If you watch the stock market, the economy, and you think bad news is bad, you’re probably a lousy investor
I’m not going to make myself popular when I say this, but investing in the stock market is pretty easy. Long term, there’s an upward trend, so it’s a lot like gambling with the odds stacked very heavily in your favor.
The stock market has always been an easy place for me to make money— because I’m not very smart.
Most smart people make terrible investors. Here are four reasons why:
1. They watch market news, talk about the economy and try to figure out where things are going next.
This is foolish move number one, but really smart people have a tough time ignoring the media and the economy. Smart people can’t help it. They want to use their brainpower, and in the process, they lose, disastrously long term to the dumb money—the stock market indexes. Buying diversified indexes on the cheap is when, to steal Buffett’s phrase, “Dumb money ceases to be dumb”
If the stock market is trading at a reasonable multiple (today it trades at roughly 14X earnings, which puts it at roughly the 100 year average) then you’ll make long term money by buying at these levels.
Valueline has a great, long term DOW Jones Industrials price chart dating back to 1920. History spells out one consistent reality. Buy when PE ratios are at or below 14X earnings, and you’ll make long term money. Buy when PE ratios are silly (like 22 or above) and the decade that follows will give you investment misery. Where’s the PE today? Roughly 14X earnings.
It doesn’t matter how you slice the pie; that’s the historical reality.
But if you were a smart person living during times when the PE ratios were below 14X earnings, and if you watched, digested and analyzed economic news, you probably wouldn’t have bought anything. You would have sat waiting for better opportunities, for the economy to turn around, for unemployment declines to abate, for prices to get cheaper. Too bad. You wouldn’t have made as much money as you could have. Your brain power would have handicapped you.
2. Many smart people like to buy what’s hot and watch current trends.
OK—sure there are people like Charles Kirk who make a fortune trading. But most traders end up sooner or later, “Blowing their Brains Out”–to use the lovable Boston stockbroker, John Spooner’s language.
3. When buying individual stocks, many smart people care what current sales trends are, and they want news of short term upwards sales growth
Again, if you’re like Charles Kirk, fair enough. You can trade your way a gazillion times and make money based on short term news. But looking at short term news is foolish for most people.
Instead, buy the greatest business you know, with the highest return on total capital, with a durable competitive advantage, with loads of customers, with products that they can increase the price of, with inflation. Ensure that the business has the least amount of debt, with a history of buying back shares only when prices are decent, and ensure that the company doesn’t overly pay its CEO. Make sure the industry’s outlook for the next five years is bleak, bleak, bleak, so you can buy loads of shares, but make sure that the industry itself is always going to be needed (ie, avoid newspapers) Then load up on shares over time, and wait, and wait and wait. Easily done. Rinse and repeat with great businesses of this ilk and you’ll make a lot of money.
4. Smart people refrain from buying indexes with bleak outlooks
I’m going to go out on a limb to suggest that smart people avoiding troubled markets will never make decent money in the stock market. That said, if you want to pound the investment returns of most “smart people”, you’ll have to discriminate. Like stock investing, you can’t just buy any beaten down stock. Likewise, you can’t just buy an index from any old economy. For instance, who knows what’s going to happen to Chile over the next 20 years? There’s a patchy track record there, poor transparency, and like most South American economies, loads of corruption. A single Chilean stock market index would be risky.
But as far as guarantees are concerned, you can’t do much better than Vanguard’s European stock market index today. Buy it now. Forget the latest news. If the index gets cheaper, buy more of it. If it gets cheaper still, back up the truck. If it drops 90%, and you can afford to borrow money to buy a six figure chunk of it, then do it.
Most smart people won’t do this, because they care too much about the short term. But if you plan on being around in 25 years, you’ll lay foundations for delicious long term profits by purchasing this index today, and continuing to average down. You’ll beat almost every “smart investor” you know.
The European index is broadly based; it isn’t Japan. This index is linked to more than one economy. Sure the European Union is somewhat linked. But that’s why it’s cheap right now. God bless you Greece, Portugal, Spain and Hungary. I love you. I truly truly love you.
Writer’s note
Truly great investors are emotionally smart. They don’t have to be intellectually smart.