“I Said ‘Hey, a-what’s going on?'” – 4 Non Blondes
Jim Shellenberger, CFA | Financial Advisor
This last month, the drama that we watched unfold between hedge funds and Reddit users battling over GameStop left for an entertaining story. Reddit users banded together to try and take down the hedge funds causing the price to soar. We’ve now seen GameStop’s stock drop significantly, which means that the hedge funds’ short positions have profited nicely while many Reddit users, sadly, may have lost big. This storyline, along with a dramatically increased interest in cryptocurrencies and Robinhood, has left many people humming to themselves, “Hey, a-what’s going on?” This is an excellent question to be asking. While it is exciting to see so many people getting interested in stocks and investing, we will spend this month reviewing some key points to remember.
1. Retail investors have beat institutional investors in 2020.
I believe this type of relative performance will make more and more people want to strive for similar success. In January of 2021, Robinhood alone had more than 3 million new app downloads1. Some people may argue that this relative performance proves that retail investors don’t need asset managers investing their money, while institutions, in turn, may claim that this outperformance is a short-lived success. I am not here to argue on behalf of one or the other.
First, this – along with many things – seems to demonstrate that the current sentiment is high. This means that the overall attitude of investors is optimistic about stocks and that people are willing to take more risk in search of higher return. If we listen to the well-known Bershire Hathaway CEO Warren Buffett, we should, “Be fearful when others are greedy and greedy when others are fearful.” When we start seeing signs of this greed in the market, we ought to realize that sentiment is getting very high. That is when we need to take a step back and instead of chasing performance, remember Buffet’s words. Or we could listen to Nick Maggiulli, who, in his blog “Of Dollars and Data,” describes the relationship between prices and reality as one of “inescapable attraction.” According to Maggiulli, investment world is one of “inevitable pull of fundamentals.” He acknowledges that yes, markets go through periods where some people make lots of money very quickly with seemingly little effort, and that we are seeing such a market today. But eventually, Maggiulli says, these same markets will find their way back. He quotes Benjamin Graham, economist and author of The Intelligent Investor, who once said that, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”²
Maggiulli’s ideas are very similar to those of Buffett. The fact that the current market enables fast money-making with minimal effort can be frustrating to many and instill a sense of FOMO – or “Fear Of Missing Out.” In times like these, it is well worth remembering that investing is long-term. As a rule: when there is a way to make a lot of money quickly, there are bound to be ways to lose a lot of money quickly.
2. Time in the market beats timing the market.
This phrase has become one of my favorites during a time of uncertainty and volatility There are several excellent examples to prove this, many of which I have written about in the past. For those wanting copies of my commentaries, I am more than happy to send some your way. To illustrate the benefits of long-term thinking in investing, just take a look at this chart.³
It is powerful to see that historically, the longer your time frame, the less likely you are to see a negative return. In the 100 years of recorded S&P 500® history, we have not seen a negative return of over 20 (consecutive) years in duration. The chart below allows an even deeper dive into that same data.
This chart shows us that the further back in time we go, the better even the worst annualized return gets. For example, the worst 5-year annualized return over these 94 years of data was –17.5%. Yet the 30-year annualized return remained at 7.8%.
In conclusion, and to answer the question whether one can achieve short-term success in investing: yes. People do occasionally get lucky and make a lot of money quickly. As a long-term investor, this can be frustrating to witness. It is, however, worth remembering what the history books teach us: that the real success of investing is in the long-term. Being consistent with your investing and, most importantly, being patient will likely ultimately pay off. Resist the temptation to start chasing the trends in the hopes of making quick money. By the time you read the story of a success, the money to be made from that source has already found a home. Do keep asking yourself and your advisor, “hey, a-what’s going on?” but remember to stick to the fundamentals and be “fearful when others are greedy and greedy when others are fearful.”
1 Wilkes, Tommy, and Thyagaraju Adinarayan. “Retail Traders Leave Wall Street for Dust in 2020 Stocks Rally.” Reuters, Thomson Reuters, 18 Dec. 2020, www.reuters.com/article/us-global-stocks-graphic/retail-traders-leave-wall-street-for-dust-in-2020-stocks-rally-idUSKBN28S0MJ.
2 Maggiulli, Nick. Posted January 26, 2021.. “Let Them Vote.” Of Dollars And Data, 26 Jan. 2021, retrieved from ofdollarsanddata.com/let-them-vote/.
3 Carlson, Ben posted February 1, 2021. How the Stock Market Works. Retrieved from https://awealthofcommonsense.com/2021/02/how-the-stock-market-works/
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