The Wisdom in Finding Out for Yourself
I graduated college in the spring of 2010 and started work not long after. As time passed, it became clear that I’d end up with savings most months. What to do with the extra cash? This got me thinking about investing in stocks and other listed securities. But I didn’t really know how.
At the time, the big market developments to me were the recent ‘08 crash, fueled by subprime mortgages and a housing market collapse, along with the emergence of index-fund investing. The other big trend, although it would only be clear in hindsight, was the emergence of large-and-dominant tech companies (e.g. FAANG).
While considering taking the investing plunge, it worried me that the TV-talking-heads were then going on and on about a potential double-dip, or even a triple-dip, recession. Another recession would inevitably cause losses for investors. With the ‘08 market crash fresh in everyone’s mind, this fear was hard to ignore.
Between the “experts” seemingly-always-negative sentiment (which I later learned was negativity bias in the news or “no news is good news and bad news is news”) and my lack of investing experience, I wasn’t sure it was the right time to start.
Around the same time, it was also becoming clear to me through annual reads of the Forbes Billionaire’s list that none of them made their wealth through bank accounts…Not one had saved their way to prosperity. I had to do something.
Finding Out for Myself: Picking The Cat up by the Tail
“A trait that showed up at about this time was my tendency not to accept anything I was told until I had checked it for myself.”
― Edward O. Thorp, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market
I solicited investment advice from my father, a few college classmates and the trusty internet. This wisdom-of-crowds method suggested that indexing should be my main (and possibly only) strategy, but the ideal stock-bond ratio wasn’t clear. Many said I should avoid stock-picking, but where was the fun in that? Finally, several personal finance articles recommended that I ought to keep 6 months of cash in a savings account as an emergency fund, just in case I lost my job. I had a few credible strategies to investigate for myself.
The advice to avoid stock-picking gave me the most heartburn. It wasn’t hard for 22yo me to imagine I might possess yet-to-be-revealed investing talents. Maybe I could pick stocks from my place on Lake Como for a living and live la dolce vita? Back then, there was no evidence to the contrary. And the stories about famed investors like Warren Buffett, Charlie Munger and Peter Lynch riding under-valued stocks to riches fueled my desires. Their investment journeys were written about and communicated in accessible ways that made it feel like you, too, could be like them.
I opened a Vanguard taxable account and went on to purchase stock and bond index funds. In addition, I also purchased what I considered to be, a few “undervalued” stocks to see how I’d fare. I also decided to keep my checking account below $10,000 in the process, preferring to essentially stay fully invested to test the emergency fund thing.
But it didn’t take long for the cracks began to emerge in my noah’s ark stock-picking strategy. Reality shattered the young boy’s illusions of possessing hidden talents. My index fund investments returned 10-12%/year while my Mickey Mouse stock portfolio accumulated losses. I was no Buffett. The stock-picking experience had left its mark.
On the indexing front, both the stocks and bonds generated positive returns. But I did observe that my stock index funds routinely grew faster than my bond ones—and had a lower tax burden. Lastly, the decision to not carry a large amount of cash in a savings account seemed to work out okay, further juiced my returns.
So. If intelligence is getting what you want out of life, one thing I knew was I preferred better results to worse ones, if they could be obtained. The entertainment of stock-picking had little value to me. It was time for me to take what I learned and align my behavior with that reality. I didn’t wish to be too soon old and too late wise.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” - Charlie Munger
The Value in Finding Out for Yourself
“You have to go out on a limb sometimes because that's where the fruit is.” -Mark Twain
The way I see it, you can be a walking echo of other people’s thoughts or, periodically, you check for yourself. The most popular diet may not be the one that ends up working best for you. Influencers may be pushing endurance exercise where you’re meant for the gym. Your friends (who are probably right) tell you to stay away from them because “they’re trouble”, but you simply must find out.
Had I blindly followed everyone else’s investing advice, I may have fared better in some columns and worse in others, but I never would have never really learned the following:
Personal Wisdom Gained:
I learned I lacked the stomach to hold individual stocks through large price fluctuations—both up and down. Yet my indexing strategy, with similar ups and downs, somehow didn’t bring out the same emotional volatility.
I was totally fine only keeping $10K or less in my checking and investing everything else, all the time. My investments were the emergency fund. Credit cards (paid in full every month) or stock sales would suffice in a pinch.
With investing and life, often the “perfect time” doesn’t exist. What, in hindsight, is close to the perfect time often presents itself as merely an “okay time” or “this is as good a time as any”. I took to heart the wisdom, “The best time to plant a tree was 10 years ago, the second best time is now.”
Investing Wisdom Gained:
My initial approach to stock-picking was naive and should be avoided (e.g. catching falling knives, value traps, low price/share stocks—like less than $10/share).
Less is more for most. Being lazier—and simply owning the S&P 500 and nothing else—generated the highest returns for me. Less work for higher returns was strangely NOT too good to be true.
Earning “average returns” through S&P 500 indexes, which on surface sounds just okay, means you’re probably making superior returns. After studying the foibles and follies of investors, many of who are constantly acting like sports betters trying to hit big parlays, I’ve come to believe that achieving mere S&P500 or QQQ returns means you’re likely outperforming.
Bonds underperformed stocks (duh). But this fact was more important because of my age (early 20s) & circumstances. After a few years I got away from bonds, and it increased my returns and am today in a better position. I may pick bonds back up later in life.
Holding funds like QQQ instead of SPY in my taxable account might be superior from an all-in standpoint due to the low dividend, which reduces annual taxes. You can simply sell if you need the cash.
All-time highs are not infrequent. It may make sense to add to your position at all-time highes, especially when you’re young. Up-and-to-the-right is the long-term trend. Auto-investing can help with this so you don’t overthink it.
Accumulating wealth through indexing (plus avoiding stock-picking and glacial bond growth) resonated more with me than returning to the convenience store every week—for decades—in hope that I’d one day being a winner. Indexing with just stocks showed the highest returns of any of my strategies, and it turned out that the strategy matched my demeanor.
“And then I realized… like I was shot… like I was shot with a diamond… a diamond bullet right through my forehead. And I thought: My God… the genius of that. The genius.” -Colonel Kurtz, Apocalypse Now
The Value in Finding Out for Yourself, For Others
It turned out that the value of my cautionary tales weren’t just limited to me. They impacted my community. My sister, mom & dad, uncle, friends, coworkers and countless others have more money today than they’d otherwise have because I checked for myself and then used my lessons to help them.
Further Wisdom Gained:
Your own hard-won & potentially costly learnings may help your community (e.g. health, finances, goals, taxes, general knowledge, etc).
It’s impossible to know all the potential benefits from a journey at the outset. This is part of the reason we must explore.
My investment experience and knowledge allowed me to intelligently engage in conversations about investing with friends and coworkers.
Through my journey, I was able to enrich the lives of others, which never crossed my mind when I set out check for myself whether or not the conventional wisdom would work for me.
Conclusion
Crowd-sourcing wisdom is both time saving and usually right. However, occasionally checking for yourself may reveal hidden opportunities for you or those around you to benefit from. In my case, a good fraction of the conventional wisdom I received held up. But in a few cases, I found opportunities to do better.
My philosophy to sometimes “check for myself” has improved my life and also benefited those around me. Maybe you should find out for yourself whether or not this makes sense.
Author’s Note
Some examples include dating that person everyone warned you about, trying the ghost chili, taking a trip to S America/SE Asia by yourself (female), trying tobacco/alcohol, investing with friends (rental properties), trying the restaurant/doctor/dentist with a few bad yelp reviews anyways.
“The best time to plant a tree was 20 years ago, the second best time is now.”
Certain things in life like hard drugs don’t lend themselves to finding out for yourself.
Improve the “wisdom of crowds” by focusing on what millionaires/billionares do or don’t do. For example, they don’t get wealthy through savings accounts & their net worth is either tied up in a large business or many investments (e.g. public stocks, private companies, land).
Finding out for yourself avoid a life of quiet desperation.
This is not investment advice.