Let's not overcomplicate things
There's only one thing worse than wasting money - wasting time.
Hi everyone,
I hope 2022 has been good to you so far.
But I do say that in the knowledge that for many investors, January 2022 has been tough.
My friends in the UK small-cap arena have seen the AIM All-Share Index fall by 10% already.
Bitcoin is under pressure:
Or if you’ve held the flagship US index, you will also have noticed a blip, having lost all of the gains you’ve made since, em… September!
The S&P is about 10% off the new all-time high it achieved at the start of the year:
Where does that leave us, stock pickers? Most likely you are licking your wounds after some nasty reversals. Or if you’ve been luckier, then you are wondering what all the fuss is about!
Since we have a new year and a fresh start, let’s remind ourselves of some basics:
Most of the noise around financial markets is just that, noise.
During my financial risk studies last year, I came across the mathematical definition of “white noise”, or “static”:
This isn’t rocket science; it’s just random output with no discernible pattern over time. You can run statistical tests on it, and the result will be: this data has no pattern.
In the real world, white noise has a very particular effect on babies: it sends them to sleep!
And that should be an important clue for us, when it comes to browsing bloomberg.com, CNBC or our favourite financial message boards.
Just like white noise, most of the output there also has no discernible pattern.
Take Bloomberg’s lead stories today:
For the avoidance of doubt, I do have a subscription to Bloomberg News.
And I don’t want to downplay the seriousness of Russia-Ukraine tensions.
But for most investors, I don’t believe that the majority of these stories will assist their returns.
And if you come back to the Bloomberg homepage in 24 hours (or maybe only 12 hours!), there will be a brand new set of attention-grabbing headlines. The news cycle never sleeps.
Here at Monopoly Investor, one of my goals is to emphasise the humble task of doing our own research into a select group of businesses, coming to reasonable conclusions when that is possible, and acting accordingly.
On the other hand, I want to de-emphasise the job of making sense of short-term asset price fluctuations, in response to the daily news cycle.
What matters to stock-pickers is our understanding of the competitive dynamics of particular businesses. That is what we need to make sense of. That is what we need to focus on.
And so for those of us who want to pick great stocks, our attitude to general news should be the same as the baby who hears background white noise: it should send us to sleep!
My suggestion is to avoid general news, even financial news, unless you find it interesting. Whatever you do, don’t read it with the expectation that it will help you to invest!
People who invest in order to stay rich will usually outperform those who invest in order to get rich - by a wide margin.
I’ve been knocking around the financial markets for a little while now - since around 2007, to be precise!
Over that time, I’ve developed an appreciation for the many different investor types: all the way from the multi-billion-dollar pension fund, right down to the amateur at the start of their investing journey.
One principle holds true, across all investor types: the more badly the investor wants to get rich in the markets, the lower their expected returns.
Sounds depressing, doesn’t it?
I guess this is the universe’s way of telling people that they can’t always get what they want.
Or equivalently, that higher returns are usually only possible through taking on (much) higher risk.
In my experience, those who get the most out of the financial markets - in every sense - are those who don’t try too hard.
They know that their money is supposed to be working for them, not the other way around. So they invest their money and then give it plenty of time to grow.
They know that it’s not possible to be an expert in everything. So they understand the assets they own, and don’t spend much time studying everything else.
They know that there is more to life than watching screens. So they give the markets as much time as needed, but not much more than that.
You’ll notice that all of these points revolve around time, and the efficient use of it.
In other words, those who get the most out of the financial markets are those who give it the right amount of time: not too much, not too little.
They are able to do that because, perhaps subconsciously, they have achieved a good understanding of what the markets are able to do for them. Above all, they have realistic expectations, and this gives them the context they need.
In conclusion…
I hope that this project will give you an appreciation not just for great companies with the potential to be great investments.
At the same time, I hope that it will also give you an appreciation for an investing style that is patient, realistic, and humble. It won’t be for everyone, but hopefully you will find that there is some value in it.
I’ll be back again very soon with a company-specific analysis.
Best regards,
Graham Neary
Excellent piece, thanks Graham. It's interesting that Standard Life found the best returns were made by clients who'd forgotten they had an account with them. There's a huge argument for just making regular investments in SPY or a MSCI world index ETF and then just getting on with something more useful with your life. LOL
A good article, Graham. Nice tone, easy to read and well written. 👍