By Dr. James M. Dahle, Emergency Physician, WCI Founder
In June 2021, I received an email from a doc. I'll paraphrase it here:
“I subscribe to the idea of an investment plan using index mutual funds rather than individual stocks, but it's always nice to see some proof. To prove it to myself, I read a Forbes article called, Here Are 20 Stocks to Buy in the Coronavirus Economy According to Market Experts, and then bought one share of each recommended stock in the depths of the bear market. I purchased all shares on 3/23/2020, one week after publication of the above article.”
The article recommended 20 stocks:
- Gilead Sciences
- Activision Blizzard
- Electronic Arts
- Take-Two Interactive
- Campbell Soup
- Johnson & Johnson
- Proctor & Gamble
The article briefly listed why these stocks should do great in the pandemic, but the reasoning should be pretty obvious to most. It goes like this: since people are going to work from home, communications technology companies should do really well. Since they're recreating at home, Netflix and video game companies should do well. Since they're eating at home, soup companies should do better than restaurants. Since they're shopping at home, Amazon and Alibaba should do well. They will also be riding their Pelotons instead of going to the gym. And, of course, vaccine manufacturers should do well, right?
At a superficial level, it all makes sense. What the author (and unfortunately apparently many of his readers) ignored, of course, was that this was all common knowledge at that time and was thus already “priced in” to the price of these stocks. So, no surprise to hear about the emailer's results:
“Peloton and Zoom did great. Gilead and Citrix did not. As of last Friday, my average gains for 19 stocks were 55.4%. That's amazing for a 15 month return. Except I also bought 150 shares of the Vanguard MegaCap Growth Index ETF (MGK) that same day, which went up 85%. Looking back, the Vanguard Growth Index ETF (VUG) went up 93% and the Vanguard Total Stock Market Index ETF (VTI) went up 89%. That taught me another lesson … aggressive large cap doesn't mean better returns.
In case you wondered why 19, I must have missed Hormel but that stock went down so return would only have been worse. Investing in individual stocks requires three correct decisions:
- Which stock to buy
- When to buy it
- When to sell it
With an index fund, you simply buy when you have money and sell when you need money. It is so much simpler and causes so much less stress.”
While I am not surprised by the results of this “study”, let's be honest and admit that over such a short time period and with so few stocks, it could have easily gone the other way. In fact, that might have been one of the worst things that could have happened to this doc.
What if these stock picks had actually beaten an appropriate index fund over this 15-month period? This doc would have been far more likely to listen to the stock-picking recommendations of a random Forbes columnist and could have embarked on an almost-sure-to-be-fruitless, lifelong crusade of trying to beat the market by reading the financial media.
The Truth About Financial Media
The author of this piece is listed as:
- Sergei Klebnikov
- Forbes Staff
- “I cover billionaires and their wealth.”
Seems like someone worth listening to, right? I mean, he's a STAFF writer at FORBES, right? He knows all about billionaires and wealth. I want wealth. I want to be a billionaire. So I should listen to him, right?
I have a little personal experience in this regard. You see, there are several articles published on the Forbes website that say this:
- Jim Dahle
- Former Contributor
- “I write about personal finance and investing for high earners.”
Forbes reached out to me a few years ago and asked me to write for the website. Now people write for all kinds of different reasons, but I'm running a business here. We have employees and have to make payroll. I'm taking time away from my wife and kids and rafting and skiing, so I actually try to get paid to write. I asked how much this job would pay. The answer was $0. Now, I write for $0 upfront all the time, but the idea is that eventually I will get paid for that writing. I was hoping to help spread the WCI message to more people, get them to come to the website, maybe boost the rankings of the website on search engines, and eventually make some money.
After a few articles, it was pretty obvious that nobody was coming to the White Coat Investor website from Forbes due to these articles. So I quit writing them and, to no one's surprise, Forbes eventually fired me as a free employee. But over the course of a year or two when I was part of the “Forbes team”, it became pretty obvious to me what kind of content they wanted. It was not the kind of content that I generally produce. However, it is the kind of content that this article exemplifies. It seems current and makes investing seem exciting and ever-changing and actionable.
Ask yourself: Why 20 stocks? Why not 17 or 23? What are the odds that there are exactly 20 stocks that will beat the market? The reason there are 20 is that it is a nice, round, clickable number.
Don't blame Forbes. Financial newspapers and magazines, whether in print or online, are mostly all the same. With few exceptions (such as the notable Wall Street Journal columns of Jonathan Clements and Jason Zweig) they're all like this. You can only write, “Buy a reasonable mix of low-cost, broadly diversified, index mutual funds and rebalance them periodically” so many times and in so many ways. It's hard to sustain an ad-selling business that way.
You need to be aware of that when you read the articles.
Investing newbies fail to realize that the market is smarter than they are. The market consists of the opinions of millions of individuals, and studies are quite clear that we're all smarter together than any of us are by ourselves. Just check out those jelly bean guessing contests. The average guess is usually pretty darn close, even if the range around that average is wildly inaccurate. So unless you have information that nobody else has in the market, the chances of you using your information to somehow beat the market are pretty low.
The market is not perfectly efficient by any means, but it IS efficient enough that the right move is to assume it is perfectly efficient at allocating capital and simply go along for the ride. Yes, you would expect Amazon and Netflix and Peloton to do well during the pandemic. But that's not the question. By the time you read this article, everybody already knew about the pandemic and knew these companies would benefit from that boost. So the prices of the companies were bid up already. The question is not “What about Warren Buffett?” The question is “Why aren't there more Warren Buffetts?” Statistically speaking, from pure chance alone, there should be more success stories out there than there are.
My favorite part of this email was the fact that the emailer not only calculated his returns but also compared them against reasonable index funds. The returns were fine…until the comparison is made. Too many investors don't even bother tracking their returns, much less compare them to a reasonable benchmark. More likely, they simply remember the winners and forget the losers when discussing stocks at cocktail parties.
So if you want to pick stocks, I recommend you do what this reader did—keep good records, track your returns, and compare them to a reasonable index over a reasonably long period of time. If it turns out you ARE a successful stock picker, know that you are in rare company and open your own hedge fund. Why settle for a measly 20% return on your own savings when you could be making “2 and 20” off of billions? If you could truly crush the market after-fees, I would be first in line to pay you to do so.
The stock market is a great place to grow your wealth over long periods of time. Buying stocks allows you to share in the ownership, earnings, and profits of the world's most successful corporations. But the right way to buy them is pretty obvious to the unbiased observer—you simply buy them all using a low-cost, broadly diversified index mutual fund rather than rapidly cycling in and out of individual shares hoping you somehow know more than everybody else.
That's not investing. That's speculating.
What do you think? Why didn't acting on this article pay off? Wasn't it obvious that these companies would outperform the market? Comment below!