“Good decisions come from experience. Experience. comes from bad decisions.” - Mark Twain
I am a big fan of long-term
investing. This is one of the few areas in life, where a small initial amount
can deliver amazing results, net worth and income to the patient individual.
However, long-term investing is
not smooth sailing at all. There are a lot of obstacles to compounding, a lot
of doubt, fear and uncertainty along the way. Not many are able to go through
the gut wrenching declines, or the long flat markets that test everyone's
conviction.
On the other hand, you are also
always worried that your investments would give back any gains, and that there
will be a big bad bear market, that also coincides with the next great
depression. Even if everything goes according to plan, there is always someone
that sounds very smart in predicting exactly how and when the collapse would
occur.
It’s even harder to stick to your investments, when you constantly see others that may have somehow selected a better, shinier and lookingly more profitable investment or strategy than you. You get envy, you feel like your strategy is “not working”, you want to jump ship.
The fun part is that no investment strategy will always work all the time, and will always outperform everyone else.
The best strategy is the one you can stick to, through thick or thin.
This is why it is imperative that you find a strategy that you are comfortable with, and then stick to it. One still needs to try and improve over time, but that doesn’t necessarily mean they need to rip and replace it every few years. I am talking about small, incremental changes, nothing drastic.
After all, markets go through different cycles and regime changes. What’s hot in one cycle, may turn out to be a major dud in the next. The investor who chases performance may end up capitulating from their former strategy at the worst time possible. They may end up compounding their mistake by embracing the next strategy at its height of importance, but possibly the worst time for returns.
Veteran investors know to control their emotions, and just stick to their plan however, knowing that their time would come. They win some during a favorable cycle, keep investing through the down cycle, and live to see another day when the tide turns in their favor.
Some of these cycles may be very long – think a decade or two. Those are career making cycles, which may give you the impression of a long-term trend. That makes a lot of sense, because on average, I would guesstimate that the average investor only seriously invests for about 2 – 3 decades.
Recency bias and performance chasing are thus something to be aware of. Biases and impulse could be a problem for your long-term wealth building plan.
For example, a lot of investors
today are just saying to just invest in S&P 500. This is particularly easy
to conclude after witnessing basically a non-stop bull market since 2009. While
we have had some declines in 2011, 2018, and even a couple of bear markets in
2020 and 2022, US Stocks have been on a tear.
This is in stark contrast with the experience from 2000 to 2012, when US Stocks practically went nowhere. US Stocks practically delivered zero in total returns during this time period. To add insult to injury, we also experienced two gut wrenching 50% declines – the dot-com bust and the Global Financial Crisis. These events also coincided with recessions, which also increased unemployment and made it very difficult not only to hold on to your stocks, but add to them. After all, back at the depths of the 2008 – 2009 recession, a lot of investors saw that their regular 401 (k) contribution plans had not made any profit, going back to the late 1990s. Even if you just kept investing regularly, you didn’t make money. That was a terrible thing, especially given inflation and the fact that many investors had to dip into their nest eggs, amidst unemployment and the difficulty in securing another job. Even finding work at Wal-Mart was not easy at that time.
Back around 2000 – 2012, it was very hard to convince folks to invest in US stocks. That’s because the recent trends had been that of stagnation. Everyone else was focused on the Emerging Markets, and Foreign Markets, as well as Bonds, which had had a very good decade. Remember the BRICs? So the general sentiment was to diversify abroad, and into other asset classes. Including commodities as well. Papers were being written, showing how investing in commodities had somehow done better than investing in stocks too. Then as we all know, the pendulum swung the other way – the cycle of US stocks not doing well, and foreign/emerging market stocks doing very well ended in 2011/2012. Now it’s the opposite since 2011.
Investors who owned US Stocks in 2000 had their patience tested. But if they held on for 12 long years, they were rewarded by 12 years of bounty, which more than compensated them for the pain.
And of course, if you remember, back in 1999/2000, the US was at the top of the world. Owning S&P 500 was the no-brainer investment, especially after it had done so well in the 1990s. Of course, it didn’t work out for the next 12 years, testing everyone’s patience and conviction.
I follow a lot of novice investors who seem to think that the only way to invest today is by investing in technology companies. Focusing on the best performing sector of the past 15 years definitely seems like a smart strategy today.
However, it ignores past history. It’s also incredibly risky. The past 15 years were great. But the previous 15 years, aka those from 2000 to 2015 were not. That’s when you had the dot-com bubble bursting, which saw an 80% decline in the Nasdaq Composite and Nasdaq 100. Many individual companies fell even more, to the point of going bust. Many investors lost their shirts, never again to invest in the stock market. Then it took 15 long years for the average to regain its all-time-highs. Many of the leaders from 2000 have not recovered, with some going under. The leaders today are companies that weren’t even public in 2000 or were just small footnotes on the stock market.
The investors buying tech in the 1990s and early 2000 have mostly been wiped out. It is very unlikely to find a tech investor today, who was also there to overcome the pain of the dot-com bust. The investors buying tech today, or buying it in the past 10 – 15 years were very likely not investing before that. They have no muscle memory from the carnage.
Sector bets are risky, because they seem like they would go in forever, and they do, until they don’t. Do you remember the best sector between 2000 and 2014? That was energy. The energy revolution did deliver energy independence to the US. But investors did not do so well over the past decade.
Many Investors tend to base their investment decisions based on recent experience. They simply take recent experience, and extrapolate it into the future. That may work under some conditions, but not work under others. Either way, the experience could be a two-edged sword. On one hand, it could be profitable and works. On the other hand, it could be unprofitable and it doesn’t work.
In the context of investors who are piling on to technology today, all they’ve seen is a concentrated sector bet work. So they take this recent experience, and extrapolate it into the future, without thinking about what could go wrong.
Those who have lived through tech carnages, such as the 2000 – 2012 period, tend to remember those and extrapolate into the future as well. They are humbled by it. However, they also missed out on the huge tech run in the past 10 – 15 years, because of the painful experiences from the dot-com bust.
The same goes for the cycles of “value” and “growth”. US and international. Dividend versus non-dividend. Technology.
As you can see, there are long cycles. The experience in one cycle would likely mean making money. But the same lessons would be devastating into another cycle.
For example, some investors learned that timing the market works between 2000 and 2012. Selling S&P 500 when it hit 1,500 was smart, and buying it back when it’s low worked. The issue was that in 2013 that was a bad idea, because if you sold, you missed out on a 4 bagger. Or worse, if you were short the market, you lost money in one of the longest bull markets in history.
For another example, in a bull market investors learn the lesson that “valuation doesn’t matter”. When a rising tide lifts all boats, and especially the more speculative companies, you get rewarded for taking on risks. Valuation is more of a hindrance to taking on those risks. However, it does matter in the very long run, and could be especially helpful if we are not in a raging bull market. Which historically we are not always in.
You have to ride the ups and downs, in order to stand a chance of making money and not just treading water all your investing life.
Dividend Growth Investing has been my strategy of choice. It was definitely easy to stick to it, as the 2000 – 2012 period saw it do very well in making money and doing better than the market. Other strategies like technology did really really poorly, amidst 80% drawdowns that had many investors sell and lose hope in markets altogether. During the hard times, dividend growth stocks delivered slow and steady returns.
However, the past 12 years saw it do worse than the market. There are other strategies like technology, which really did very well. While Dividend Growth Investors made money, they didn’t do as well as others. During the good times, dividend growth stocks delivered slow and steady returns. I don't think relative performance comparisons are useful, because you end up chasing performance, and less likely to stick to an investment strategy through the eventual ups and downs. Keeping up with the Dow Joneses could be costly in the long run.
Many investors are extrapolating the good times of the past 12+ years, and assuming they would continue indefinitely. This is where a lot of investors are abandoning dividend oriented strategies. I believe these investors are making a mistake, as they are chasing performance and subjecting themselves to their recency bias. Of course, if there is indeed a paradigm shift, it’s possible that I am just a stubborn old person who refuses to learn. In that case, I won’t be the disciplined person I think I am. Oh well.
I believe that if we do see a regime shift again, at some point in the future, the dividend strategies would shine again on a relative and absolute basis. (we saw that briefly in 2022). This is what is appealing to me with dividend oriented strategies – when the going gets tough and we have a bear market, you don’t lose as much. This makes it easier to hold on during the hard times. The predictability of dividends, which are received on a regular schedule, also makes it easy to hold on to a stock, and focus on fundamentals, rather than the oscillating share price. After all, dividends are much more stable, and predictable when compared to share prices. That’s because dividends come from cashflows, and not the opinions of others. Share prices reflect the opinions of others, which is why they can overshoot above or below intrinsic values.
During a bull market however, reliable dividend companies are shunned. They do not go up as much as others, particularly shiny new emerging concepts. However, they still deliver slow but steady returns. When the cycle turns, those investors are happy to own those steady eddies, which shower them with growing torrents of cash. All of this makes them sleep well at night.
The things that make Buffett special, is that he has been able to consistently make money, despite the cycle we are in. He has done that, because he has stuck to his strategy for decades, while patiently improving. Perhaps having some diversified exposure can help.
Those ordinary investors like you and me however have only a few smart tools within our disposal.
Notably, to stick to our strategy, and stay the course, while ignoring the songs of the sirens. Someone will always be getting rich faster than you or me, but that’s not the end of the world, for as long as we reach our own goals and objectives. Keeping up with the Joneses can be costly, and derail our train on its way to financial independence.
The investment journey is long
and arduous. In order to achieve goals, one needs to survive it first. Chasing
what’s hot may work for a while in one cycle, but it is not a plan that would
work over one’s whole investment lifecycle. That lifecycle is comprised of many
cycles. What's hot in one cycle is unlikely to be hot over all the cycles you are going to be investing for. Sticking to a strategy lets investors stay the course, and reach their
goals and objectives. It also helps ignore the noise.
