
things like well there's Maybe 9 to 12%
00:13:00
average annual return from the stock
00:13:02
market you should assume 2 to 4% as an
00:13:05
average tax rate so if you have pre-tax
00:13:09
annual inflation adjusted return you're
00:13:11
somewhere between 5 and 10% per year
00:13:15
totally understandable why people use
00:13:17
average I use average a lot myself
00:13:20
there's nothing wrong with it except you
00:13:23
have to realize that real life is an
00:13:25
average so one thing I did was I wanted
00:13:27
to look at a real investors timeline
00:13:30
imagine someone starts investing in pick
00:13:32
a year
00:13:34
1991 and they dollar cost average they
00:13:37
put the same amount of money into the
00:13:39
stock market every month for the next 30
00:13:41
Years from 1991 to 2001 now they aren't
00:13:45
going to get a steady 8% return every
00:13:49
single year right their their returns
00:13:51
will be all over the place because
00:13:52
they'll be in Bull markets they'll be in
00:13:54
bare markets sometimes their average
00:13:57
return will be way above
00:13:59
or the return that they've experienced
00:14:01
over their time will be way above
00:14:03
average and sometimes the return they've
00:14:05
experienced over time will be below
00:14:07
average so yes it does help to see this
00:14:09
in a chart but I want to point out some
00:14:12
highlights from exactly that investor
00:14:15
that I just described someone who
00:14:16
started in 1991 and ended in 2021
00:14:20
investing the same amount every single
00:14:22
month into the S&P 500 just a simple S&P
00:14:25
500 Index Fund so you might know this
00:14:29
that the '90s were a great time to be a
00:14:32
stock investor right up until the end of
00:14:33
the 90s when the bubble burst so if I
00:14:37
look at the first eight years of this
00:14:39
investor timeline they saw
00:14:42
177% annualized growth average we said
00:14:46
might be 7 8 9% well this person had
00:14:51
177% but then we had the dot bubble
00:14:54
burst okay that hurts their average
00:14:58
performance over the timeline they went
00:15:00
through the 2000s which were a little
00:15:02
bit bumpy and then the great financial
00:15:05
crisis hit at the end of the 2000s so
00:15:07
let's go to 2009 specifically March of
00:15:10
2009 that was the the bottom that was
00:15:13
the worst point in the financial crisis
00:15:15
was March of 2009 at this point our
00:15:18
investor who started in 1991 they' been
00:15:21
investing for 18 years and throughout
00:15:24
those 18 years at that point they had
00:15:26
seen 3.5 % annualized growth again
00:15:31
average might be seven8 or nine at one
00:15:34
point just a decade earlier their
00:15:36
portfolio was averaging
00:15:38
177% and now here they are almost two
00:15:41
decades into their investing career and
00:15:44
their average return is 3.5% per year
00:15:47
that must be a terrible terrible feeling
00:15:50
I think you can agree with me now if
00:15:52
they had stayed the course they would
00:15:54
have gone through a bull market from the
00:15:57
pits of 20 9 all the way up through
00:16:01
2022 and they would have finished right
00:16:03
around 8% per year for the full 30y year
00:16:07
timeline so it's very interesting
00:16:10
because they had some highs 177% per
00:16:12
year for the first eight years and then
00:16:15
eventually they hit some real lows where
00:16:17
they looked back on 18 years of
00:16:19
investing and only saw 3.5% annualized
00:16:22
growth but if they stayed the course
00:16:24
until today their portfolio would have
00:16:27
returned seven or eight % annualized
00:16:29
over the full 30-year period so this
00:16:32
brings us to this great quote from John
00:16:35
Bogle the founder of Vanguard and the
00:16:37
quote is reversion to the mean is the
00:16:40
Ironclad rule for financial markets
00:16:43
right reversion to the mean it means
00:16:45
that some periods start off really hot
00:16:47
but then they tend to cool off at the
00:16:49
end other periods of time will start off
00:16:51
cold but then they'll get hot later on
00:16:55
eventually after 30 years you end up
00:16:57
with the stock market at least somewhere
00:16:59
between 6 7 8% for an inflation adjusted
00:17:03
real return the longer you wait the more
00:17:06
dependable your average annualized
00:17:09
returns are it's kind of like ripples on
00:17:11
a pond right the more you wait the more
00:17:13
they Decay and the more predictable the
00:17:15
state of the pond becomes the pond
00:17:18
reverts to its mean now I do think it's
00:17:21
important for you guys to at least see
00:17:23
this final chart in the slide deck or at
00:17:26
least the final chart about the topic
00:17:27
that I just spoke about because this
00:17:30
chart it shows the same exact analysis
00:17:32
that I just talked about but it shows it
00:17:34
for eight different investing periods
00:17:36
you know from 1920 to 1950 then from
00:17:39
1930 to 1960 etc etc and you're going to
00:17:43
see reversion to the mean in action
00:17:45
you're going to see some periods
00:17:47
starting off pretty poorly after a
00:17:50
decade there's basically 0% return but
00:17:54
then by the time we get 30 years out
00:17:56
there's 7 or 8% annualized return
00:17:59
other periods are going to resemble that
00:18:00
period I just went through the 1991
00:18:02
period where the first say 10 or 15
00:18:05
years sees 15 20% annualized returns
00:18:10
those investors must have felt great
00:18:12
unfortunately those returns eventually
00:18:14
reverted to the meane by the time
00:18:17
they're 30 years into their investing
00:18:18
career they're back at seven or 8%
00:18:21
annualized returns so it's okay to use 7
00:18:25
or 8% as an average stock return but
00:18:28
just realize that actual returns are
00:18:30
nowhere near that stable and it often
00:18:32
takes 20 30 or 40 years to actually feel
00:18:36
like you're getting that average
00:18:38
[Music]
00:18:39
[Applause]
00:18:41
[Music]
00:18:46
return hey guys just a quick plug I'm
00:18:49
trying to be more intentional with
00:18:50
growing the best interest podcast one
00:18:52
thing that really helps potential
00:18:54
listeners decide if they want to listen
00:18:56
is the show's ratings and reviews I know
00:18:58
you've listened to the show before
00:19:00
you're listening right now so I'm hoping
00:19:02
you could leave a rating and an honest
00:19:03
review if you have the time on Spotify
00:19:06
you can only leave a rating but if you
00:19:07
use apple podcasts you can leave a
00:19:09
rating and review either works it's very
00:19:12
straightforward straight from the app
00:19:13
that you're listening to thank you so
00:19:15
much guys and thank you for listening to
00:19:17
the best interest podcast topic number
00:19:20
three the worst Market timer so imagine
00:19:24
a guy named Jim Jim wants to invest but
00:19:27
he happens to have the worst intuition
00:19:28
on Earth he starts in 1990 he saves
00:19:32
$5,000 per year and he increases his
00:19:34
savings rate by $500 a year right so
00:19:37
5,000 then the next year 5,500 then the
00:19:40
next year
00:19:41
6,000 but he invests at the worst time
00:19:45
possible imagine he he puts his money in
00:19:47
a savings account he's never quite sure
00:19:49
when to pull the trigger and then he
00:19:52
happens to invest all his money at once
00:19:54
in August 2000 right before the dotc
00:19:57
bubble bursts
00:19:58
he doesn't sell when the bubble bursts
00:20:01
he just kind of sits in his misery
00:20:03
realizing that he timed the market
00:20:04
terribly he continues to save
00:20:08
$5,000 plus every year but then he just
00:20:11
puts it in the savings account again and
00:20:13
he waits again until right before the
00:20:16
great financial crisis he dumps all of
00:20:18
his money into the market in October
00:20:20
2007 terrible timing the market crashes
00:20:23
before him and then he does it once more
00:20:26
in February 2020 right before Co so the
00:20:30
entire time he's always saving 5,000
00:20:32
5500 $6,000 a year he's saving money
00:20:35
every year he's just choosing to put it
00:20:37
in a savings account except for right
00:20:39
when the Market's about to crash which
00:20:42
is when his terrible timing comes to the
00:20:44
four now of course we don't expect Jim's
00:20:47
results to be good but I think if I just
00:20:49
told you that story and you didn't know
00:20:51
anything else you would assume that as
00:20:53
Jim sits here today he must have lost a
00:20:56
ton of money and that's that's not true
00:20:59
Jim ended up contributing about
00:21:02
$411,000 four just over
00:21:05
$400,000 over 30 years but as of today
00:21:09
his portfolio is worth
00:21:11
$800,000 his average dollar has seen a
00:21:14
4.2% annual growth and that includes the
00:21:18
Lost decade of the 2000s it includes all
00:21:20
of his bad timing because the key is Jim
00:21:23
didn't sell right yes Jim invested at
00:21:27
the worst possible time he dumped his
00:21:29
money into the stock market right before
00:21:31
the dot bubble and that really hurt he
00:21:33
dumped more money in before the great
00:21:35
financial crisis and again that hurt for
00:21:37
a few years and I will say you can look
00:21:39
at the data and Jim's portfolio was
00:21:42
underwater right up until about
00:21:45
2012 he hadn't made a dime but those
00:21:48
investing dollars that he put in in 1999
00:21:51
and then the investing dollars that he
00:21:52
put in in 2007 by the time he got to the
00:21:57
mid2 those investing dollars were making
00:21:59
him a profit and even though he did make
00:22:02
his final third investment before covid
00:22:04
he was still above water he was still in
00:22:06
the black he had still made a profit and
00:22:09
as he sits here today he's realized
00:22:12
4.2% annualized growth on his total
00:22:15
investment he's doubled its money over
00:22:17
30 years now if Jim had been dollar cost
00:22:20
averaging the whole time again that
00:22:22
means putting his money into the stock
00:22:24
market instead of putting it in a
00:22:25
savings account not really worrying
00:22:27
about the high in the lows of the stock
00:22:28
market just month after month after
00:22:30
month saving he'd have about $1.5
00:22:33
million today or about 8% annualized
00:22:36
growth so the point of the story is you
00:22:39
should be dollar cost averaging you
00:22:42
shouldn't be throwing your money in a
00:22:43
bank account and then dumping it in all
00:22:45
at once it would especially suck if you
00:22:47
happen to have terrible timing like Jim
00:22:49
did but the real important takeaway is
00:22:52
not to sell not to sell even when things
00:22:55
feel bad not to sell even when maybe you
00:22:58
personally feel stupid if you have a
00:23:00
diversified portfolio which in this case
00:23:02
Jim basically did right he was investing
00:23:04
in in S&P 500 Index Fund it's a little
00:23:07
bit concentrated in only stocks and it's
00:23:09
a little bit concentrated in that it's
00:23:11
only American stocks and only large
00:23:13
companies but still he's investing in a
00:23:15
broad swath of the American economy
00:23:18
that's relatively Diversified and he
00:23:20
doesn't sell he holds holds holds holds
00:23:23
so that even his old poorly timed
00:23:26
Investments had enough time to make up
00:23:28
for his bad timing and eventually bring
00:23:31
him an investment return don't
00:23:36
[Music]
00:23:48
sell lesson number four is the market a
00:23:51
casino this is one of these tropes that
00:23:53
I hear a lot some people think that
00:23:55
investing in general is like gambling
00:23:58
but especially the stock market people
00:24:00
equate the stock market to gambling a
00:24:01
lot and I I understand why they say that
00:24:05
on the one hand we have things like the
00:24:06
Robin Hood app which I mean the Robin
00:24:08
Hood app literally looks like a casino
00:24:10
right like little sparkly come down from
00:24:13
the top of the app when you make a
00:24:15
successful trade we had recent things
00:24:17
whether it's cryptocurrency meme stocks
00:24:20
that certainly felt like gambling where
00:24:22
someone was maybe 10 Xing their money in
00:24:25
a week that that always feels like
00:24:27
gambling you know options trading and
00:24:28
stuff like that and then okay making or
00:24:31
losing money sure that feels like a
00:24:34
casino kind of you know numbers going up
00:24:36
and down for apparently random reasons
00:24:39
that kind of feels like a casino when
00:24:41
someone looks at the stock market only
00:24:43
for for a couple days or for a couple
00:24:45
weeks it it feels like luck right and
00:24:49
luck is the essence of gambling I get it
00:24:52
we all get it in fact some of you
00:24:54
listening to this just say like yeah the
00:24:56
market is a casino for all all the
00:24:58
reasons that Jesse just laid out but
00:25:01
there is one all important difference if
00:25:04
I play roulette one time I have a 47%
00:25:07
chance to win to make a profit if I play
00:25:11
roulette 10 times I have a 41% chance to
00:25:15
make a profit my odds dropped from 47 to
00:25:18
41% if I play roulette 100 times I have
00:25:22
a 26% chance to walk away with a profit
00:25:25
the more I play roulette the worse my
00:25:28
odds become of walking away with any
00:25:31
sort of profit but with investing that's
00:25:34
exactly the
00:25:35
opposite if I had randomly picked a time
00:25:38
to start investing in the US Stock
00:25:40
Market anytime since
00:25:43
1871 if I had held my investment my
00:25:45
stock investment for one month I'd have
00:25:49
a 63% chance of making money if I hold
00:25:53
that same investment for a year I have a
00:25:55
72% chance for 5 years it's an 89%
00:26:01
chance for 10 years a 97% chance and for
00:26:05
20 and 30 years it's a 100% chance
00:26:08
there's never been a 20 or 30 year
00:26:10
period in the US Stock Market where
00:26:12
someone could have held their investment
00:26:14
over that period and lost money and
00:26:16
again I'm assuming here an S&P 500 Index
00:26:19
Fund right I'm using Robert Schiller's
00:26:21
S&P 500 historical data going back to
00:26:24
1871 in a casino the long longer you
00:26:28
choose to sit there at the table the
00:26:30
less likely you are to walk away with
00:26:32
money with a stock market the longer you
00:26:35
sit there and hold your Investments the
00:26:38
more likely you are to walk away with
00:26:40
money so again some people treat the
00:26:43
stock market like a casino and they see
00:26:45
the way that others are treating the
00:26:47
stock market and they say yeah
00:26:48
everyone's treating it like a casino but
00:26:50
you don't have to treat it like a casino
00:26:52
you can just sit there your hands in
00:26:55
your pockets holding your Investments
00:26:57
and and walk away in 20 or 30 years with
00:26:59
a lot more money than you walked in with
00:27:02
I'm going to turn it over to NYU Stern
00:27:04
business school Professor aswath
00:27:06
deodoran who had a uh an excellent
00:27:09
little blurb on a recent Morning Star
00:27:11
podcast to support this idea we also
00:27:14
asked chat GPT we prompted it to come up
00:27:17
with a question that would annoy you
00:27:19
yeah and without missing a Beat It
00:27:21
responded as follows it said can you
00:27:23
give me a hot stock tip that will make
00:27:25
me Rich quickly without any research or
00:27:28
understanding of the company's
00:27:29
fundamentals and so my question for you
00:27:31
is actually do you get this question
00:27:33
more often from Uber drivers or from
00:27:35
others in academic and Social Circles I
00:27:37
think I get it from 95% of investors I
00:27:40
think that they miss the essence of
00:27:43
investing invest you don't invest to get
00:27:45
rich you invest to preserve and grow
00:27:47
wealth I think the minute you think of
00:27:50
investing as a pathway to getting rich
00:27:53
you set yourself up for all kinds of
00:27:55
mistakes you overreach you over bet cuz
00:27:58
that's the way you get rich as you
00:27:59
gamble and I think we need to redefine
00:28:02
investing investing is about preserving
00:28:04
growing wealth which means if you're a
00:28:06
doctor go back and do your job earn your
00:28:08
income that's going to be at the heart
00:28:10
of your investing if you're spending
00:28:12
most of your time as a doctor looking
00:28:13
through the stock Pages trying to pick
00:28:15
stocks your wealth is not growing your
00:28:18
investing can be great but it doesn't
00:28:20
pay off so I think that it's much more
00:28:23
common than than we accept many people
00:28:25
they're Traders they're not investors
00:28:27
they want to trade their way to riches
00:28:30
and they look at success stories this is
00:28:32
selection bias now you have YouTube
00:28:35
videos of people who got rich in five
00:28:37
years by trading and you use those as
00:28:40
Role Models it's it's an extraordinary
00:28:42
dangerous pathway you're on because
00:28:45
history suggests that sooner or later
00:28:47
you're going to leave that casino with
00:28:48
nothing in your
00:28:56
pocket
00:28:58
okay cool idea number five let's talk
00:29:01
about Luck versus skill so I recently
00:29:04
ran a a stock picking competition on the
00:29:07
blog it was 100 days long and I got
00:29:11
100,000 people to participate you're
00:29:12
just going to have to you're going to
00:29:13
have to go along with me right now
00:29:15
100,000 people were saying invested in
00:29:17
my competition over 100 days every day I
00:29:20
came to them with an A versus B choice
00:29:23
about which stock would do better this
00:29:25
day you know is stock a or stock B going
00:29:28
to perform better on this particular day
00:29:30
it was that easy they had to vote for
00:29:31
one A or B and out of 100,000 people we
00:29:35
did end up getting an obvious winner and
00:29:38
an obvious loser the obvious winner he
00:29:40
was right on 71 out of 100 days so he
00:29:44
had 71 wins and 29 losses our obvious
00:29:47
loser had 30 wins and 70 losses now
00:29:52
imagine I came to you telling you what I
00:29:54
just told you and I said that starting
00:29:56
today
00:29:57
you have to invest in a a mutual fund or
00:30:00
a hedge fund that is being run by either
00:30:03
our winner or our loser would you have a
00:30:07
preference now the logical thing of
00:30:09
course is to say yeah I have a
00:30:11
preference considering one person got 71
00:30:14
days right and the losing person got 70
00:30:18
of the days wrong I'm going to go with
00:30:20
the winning person now I have to come
00:30:23
clean I've kind of sort of been lying to
00:30:26
you if you couldn't tell Maybe the
00:30:27
100,000 participants gave it away this
00:30:29
wasn't really a stock picking
00:30:30
competition what it was was a coin
00:30:33
flipping simulation that I wrote in
00:30:35
matlb a computer software and there
00:30:37
really were 100,000 simulations of 100
00:30:40
coin flips which of course as you guys
00:30:43
know it's just a 50/50 proposition it's
00:30:45
a coin flip and the best coin flipper
00:30:47
got 71 of the coin flips right and the
00:30:49
worst one got 70 of the coin flips wrong
00:30:52
and of course we know about coin
00:30:54
flipping that coin flipping isn't
00:30:56
repeatable someone can win 71 coin flips
00:31:00
out of 100 in one simulation and that
00:31:02
same person is not guaranteed to get 71
00:31:06
coin flips right in the next simulation
00:31:07
not even
00:31:08
close so that's when we get into the
00:31:11
whole idea of luck versus skill and and
00:31:13
we'll come back to the stock market in a
00:31:14
second because imagine Jesse imagine I
00:31:17
won the US coin flipping competition by
00:31:20
successfully guessing I don't know 28
00:31:22
coin flips in a row because it takes 28
00:31:25
coin flips to boil down three 100
00:31:27
million Americans into one winner I got
00:31:30
28 coin flips in a row but the real
00:31:33
question is am I the favorite to win
00:31:35
again next year well of course I'm not
00:31:37
because getting 28 coin flips in a row
00:31:39
is pure luck and luck is not
00:31:42
repeatable that's the Highlight here
00:31:45
luck is not repeatable but now imagine I
00:31:48
don't know listener of the podcast
00:31:50
Beckley imagine that Beckley wins the
00:31:53
American Chess Championship Again by
00:31:56
successfully winning 28 games in a row
00:31:58
we somehow get every American to
00:32:00
participate in this chess tournament all
00:32:02
300 million of them and it takes 28
00:32:04
rounds to eliminate everybody except for
00:32:06
Beckley he wins is Beckley the favorite
00:32:09
to win again next year I would probably
00:32:11
say yes or he's one of the favorites and
00:32:14
the reason why of course is we know that
00:32:15
chess is pure skill chess is a game
00:32:18
where there's no such thing as luck all
00:32:20
the information is available there on
00:32:22
the board it's turn-based there's just
00:32:25
no chance involved so if Beckley was
00:32:28
able to use his skill to win this year's
00:32:30
tournament odds are he's going to be one
00:32:33
of the favorites in next year's
00:32:34
tournament
00:32:35
too now let's bring this back to the
00:32:37
stock market is the stock market a
00:32:40
function of skill a function of luck or
00:32:42
somewhere in between an MIT study they
00:32:46
wanted to understand how much luck was
00:32:48
involved in in various games and sports
00:32:51
and practices and they they ran their
00:32:53
study by measuring repeatability just
00:32:56
like we talked about with coin flips and
00:32:58
chess now coin flipping of course they
00:33:00
found was 100% luck chess they found was
00:33:02
100% skill but they also looked at
00:33:05
things like NBA basketball now NBA
00:33:07
basketball they found was mostly skill
00:33:10
of course there's some luck right
00:33:12
sometimes a shot that you think was
00:33:14
going in goes out sometimes a guy gets
00:33:16
injured that's bad luck sometimes the
00:33:18
ref makes a call that you didn't think
00:33:19
is supposed to go the right way that's
00:33:21
luck but it's mostly skill and they
00:33:23
found that NBA basketball was about 86%
00:33:26
skill NFL football they found was about
00:33:28
68% skill but mutual fund management
00:33:32
which is another name for stock picking
00:33:34
they found was only 31% skill in other
00:33:38
words yes there is some underlying skill
00:33:41
to to picking stocks but it is mostly
00:33:44
luck there is a measurable a repeatable
00:33:47
skill in stock picking and some people
00:33:50
do have it but there's more random noise
00:33:53
there's more luck than there is skill so
00:33:55
if you had to just pick one one if you
00:33:57
had to choose to either invest with an
00:34:00
active fund manager or to invest in a
00:34:03
passive Index Fund you're going to be
00:34:05
better off statistically speaking
00:34:07
investing in that passive index fund and
00:34:09
we're actually going to come back to
00:34:11
this topic in a little bit but first
00:34:13
let's talk about topic number six which
00:34:15
is when someone says but the market is
00:34:17
at an all-time high it's really hard to
00:34:20
look at the stock market granted the
00:34:22
stock market isn't at an all-time high
00:34:23
right now when I put these charts
00:34:25
together probably in 20 19 or 2020 it
00:34:29
was at an all-time high and it's
00:34:31
something I heard a lot it's one of the
00:34:33
things it's actually one of the first
00:34:34
kind of viral articles I I wrote for the
00:34:36
best interest it had to do with readers
00:34:39
telling me you know Jesse why are you
00:34:42
still investing in the stock market it's
00:34:43
at an all-time high of course the answer
00:34:47
is the stock market's at all-time highs
00:34:50
a lot and if you choose to not invest
00:34:52
simply because the market's at an
00:34:54
all-time high you're going to be missing
00:34:56
out on a lot of investing opportunities
00:34:58
in your career so I have this chart in
00:35:02
the presentation that I put together
00:35:03
where I I show a real snippet of the
00:35:05
stock market over roughly 15 years and I
00:35:10
I asked the people in the room I said
00:35:11
when do you want to sell if I show you
00:35:13
this chart when when do you want to sell
00:35:15
do you want to sell when you're up 150%
00:35:19
over 5 years because you were at an
00:35:21
all-time high at that point you were up
00:35:23
150% over 5 years but the thing is if
00:35:26
you sold then you would have missed out
00:35:28
in the fact that after 8 years you were
00:35:31
up
00:35:32
213% you had a lot more room to grow if
00:35:35
you had just held on but again after 8
00:35:37
years we an alltime high so maybe that's
00:35:39
the time to sell but really if we zoom
00:35:42
out even further after 13 years your
00:35:44
investment was up
00:35:46
500% and again it's at an all-time high
00:35:49
at all three of these points your
00:35:51
investment would have been at an
00:35:53
all-time high and you could have used
00:35:54
that to justify selling at the first
00:35:56
point point when you're up
00:35:57
150% but you would have missed out on
00:36:00
the next 8 years of growth which got you
00:36:02
up
00:36:04
500% right that's the way the stock
00:36:06
market works the stock market in general
00:36:08
moves up and to the right especially
00:36:11
over long periods of time selling at an
00:36:13
all-time high or kind of equivalent to
00:36:16
that is choosing not to buy because
00:36:18
you're at an all-time high usually it's
00:36:20
the wrong thing to do if you're a
00:36:22
long-term
00:36:25
investor
00:36:30
hey guys Jesse here some of you might
00:36:32
not know that I send a quick weekly
00:36:34
email usually on Thursdays it'll take
00:36:37
you about 2 minutes to read with links
00:36:39
to new podcast episodes new blog posts
00:36:42
and the best financial content that I've
00:36:45
read over the past week from all over
00:36:47
the Internet thought being there I want
00:36:49
to share not only my work with you guys
00:36:51
but just the smartest stuff that I'm
00:36:53
reading that I'm learning from on a
00:36:55
regular basis right now about 6,500
00:36:58
people get that email every week and you
00:37:01
can sign up completely for free if you
00:37:03
just go to the homepage of the blog
00:37:05
that's bestter interest. blog one of the
00:37:08
first things you'll see is the email
00:37:10
sign up totally free quick weekly email
00:37:13
pretty worthwhile about 6,500 people
00:37:16
like it and I think you'll like it
00:37:20
too and the last one number seven I'm
00:37:23
going to get a little bit of flak from
00:37:25
this but I have the data to support it
00:37:27
number seven is you can beat the market
00:37:30
despite what people say because what
00:37:33
people usually say is nobody can beat
00:37:35
the market and that's just a silly myth
00:37:39
it really is just a silly myth the
00:37:41
market is an average it's the average of
00:37:44
all listed stocks so imagine someone
00:37:46
saying you can't be taller than the
00:37:49
average you can't be smarter than the
00:37:51
average you can't be better than the
00:37:53
average you can't be heavier than the
00:37:55
average you can't have longer hair than
00:37:57
the average it's just silly of course
00:38:00
you can be taller than average lots of
00:38:03
people are so similarly you can beat the
00:38:07
market you can have better performance
00:38:09
than the market but of course we do need
00:38:12
to talk about some caveats some really
00:38:13
really important caveats and at the end
00:38:16
of the list of those caveats we might
00:38:18
realize that trying to beat the market
00:38:20
is a bit of a Fool's errand okay so what
00:38:22
exactly are the caveats it's really hard
00:38:25
to beat the market and there are few
00:38:26
reasons why one of the big ones is Luck
00:38:29
versus skill we already talked about
00:38:30
this one I promise you guys we'd come
00:38:32
back to it can you repeatedly beat the
00:38:34
market over time okay let's say you beat
00:38:37
the market in year one was that luck or
00:38:39
was that skill how can you tell that's
00:38:42
it it sounds a little bit philosophical
00:38:44
but it's a really important question
00:38:46
even if you beat the market over a
00:38:47
three-year or a 5year time period how
00:38:50
much of that was luck how much of that
00:38:52
was skill how repeatable was your
00:38:54
performance honestly it's a hard
00:38:56
question to answer and then there's a
00:38:58
really cool statistical fact about the
00:39:00
stock market it's called skew
00:39:03
skew and we know what skew really means
00:39:05
skew is like a lean right when when
00:39:08
something leans to one side or the other
00:39:10
in this case what skew represents or
00:39:12
what skew refers to is the fact that the
00:39:15
stock market is comprised of many many
00:39:18
mediocre losers and a few Big
00:39:21
Winners the way that you get to a quote
00:39:24
unquote stock market average the way
00:39:25
that the stock Market average you know
00:39:27
exists is that you have many many losers
00:39:30
on one side of the average and then you
00:39:32
have a few Big Winners that pull the
00:39:34
average up and to the right in fact if
00:39:37
we go back about 30 years roughly 65 to
00:39:40
70% of stocks underperform their index
00:39:43
and only 35% of stocks outperform their
00:39:46
index so if you want to beat the market
00:39:49
you have to be skilled enough to
00:39:51
identify those 35% of stocks you have to
00:39:54
be skilled enough to identify the
00:39:55
minority of stocks and just the odds are
00:39:58
against you odds are if you're looking
00:40:01
for a needle and a Hy stack if you're
00:40:02
looking for a minority you're going to
00:40:04
have a hard time finding it and that's
00:40:06
why most stock Pickers most active
00:40:08
managers end up failing and then we get
00:40:12
to fees of course investing fees it's
00:40:15
kind of like starting a golf round with
00:40:16
Strokes already on your card it's still
00:40:19
possible to shoot under par but it just
00:40:22
got that much harder to do so again it's
00:40:25
possible some people do it I've seen it
00:40:28
you can Google it you can find results
00:40:30
that show that it's possible but you can
00:40:32
also Google and find results that say
00:40:34
most of the time stock picking is hard
00:40:37
beating the market is hard it's one
00:40:40
thing to do it without fees it's already
00:40:41
kind of like the the odds are stacked
00:40:43
against you again because of that skew
00:40:45
that we talked about once you add in
00:40:47
fees fees are like a whole another layer
00:40:49
of skew making it even harder and then
00:40:52
there's the fact that even if someone
00:40:54
does it even if someone comes to and
00:40:55
they say
00:40:56
I have one year of performance even
00:40:59
after my fees look at how well I beat
00:41:01
the market you can say that's great
00:41:03
that's phenomenal good for you but can
00:41:05
you prove to me that it's repeatable can
00:41:07
you prove to me that you used skill to
00:41:09
get you there it's pretty tough to do
00:41:12
and maybe one more that I'd add in if
00:41:13
you're a DIY if you're listening to this
00:41:15
at home and you're a DIY active investor
00:41:19
was your time commitment to beat the
00:41:21
market actually worthwhile cuz if you're
00:41:23
the kind of person who you sit at your
00:41:24
computer for 2 hours a day
00:41:26
deciding what stocks to pick and you do
00:41:28
that every single work day or every
00:41:29
single day that the Market's open you
00:41:31
committed 400 hours of your time over
00:41:34
the course of a work year to trying to
00:41:36
find stocks was that 400 hour commitment
00:41:39
worthwhile you know did you actually
00:41:41
profit did you actually beat the market
00:41:44
enough to justify your 400 hour time
00:41:47
commitment kind of hard to do but worth
00:41:49
doing so these complications they all
00:41:52
point in the same direction and namely
00:41:55
they ask ask this question is beating
00:41:57
the market worth attempting we know it's
00:42:00
possible mathematically it has to be but
00:42:03
is it worth attempting for the average
00:42:05
person the answer is no a quick review
00:42:08
of these seven cool fantastic facts to
00:42:11
improve your investor knowhow your
00:42:13
investor psychology the first one
00:42:16
remember that story about rice remember
00:42:18
the story about the lily pads remember
00:42:20
the power of compound
00:42:22
interest the second one Average stock
00:42:26
market returns are far different than
00:42:28
actual returns it's okay to use the
00:42:30
average returns when you're plugging in
00:42:32
a little bit of analysis but remember
00:42:34
that the actual returns are probably
00:42:36
going to be far more painful at some
00:42:38
point during your investing career
00:42:41
number three remember our story about
00:42:43
the worst Market timer yes he had
00:42:45
terrible timing but even though it felt
00:42:48
like he should have been losing money
00:42:49
over his career because he never sold he
00:42:52
actually came out with a pretty
00:42:54
reasonable profit number four is the
00:42:56
stock market like a casino well it might
00:42:59
look that way at least in the short term
00:43:01
but remember there's that fundamental
00:43:03
difference the longer you play in a
00:43:05
casino the worse you'll be but the
00:43:07
longer you play and the longer you hold
00:43:09
your investments in the stock market the
00:43:11
better you'll be number five Luck versus
00:43:14
skill remember coin flips all luck chess
00:43:18
all skill Stock Investing somewhere in
00:43:21
between but more on the luck Spectrum
00:43:24
than the skill Spectrum
00:43:26
number six but the market's at all-time
00:43:29
highs yeah that might be true but the
00:43:32
market is usually at all-time highs and
00:43:34
if you use that fact of the market being
00:43:36
at an all-time high to either sell or to
00:43:39
prevent yourself from buying more
00:43:40
Investments odds are you're doing it
00:43:43
wrong and finally number seven yes you
00:43:46
can beat the market but there are many
00:43:49
complications standing in your way and
00:43:51
those complications they all point in
00:43:53
the same direction and they ask you is
00:43:56
beating the market even worth
00:43:59
attempting thanks for tuning in to this
00:44:01
episode of the best interest podcast if
00:44:04
you have a question for Jesse to answer
00:44:05
on a future episode send him an email at
00:44:08
Jesse bestin interest. blog again that's
00:44:11
Jessy at bestter interest. blog did you
00:44:15
enjoy the show subscribe rate and review
00:44:17
the podcast wherever you listen this
00:44:20
helps others find the show and invest in
00:44:22
knowledge themselves and we really
00:44:24
appreciate it we'll catch you on the
00:44:26
next episode of the best interest
00:44:28
[Music]
00:44:30
podcast the best interest podcast is a
00:44:33
personal podcast me for education and
00:44:35
entertainment it should not be taken as
00:44:38
Financial advice and is not prescriptive
00:44:40
of your financial
00:44:42
situation