Over the last few years, I’ve occasionally wished that I had bought big into Amazon, Apple, Bitcoin, or something else with explosive growth. I keep most of my money in cheap index funds like VFIAX, VFWAX, and VTSAX. VFIAX is the S&P 500 fund. Here’s how the results of $10k purchases 2 years ago compares for the above stocks (dividends reinvested).
The 35% growth in the S&P doesn’t look very exciting, does it? Really none of it looks all that exciting compared to the 3100% growth of Bitcoin. Here’s a rough part though… That Bitcoin was worth about $4.5 million in Sep 2017. Can you imagine the feeling of still holding that Bitcoin and knowing you’d lost over $4 mil on it?! What would your focus be on: making $310k or losing $4.1 mil?
Another scenario: let’s say you bought $10k in Fitbit, GE, Ford or AT&T during the same time period. Here’s what those purchases would look like today.
That 35% growth from the S&P 500 looks pretty good from this chart.
Picking winners and avoiding losers
An acquaintance told me a few months back, “I only invest in well-positioned companies that I know will outperform the market.” I laughed inside. How can anyone know such a thing?! I asked how he decided when it was time to buy or sell. He said, “I always sell when the stock gets too high.” I laughed inside again. He owned a few shares of Amazon and NVIDIA and wanted to boast about his genius. I asked if he bought any other stocks. He wouldn’t admit it at first, but by the end of our lunch he divulged that he also bought Frontier Communications (FTR). A lot of analysts believe FTR is in serious trouble. It went through a reverse stock split last year, which is never a good sign. Maybe it will end up being a winner. I don’t know. I found it funny that he loved to brag about his victories resulting from his brilliant strategy; however, he wouldn’t openly admit there were failures/flaws that came out of the same strategy. Sounds like a gamblers mentality to me. It can be dangerous to only call the failures anomalies.
I’ve bought and sold stocks from both of the charts above. I thought all were positioned for growth. I liked Ford’s dividend yield and P/E ratio (currently 5.24). I couldn’t ever get myself to buy Amazon because of the P/E ratio (147.67). Looks like I should’ve bought Amazon instead of Ford. Not sure if/when the right time would be to sell them though. I don’t buy individual stocks anymore.
Why I hate buying and selling stocks…
Truth is, I don’t know how to pick the winning stocks from the losers.
Additionally, it consumes me when I see the stocks rise or fall. I constantly think, “should I sell?”, “should I buy more?”, “is it going to keep going up?”, or “is it going to fall?”.
I think for me and just about everyone else, we are just guessing and hoping when we buy stocks. Odds are, none of us have extra insight that gives us a better chance of picking a winner than anyone else. Most likely, whatever expectations we have of a company have already been accounted for in the price. Why risk my long-term wealth on a guess that a single winner will grow to take over the world? And when it does, how will I know when to sell it?
I think Warren Buffett’s logic on buying stocks is much better than the talking heads on TV that scream “BUY BUY” or “SELL SELL.”
This type of stock trading is more centered on short term gains than long-term wealth.
Alternatively, Buffett says things like:
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
For whatever reason, I can’t get myself to think this way with stocks. Though, this is my exact mentality with buying index funds. I have no plans of selling until I need some as spending cash. Also,
“Nobody buys a farm based on whether they think it’s going to rain next year. They buy it because they think it’s a good investment over 10 or 20 years.”
Maybe since I don’t have confidence in picking winning stocks for the next 12 months, I don’t want to risk holding onto a loser for the next 20 years. Instead, I prefer a more passive approach. I bet on the market as a whole over the long-run.
By investing in index funds, like VFIAX, I may never hit a home run like Apple or Amazon have been in recent years. I’m willing to live with that. A 7-10% average annual growth over 10 or 20 years will keep me happy. My investments also won’t bottom out like it would have through holding onto Sears stock. Investing in index funds is cheap. Studies support that passive index fund investing is likely to outperform actively managed funds trying to beat those indexes. Don’t think you’re smarter than everyone else. Be patient. Save a lot. Invest, don’t gamble.
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