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Stock market investing: does positioning beat predicting?

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Mark Twain had a famous quote from way back in the early 1900s. “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

Cleverly, he highlighted the point that speculating in “any” month could be dangerous. Interesting insight from over 125 years ago—and the same holds true today.

By Alan Ebright, Senior Investment Officer, Check Capital Management

Investing, in its most basic sense, is realizing that $1 today will be worth less in the future due to the persistent and continually rising cost of living. Therefore, to maintain one’s purchasing power, one must invest his/her money.

Stocks, over time, have proven to be a wonderful mechanism for accomplishing this goal. Yes, there can be days, weeks, months, and even multiple years, where they don’t earn a positive return. However, when you stretch this out over multiple decades, the proof is in the numbers. It’s quite simple to look at a 10, 20, 30…50-year chart of a broad index like the Dow Jones Industrial Average or the S&P 500 and see the trajectory.

There’s no doubt that the results on those charts paint a successful picture, so why do many investors fall short of these results? I can’t point to one single cause, but it’s most likely the confluence of the 24/7 news cycle, the invention of the smartphone and the ever-increasing easy access to information (regardless of accuracy). Too many inputs, causing us to overthink everything and making us forget that it’s a marathon, not a sprint.

Would you be surprised to learn that the average person underperforms the market? Well, there’s a Boston-based company called Dalbar, Inc. which each year compiles the Quantitative Analysis of Investor Behavior, or QAIB. It’s a statistical study comparing the returns of broad indices of stocks versus what the average investor earned.

Dalbar’s shows the growth of $100,000 starting on January 1, 1994, and the total return over the ensuing 30 years. The average investor had a return that was approximately $800,000 less than what the S&P 500 returned.


The gap in total return comes down to one single thing: investor behavior. Never has there been a time when all investors, be they professional or novice, have access to the same information.

Twenty-five years ago, the stock ticker on CNBC was 15 minutes delayed. Thirty years ago, you’d have to call a broker to place your trades; now you can do it yourself and on your smartphone. All of us have easy access to real-time information and access to more in the future is a certainty. Logically, one would think the return differential would be shrinking, but it has not.

Where are investors going wrong?

Here are a few examples of what can lead to lackluster investing results.

Have you ever chased a handful of stocks and continued to purchase more at higher prices, only to turn around and sell when they declined? Have you ever invested in a hot new mutual fund, only to sell out when the fund hit hard times and the ranking company, Morningstar, downgraded it from a 4-star to 1-star? Have you ever read a few pieces of news that convinced you that the market was going to take a hit, so you chose to sell all your holdings, only to watch the market go up 10, 20, 30% without you? That is exactly what Dalbar is studying.

How can we become better investors?

I believe that you must have some degree of faith. I don’t mean “biblical” faith, but at least some faith in corporate America, capitalism and the profit incentive of companies. If you can embrace those, then you must keep repeating these words—perhaps write them on a piece of paper and pin it to your family’s bulletin board.

“The economy cannot be forecast, nor the market timed, for having the ability to do so would mean you are privy to information of which millions of others are not.”

Your #1 goal is to position yourself for future success. As a long-term investor in stocks, it’s not advisable to interrupt the compounding effect of time.

Your #2 goal is to remove yourself from the prediction game. Keep playing a guessing game with the market, and you’ll almost certainly lose. If you feel you’re unable to do this on your own, I suggest (shameless plug) hiring an advisor. After all, the advisory profession is not what most people envision it to be.

We spend about 30% of our time on planning and investing and the other 70% dedicated to keeping clients from interrupting their own plans. Helping clients navigate through the tough (yet temporary) times usually makes all the difference to their long-term outcomes.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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