My wife and I are blessed with two little boys. One is a year and a half and the other is two months old. For the parents reading this, I can imagine you nodding with a “say no more” look in your eyes.
We have a part-time nanny in her early 20s named April. She inevitably hears me on work calls and knows “I am in stocks.”
Yesterday, April brought up her friend that had gotten into day trading. She was curious what I thought because, on one hand, she knew investing in stocks is key to building wealth. On the other, she heard day trading was risky.
I asked her if she wanted the standard answer or the uncut one. You already know which one she chose.
As I shared some of the wisdom I’m lucky enough to have gained from 20 years in the markets, something dawned on me. I needed to be reminded of these lessons and, odds are, so do you.
In today’s edition of Wide Moat Daily, I’ll tell you what I told April. My goal is to recalibrate how you look at investing with a few simple rules.
And you should start by asking yourself a few questions…
Who Are Your Competitors?
Don’t kid yourself. The markets are a game and there are winners and losers. And when there is a stock market crash, it feels like a full-blown war you just can’t win. I was a professional trader at a hedge fund during the Great Recession, and I experienced the highest highs and lowest lows.
But not every investment strategy is the same battle.
In 2024, an industry survey found that the top 12 investment banks collectively spent $34 billion on technology that year. Goldman Sachs (GS) alone spends between $2.5 billion and $4 billion annually on its trading division (hardware, software, and personnel).
According to their Securities and Exchange Commission filings, most of Goldman’s trading division is focused on short-term, market-making, and order-flow-driven strategies. They use huge amounts of expensive data, the best trading software, and the smartest minds in the world to mine money from the markets through short-term trading.
That part of the business alone generates $25 billion to $30 billion in revenue each year. Goldman might be top dog in some areas, but Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC), and Morgan Stanley (MS) are all heavy hitters that send soldiers into battle every day the markets are open.
Let me make this crystal clear: You do not want to compete against the likes of Goldman Sachs in these areas.
Technology investments and costly data subscriptions give them an edge you’ll never have. You’d never voluntarily fight a losing battle, and you shouldn’t do it when investing, either.
What Are the Odds of Success?
I’m going to give you a few statistics that are so simple that it might deceive you into thinking they aren’t extraordinary. But they are.
Over the past 50 years, the S&P 500 has produced an annualized total return of 12%. In the past 10 years, it’s just under 15%. The past five years have been even better. If this sounds consistent, it is.
But what I’ll share next is even more important.
Over every rolling five-year period (2000 through 2004, 2001 through 2005, etc.) going back 90 years, only six out of 94 ended with a negative return. That’s a 93.6% win rate. And when it didn’t result in a gain, losses were usually minimal.
If we step up to rolling 10-year periods, there are virtually no losses. This matters because it helps alleviate that fear everyone has of buying stocks at the “wrong time.” In real life, people invest over several decades. There are zero times where that strategy hasn’t worked out spectacularly independent of when the individual started investing.
Let’s look at the other side of the coin. Quantified Strategies has published a lot of data on those attempting to trade throughout the day. Roughly 72% of day traders lose money each year, and the long-term success rate is roughly 1%. A new study out of Brazil found that 17 out of 1,500 traders earned more than minimum wage. I wonder what happened to the other 1,483..
Now, this is a good time to explain the difference between “investing” and “day trading.”
Passively putting dollars into the S&P 500 is not the only way to invest successfully. Investing is based on fundamentals like financial data, industry trends, competitive advantages and moats (our company’s namesake), and management’s track record.
The most successful investors in history have become that through buying individual stocks and holding them until their thesis played out. For Warren Buffett/Berkshire Hathaway, that might be 10 years. For Terry Smith of Fundsmith, it’s six to eight years on average. Chase Coleman of Tiger Global holds his stock positions for about two years.
Every one of these hyper-successful investors have held on to positions for much less time when it made sense. The best example is when the stock reaches its return goal sooner than expected.
The bottom line is so simple that it can be irritating: By investing in American businesses (whether individually or through an index like the S&P 500), the odds are greatly in your favor over time. It’s the exact opposite with short-term day trading.
Invest For Your Kids, Even if You Don’t Have Any
Let me explain what I mean. The next time you look at your portfolio, pretend that you have to fund a trust for your kids or your favorite non-profit. What investments would you make and why?
What’s funny about this strategy is it makes people honest. They already know which speculative investments don’t really make sense. They have a deep intuition about which stocks should be core holdings, and which shouldn’t.
But if you are human like the rest of us, these principles aren’t always reflected in our brokerage accounts. Over time, portfolio start to stack up with low-quality companies that we are “betting on” rather than investing in. We hold losers hoping to break even when our capital would be much better off somewhere else.
When we think about investing for our kids or charity, we can let go of those personal biases that hold us back. The truth is it’s not hard to make wild trades if the only victim is us. But we’ll hesitate if that money is for a greater purpose. I encourage you to value your capital and invest with that spirit in mind.
Invest in Investing
What are the most important responsibilities in your life? Family and health are usually at the top, but financial stewardship is up there, too. And it’s hard to take care of your family or health living in a van down by the river.
How much time and money have you invested in your education? $100,000 and eight years? More for some people. And that doesn’t include the opportunity cost.
What about your health? If it’s hard to calculate, that’s your answer. Here’s the painful one: What about your favorite hobby? I have two motorcycles and a sports car in the garage. I also try to get in a couple track days a year at my local track Circuit of the Americas, and they aren’t free.
Now, how much have you invested in improving your investing skills? For most people, they are embarrassed to say. A few hundred dollars in books? Maybe a seminar? We all agree that investing our money wisely is one of our most important responsibilities and has a dramatic influence on our families.
Yet, most people spend little time or resources to improve. My suggestion is to look at investing just like your favorite hobby or professional education. Allocate it the attention and resources it deserves.
Investing isn’t always easy, but it is relatively straightforward. Follow these general rules, and the odds are very good that you will be wealthier in the years ahead.
Regards,
Stephen Hester
Chief Analyst, Wide Moat Research
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