TIB 18: Are the best investors dead people?

TL;DR - Does doing less equate to better returns when investing? The data seems to suggest that time in the market matters more than timing the market. As retail investors should we just focus on maximizing the length of our holding period?

There’s an urban legend in the investment community about an internal study that Fidelity conducted regarding the performance of various accounts on their platform. The study showed that between 2003 and 2013 the best investors were either dead or inactive.

That’s right! The best investors over a ten-year period were:

1. people who switched jobs and “forgot” about an old 401k,

2. people who left their current investments in place because they forgot their password and couldn’t log back in, or

3. people who had died and the assets were frozen while the estate figured out how to handle the assets.

This urban legend is backed up by statistics that show that the longer your holding period, the higher the likelihood that you will have a positive return on any investment in the S&P 500. Don’t believe me? See for yourself.

Over the last 100 years, the odds that the market will go up on any given day is slightly better than a coin flip (52%).

What are the odds if you hold for a month? 61%.

What about six months? 66%

A year? 69%

Five years? 81%

Ten years? 89%

20 years? 100%*

The longer your holding period is, the greater the likelihood that you will enjoy success in your investment in the market. So if it is this intuitive, why is it that retail investors (i.e. people like me and you) consistently underperform the market?

There are many theories as to why, but my best guess is that it is because we are bad at managing our emotions.

Investing is emotional as much as it is an exercise in numbers and stories. You are risking your hard earned cash. When you see the value of your hard work plummet, you get antsy and you’re tempted to sell out at the worst possible moment.

Why were the best investors those that forgot they had an investment account?

Because there was no emotion involved. It was not top of mind (or in their minds at all), and over the long run (ten years), the probabilities worked out in their favor.

*Statistics taken from “Why does the stock market go up?” by Brian Feroldi.

Found money is better than earned money

I got the idea for this newsletter after working with one of my coaching clients this past week. To keep things anonymous, we’ll call this client Anna. One of the first things that we do in a coaching session is we first try to figure out where everything is.

Where are all the bank accounts, where are all the brokerage accounts, where is all the money that you have right now?

While we were doing this, Anna suddenly stood up straight and gasped. “Holy shit, I totally forgot I had a 401k from my first job.” Anna had to search her emails and find the login information for this account. After a few minutes of panic, Anna was able to get into her account and when she saw her balance she started laughing.

It turns out Anna had invested about $9,000 in a 401k account and had just left it in a ETF that broadly tracked the market. Once Anna had left her job at the end of 2016, she had obviously stopped contributing to the account so the money that was in there already just grew untouched for the better part of the last six years.

Guess how much money Anna had in her account now?

A little over $18,000, or a 100% gain. Is Anna the next Warren Buffett? Probably not, but she most likely outperformed her peers in this particular account. All because she had invested and forgotten about it.

Luck in the short term but process in the long term

I recently read a great book about the role of luck and skill in success (“The Success Equation” by Michael Mauboussin). While most activities fall somewhere on the spectrum between being a combination of luck and skill, a good rule of thumb is whether you can fail on purpose.

If you can fail on purpose, then the activity probably involves more skill than luck (like running a race against someone).

If you cannot fail on purpose, then the activity probably involves more luck than skill (like playing roulette).

So where does investing fall on the spectrum?

Investing is a fascinating example of an activity that involves a lot of luck in the short term and a lot of skill in the long term. This is why you see a lot of stories about investors who have a hot streak that lasts a few months but cannot sustain that success over a longer stretch of time.

To use our rule of thumb, it is very difficult to fail on purpose when investing in the stock market for a day. If you just invest in the S&P 500 on any given day with the goal of losing money, it is very difficult to lose money on purpose. The market moves for any number of reasons on any given day, and it is hard to predict before fact.

In the long run, there is a lot more skill involved (see Charlie Munger and Warren Buffett).

So what is important for success in activities that involve more luck than skill?

Good process.

Because a good process is what will put you in a position to consistently take advantage of situations in which the odds favor you. A good process will keep putting you in position to succeed even if luck is against you for a short period of time. Good process will give you the best chance to succeed long term when investing.

So what is good process in investing?

It probably differs depending on who you ask, but if you just look at the data from the last 100 years, it looks like a good process might be anything that prolongs your holding period for as long as possible.

Whether that is taking your brokerage account information and throwing it down the toilet so that you can’t get into your account, or keeping an adequate amount of cash on hand to never feel like you have to sell your investments when everyone else is losing their minds, good process seems to be about maximizing time in the market.

Do less; make more.

^{Disclaimer: Nothing contained in this website and newsletter should be understood as investment or financial advice. All investment strategies and investments involve the risk of loss. Past performance does not guarantee future results. Everything written and expressed in this newsletter is only the writer's opinion and should not be considered investment advice. Before investing in anything, know your risk profile and if needed, consult a professional. Nothing on this site should ever be considered advice, research, or an invitation to buy or sell any securities. Rohan Muralidhar is not a licensed securities dealer, broker or US Investment adviser or investment bank. This newsletter is not an offer to buy or sell, nor is it a solicitation of an offer to buy or sell or to participate in any advisory services or trading strategy.}