By Dr. James M. Dahle, 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
- Clorox
- Teladoc
- Slack
- Zoom
- Citrix
- Netflix
- Peloton
- Activision Blizzard
- Electronic Arts
- Take-Two Interactive
- AT&T
- Verizon
- Comcast
- Amazon
- Alibaba
- Campbell Soup
- Hormel
- 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.
It's also worth noting that in the third quarter of 2021, the news that the stock for Peloton and Zoom had dropped significantly made big waves.
The Truth About Financial Media
The author of this piece is listed as:
- Sergei Klebnikov
- Forbes Staff
- Markets
- “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
- Retirement
- “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.
Efficient Market
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.
Tracking Returns
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!
Great insight. Corporate financial media is just the propaganda wing for Wall Street elites and a dare I say without triggering your readers ….politicians and central bank. Possibly even more insidious than corporate news stations.
Happy to see my biased confirmed 🙂
It was such a huge “a-ha” moment realizing that the financial media’s purpose is to make this stuff seem exciting and difficult when in reality is *should* be just the opposite to be successful. It seems so obvious now with self education but for the majority without it makes the picture so muddied.
Prior to finding this site I was in the big group of ignoramuses that thought financial “news” was actual news. I had a hard time believing such an impossibly complex economic system had such a simple answer as index investing. I wondered how people possibly kept up, and assumed they read some special information source that I did not. I also noticed the frequent use of metaphors and exciting language (prices surging, crashing, soaring, skyrocketing, shaking things off, being cautious).
Turns out it’s all horsecrap, designed to exploit readers. I find no value, not even entertainment, in reading it now. Might as well read The Onion.
I agree. It’s a waste of time and a temptation to do things that will actually hurt your portfolio. Reminds me of an old story….
Maybe the mark of a good investor is how far away they stay from financial porn.
This was interesting, but it would have been more interesting if same amount of money was invested in each stock instead of buying single shares.
My son was a chemical engineer who went back to school and is now a radiation oncologist. He’s going to make a decent living after residency, but his business major roommate when he was getting his engineering degree went to work for an unheard of start up called Zoom. As one of the first employees I can only say he’s doing pretty well now. Its funny how one small decision can be worth many millions. I realize this isn’t germane to the post but when I saw Zoom at the head of the list I couldn’t help commenting.
With time we see INDEXING beating active investors which shows more Americans are getting it
Next the AUM fee will be obsolete!!!
excellent post Jim as always. any insight into how this financial porn might be adding to inefficiency of pricing in the markets? I am wondering if as index investors are we actually profiting from the haphazard buying and selling of readers of financial media. If this is the case, then I can’t be too angry at the financial media! But I would feel sorry for those poor souls who I might be taking advantage of because of financial illiteracy.
Informed trading should make prices more efficient. Not sure buying stocks based on most financial articles is really informed trading though.
It’s a good article. Warren Buffett once said: “A low cost index fund is the most sensible equity investment for the great majority of investors.” It’s pretty hard to argue with that. A 15 month holding period is just way too short to draw long term conclusions in my opinion though. It would be good to see a follow up article in 3/5/10 year intervals to see how this stock portfolio does.
Dear Dr WCI;
Surely there are more than 2 ways to invest; following the newsy writers versus using big low-fee mutual fund/ETF’s. I am an individual equity investor. I do so for specific reasons. There ARE criteria that identify superior companies with long histories of steady growth and rewards for their owners. There are easily accessible, low cost tools for identifying and managing investments in these companies. If your only benchmark for success is “beating the market”, I’ll grant you your opinion on the manner. However, I take a different view. My retirement portfolio is my second business, after my surgical career. As a business owner, I expect that business to perform in specific ways. I want it to grow in value. I want it to yield growing cash flow that covers expenses and allows reinvestment in the business. While I could compare it against any number of “managed” or “passive” collections of literally hundreds or thousands of equities, I’d prefer to collect a finite number of superior companies, enough to mitigate against the possibility of a few complete melt-downs, and enjoy steady and acceptable returns, including growing cash flow. There’s no food for thought whatsoever in a 3-index fund portfolio, despite the definitions of risk control applied to that approach. It’s quite acceptable for those who have little/no interest in the art of investing, but does little to satisfy those of us who actually take an interest in the companies in which they are a fractional owner. Ultimately, I have little interest in price/earnings, if cash flow is well supported and growing, since cash is the way I pay my bills. If I am reinvesting steadily, price/earnings has a way of averaging out by dollar/cost averaging, so my only real decision points are “which equities” and the valuation of my initial position. Earnings yield and dividend yield-on-cost, amongst others, are good alternatives to “beat the market” measurement of success.
It’s your money, do what you want. Even a suboptimal approach, if funded adequately, is likely to be successful.
The data suggests that the vast majority of people would be better buying an index fund instead of picking their own stocks, especially after subtracting transaction costs, taxes, and the value of their time and adjusting for risk. However, there are likely some talented stock pickers; perhaps you are one of them. Those few, however, shouldn’t be wasting their time managing just their own portfolio though given the financial rewards of successfully managing money for thousands of others. Why screw around eking out an extra 2% on a $5 million portfolio ($100K a year) when you could be collecting 1% of $500 million of AUM ($5 million a year)?
Good luck investing.
most hobbiests do not have the objective of growing their hobbies into businesses…then they stop being hobbies. My first post pointed out that “beating the market” isn’t my objective. The only way to know if you are doing so is attempt to mirror some benchmark, which is also not what I am attempting to construct. I’m interested in constructing a cash-generating machine, purchasing discrete equities having a long history of appropriate characteristics, then monitoring trends in earnings and cash yields.
You don’t need to buy individual securities to institute a dividend tilt into the portfolio. If you’re not beating a dividend focused fund with your dividend focused approach, you’re wasting your time and effort adding unnecessary risk to the portfolio. If you are, you shouldn’t just be managing your money. Others will pay you a lot to successfully do what you are trying to do with their money too.
If you consistently can outperform the market over time on a risk-adjusted, real, after-tax basis, quit wasting your time performing surgery and managing your own modest portfolio. Open your own hedge fund for 2 and 20.
be my guest; personally I’m not interested in either the benchmark or the career suggestion. More is not better, from either perspective, in my view. There are 40 year strategies that “beat the market”, but have prolonged stretches that underperform certain market benchmarks. That doesn’t mean that they fail to serve their disciples well. The best strategy, IMHO, is one which has clear objectives, useful metrics which guide acquisition and monitoring of discrete investment choices, and produce the kind of results you desire. In my case that’s a strategy that doesn’t require sale of positions or partial positions to generate cash for living expenses. Every share one can hold is a share with the capacity to grow in value as well as the fractional claim on earnings and cash payouts. And, the monitoring is clear and simple.
I certainly don’t reject the concept of growth in valuation, simply the benchmarking, because it locks one into a mixture of holdings that someone else has deemed to be ideal, but those funds with hundreds of tickers carry with them, by definition, the also-rans and laggards. And, valuation matters most if/ when you decide to sell, which is a rare event in my case.
The best advice I think is, do your own research and then Bye, keep (forever) and forget 🙂
I used to watch CNBC a fair bit. After a while I had the thought that if you did the exact opposite of whatever blather was coming out of any of their talking head’s noise holes you’d probably do way better than actually following their “advice”.
“That taught me another lesson … aggressive large cap doesn’t mean better returns.” – this seems to be you making the same mistake you rail against in the article. A 15 month investment didn’t beat the market means essentially nothing. Come back when you’ve owned it 50 years.