The Wisdom in Finding Out for Yourself
I graduated college in 2010 and started my full-time job. After a few months of working and paying bills, it became clear I’d have savings left over most months. What to do with the savings? This got me to thinking about investing. But I didn’t really know how.
At the time, the big market developments to me were the recent ‘08 crash and the emergence of index fund investing—relative to higher-expense mutual funds.
The other big trend, although it wasn’t clear at the time, was the emergence of large-and-dominant tech companies (e.g. FAANG) that would go on to separate themselves from the pack.
While plotting my course, it concerned me at the time that the TV-talking-heads were jibber-jabbering about the economy potentially experiencing a double-dip, or even a triple-dip, recession. If so, it’d pull the market down with it, and I’d sure lose money in that timeframe. Post ‘08, this wasn’t easy to dismiss. They were apparently the experts. They presented persuasive cases. Between their seemingly-always-negative sentiment (which I later realized 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.
Around then, it also became clear to me from the Forbes Billionaire’s list that none of them became wealthy through a Bank of America savings accounts; none of them saved their way to prosperity. Nor would I.
Finding Out for Myself
“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 advice from my father, a few college classmates and the trusty internet, which led me to index-fund investing (e.g. S&P 500, treasury bonds, etc). I learned that index funds work by both avoiding the human follies and charging minimal fees. The “wisdom of crowds” at the time suggested index-fund investing should be my main strategy, though the ideal stock-bond mix wasn’t clear to me. Further, another common refrain was to avoid stock-picking, as it was likely to lead to lower returns than I’d otherwise be able to make.
But I had zero investing experience myself, and it wasn’t hard for 22yo me to imagine I possessed hidden talents yet to be revealed. Stories about famed investors like Warren Buffett, Charlie Munger and Peter Lynch surfing the wave of under-valued stocks spoke to me; their investment journeys were written in accessible ways that made it feel like you too could be like them. Maybe I too had a Midas Touch?
So, despite the warnings about stock-picking, I decided to “find out for myself” whether I too could produce beautiful up-and-to-the-right charts.
My journey began. I opened a Vanguard account and went on to purchase stock and bond index funds and also picked up, what I considered to be, a few “undervalued” stocks.
It wasn’t long before the cracks began to emerge in my noah’s ark stock-picking strategy. Reality shattered the young boy’s grand illusions. My index fund investments returned 10-12%/year while my stock-picking returns were rubbish—more Mickey Mouse than Buffett. Further, I observed that my stock index funds grew faster than my bond index funds. Like the man who picked up the cat by the tail, the experience left its mark; no more monkeying around.
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 either be filled to the ears with people’s ideas or, periodically, you can check for yourself and form your own ideas. The best diet for most people may not be the one that’s best for you. They may be meant for endurance exercise where you’re meant for the gym. The population may have genetics that predispose them to higher relative levels of Vitamin D whereas you need to take 5,000 IUs/day. Your friends (who are probably right) warn you about dating person X, but you must know for yourself.
Crowd-sourced wisdom is often but not always right. What worked for them may not work for you. Their advice might not be specifically tailored to your situation. Sometimes popular advice was meant for the generation before you and is now a bit outdated, especially if you’re young. This means more responsibility for you, more agency, and fewer NPC tendencies—yes, more work.
If I had listened to what I considered to be everyone else’s best advice, I would 1)avoid stock picking and 2)invest only in stock and bond index funds. But I would have lost out on learning more about myself and how to invest.
Personal Wisdom Gained:
I lacked the stomach to hold individual stocks through large price fluctuations—both up and down. Yet somehow my indexing strategy, through the peaks and valleys, wasn’t the same emotional rollercoaster.
My initial approach to stock-picking was naive (e.g. catching falling knives, bottom feeding, value traps, low price/share like $6 or so) and should be avoided.
Investing Wisdom Gained:
Less is more (one of the few places in life where this idiom nails it). Less work (and simply owning the S&P 500 and nothing else) seemed to generate the highest returns. Less work for higher returns was NOT too good to be true—winning in the numerator and denominator.
Earning “average returns” through S&P 500 indexes, which at first doesn’t sound amazing, means your returns are probably superior to the crowd. After understanding the foibles and follies of most individual investors, 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 outperforming.
Bonds under-performed stocks (duh). But this fact was more important because of my age (early 20s) & circumstances. After a few years I got away from bonds (though I may pick them back up later in life).
“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
Accumulating wealth through indexing (and avoiding glacial growth via bonds) resonated more with me than than returning to the convenience store every week—for decades—in hope of purchasing a winning lottery ticket. Indexing with stocks seemingly offered the highest returns of any of my strategies, and it turned out that the strategy matched my demeanor. That’s what I decided to do from then on.
“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
Much in the same way finding the right diet can unlock your energy levels and wellness, this experience cleared up the black gunk from my cognitive machinery. By finding out for myself, I gained two valuable lessons: stock-picking reliably made me poorer and my stock indexes outperformed bonds. My stars were no longer crossed.
Today, I’m financially in a much better place (higher net worth) than I’d otherwise be because I found out for myself about the sweet returns of low cost indexing into the S&P 500 and avoiding pretty much everything else.
The Value in Finding Out for Yourself, For Others
But the value of my cautionary tales weren’t limited to me. Perhaps I nearly re-invented the wheel in my investment journey with close-to-where-I-started investment advice. But with my hard won & costly education, which did differ from the original wisdom I received, I was able to confidently help others with my tangible life lessons. My sister, mom & dad, uncle, friends, coworkers and countless others have more money today than they’d otherwise have because my lessons provided a sound base and gave me confidence to where I could offer them sound investment advice.
Further Wisdom Gained:
Your own hard-won learnings may end up helping those around you (e.g. their health, finances, goals, thinking, etc).
It’s impossible to know all the potential benefits from a journey at the outset. This is part of the reason it’s important to go on them, for the unforeseeable fruit that they inevitable bear.
Through this journey, I was able to enrich the lives of others, which hadn’t even crossed my mind when I set out to learn a few things about investing.
Conclusion
While crowd-sourcing wisdom is time-efficient and often serves, occasionally checking for yourself will separate you from the herd.
Finding out for yourself usually either solidifies conventional wisdom in your mind or offers insights into its shortcomings, which is where the opportunities lie.
Stock picking taught me what not to do early on in my investing career. I’m much better off today because of it and continue to “dance with the one that brought me”. My philosophy, and the associated lessons, have also helped those around me. But maybe you find out for yourself whether this advice 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.