Two weeks ago, I wrote about the (hypothetical) unluckiest investor in history. I call him Bad Luck Brian.
Imaginary character Brian sat out the most explosive bull market in history – all the way from 2008 until 2021 – without investing a single dollar. He stood on the sidelines as all his friends got rich. He scrolled through Twitter screengrabs of 100X crypto returns, Instragrams of old high school friends buying houses, and colleagues boasting how they doubled their month’s wages betting on Gamestop. He never bought anything.
Then, when the market peaked on 29th December 2021, he decided the time was now. He became an investor *right* at the market peak. In many ways, therefore, we can call him the world’s unluckiest investor.
Ever since the peak, Bad Luck Brian has made monthly investments into the S&P 500 of $100. One click of the mouse each month. That is all he does – no individual stocks, no fancy allocation, risk analysis, studying of earnings, scrolling of Twitter.
And Brian is now profit.
That’s right. Despite investing right at the peak of the bull market, and hence having a fair claim to the title of “unluckiest investor in history”, Bad Luck Brian is now sitting on a nice profit $7.06 off his $100 monthly investments – that is a 0.44% return off fifteen monthly investments totalling $1,500.
Brian isn’t even aware of what inflation is; he knows nothing of banking collapses or energy crises, nor inverted yield curves and equity risk premiums. He just clicks buy in his index fund month every month.
Passive management trumps active management
I have written about this plenty before, but the most powerful adage in investing is to believe that you know nothing.
Because in the long-term, the math says that passive management trumps active management. And math is never wrong. In fact, the math suggests the following three mantras when it comes to investing:
Most active investors fail to beat the market
The S&P 500 has an inflation-adjusted historical return of 8.5% on average
The market is extremely volatile
So if your investment horizon is over the course of many years, the most mathematically sound strategy is just to fire it into an index fund tracking the market.
Sure, in the short-term anything could happen. And to be clear: Brian’s example is very much short-term (15 months). But it also illustrates the power of sticking to the course. Below are the current value of his investments. As you can see, despite a big market rally thus far this year, his first five investments are still in loss territory.
Math trumps ego
I wrote last September about how pessimistic I was about the state of the economy, yet the math behind a positive average return and long-term time horizon meant I decided the +EV play was to invest anyway, despite it going against my gut. So I made my biggest stock market purchase of the year.
This is known as the efficient market hypothesis, which in simple terms means that the market is highly efficient and it is hard to make money because everything is “priced in”.
There is an oft-repeated saying that tells you to “always trust your instinct”. It’s wrong. Always trust the math.
It’s the power of long-term investing. That purchase now makes me look very smart. So does this piece, talking about the scale of the stock market pullback historically, and why I was fearful heading into winter.
But in truth, all my thoughts about the market were irrelevant. Prices have run up immensely since then, proving my analysis…wrong.
I was pessimistic, but things have brightened somewhat and the market has run up. Thankfully, I chose a bruised ego at the time over backing myself to be smarter than the market, and that is what matters. It’s damn difficult to beat the market, no matter what anyone says. Why should I be different? Why should you?
Short-term volatility
If you plot the stock market year-to-year, you will see returns are all over the shop. In fact, 2022 was the stock market’s worst year since 2008.
But the average return is 8.5%. And in the long-run, if you can stomach the volatility, that is kind of all that needs to be said.
Of course, this is all invalid if that short-term volatility is prohibitive for an investor. If Bad Luck Brian needs to purchase a house next year, for example, shoving half his paycheque into the stock market every month would be incredibly foolish, given it could be 50% lower this time next year.
Same logic if he wants a car, or needs to pay tuition, or one of the other million things that people spend their money on. Investment sizing is important, and the above chart shows that every dollar you put in could be worth 40 cents in a year’s time if you get the timing wrong – and again, nobody knows the future, so that always must be considered.
The fact that nobody knows the future is actually the entire thesis of this theory. And in the long-term, it always comes back.
So let the case of Bad Luck Brian be a nice little example that even amid a ferocious bear market, staying true to the cause is what the math argues.
Very few people can beat the market. It’s not impossible, but it’s seriously rare, and that is why most underperform so badly when they strive to do so. If you want to invest for the long term, it’s extremely difficult as a retail investor to come up with a strong argument for not just keeping faith in the math.
If you are interested in reading more about the power of dollar cost averaging, I would suggest Nick Maggiulli’s excellent book “Just Keep Buying”
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