Similar stories play out in every bull market. Someone somewhere begins investing for the first time. First in mutual funds until they get a taste for better returns.
This story, in particular, begins in 1957. A lone investor makes his first foray into the stock market. An inheritance from his father’s death left him with more money than he needed, so where to invest it? The family suggested mutual funds for the long term. So that’s what he did.
His returns were average.
But the market was booming. The post-war boom struck the 1950s with one of the longest bull markets ever. People who never invested before were drawn to the stock market because of the possibility to turn meager savings into a small fortune. Our lone investor included.
It started with a conversation with his cousin. “Do you have money in the market?” “No, except mutual funds.” “You should talk to my broker.”
And so it began.
He sold the mutual funds and cashed out his war bonds to start a discretionary account with $62,000. The broker would handle everything. The first two years went well — 18% returns plus dividends each year. Better than the 15% the broker claimed he could make.
Investing looked easy.
But the lone investor couldn’t get over a nagging feeling. The broker traded a lot. Worse, the stocks the broker sold kept going up after he sold them. He would have made more money if he just held on a little longer.
He’d also been reading business news regularly. He tried a few newsletters too. The recommendations were appealing. He started making suggestions to his broker.
The first one didn’t go as planned. A $1,900 loss on 100 shares of American Motors.
So he tried another newsletter. Its recommendation earned a small profit but its next recommendation led to a loss and then another loss after that. A tip from a friend dug the hole deeper. The trading increased. He had a growing list of stocks that sounded great on paper but as soon as they didn’t immediately perform in his favor they were replaced.
His broker wasn’t doing any better. The year ended with a $6,000 loss. Not happy, he closed the account.
Our lone investor felt he could do better. The new goal: double his money each year. The latest investing book drilled that idea into his head.
But first, he needed a new broker. A friend of a friend recommended a young broker who recently made 75% on a single stock. The new relationship started out well enough but things quickly went south.
This time it was Twentieth Century-Fox — it had something to do with a spinoff. Margin was involved. At its peak, our lone investor was up $25,000! But it was only on paper. Then it dropped. It happened gradually at first. A quarter-point here, a half a point there, until he was back to even. Then it fell quicker. Sitting at a loss, he and his broker decided to hold off on selling. Good news would come.
It never did.
A margin call finally forced our lone investor’s hand. He sold with a $14,000 loss! He was crushed.
He was desperate to earn it all back. He needed a big win. He also needed a new broker. He needed a new newsletter too. But the same story played out. Early success followed by devasting losses.
The lesson finally hit him too late:
What all the rule books and all the pamphlets put out by the big brokerage houses and the Exchange itself tell you about how to avoid losing your capital is true: you shouldn’t listen to rumors, you shouldn’t try to trade, you shouldn’t buy on margin, you should diversify your holdings, you should buy quality, you should be informed about a company and invest in it because you have faith in its future and be patient for that future to arrive… The company is sound, you’re getting a dividend, you wait. That is investment, even if you should prove wrong and have invested unwisely…
The best you or anyone else can do is make the wisest choice you can with facts as you know them and hope the unknowables are also on your side.
The safest way to invest, to repeat, is to put your money into a conservative mutual fund or let a cautious broker pick out a portfolio of unimpeachable quality. That way you can wait out even the severest slumps. But it is very hard, especially for the younger investor, to put all one’s money into blue chips, which climb upward, it is true, but with majestic languor, while one watches the glamour issues spring ahead with seemingly irrepressible ease.
Our lone investor went through nine brokers over six and a half years. He subscribed to dozens of newsletters. He made every mistake in the book.
He never had a plan for any of it. He bought stocks on rumors, “inside information,” and hot tips. He followed the newsletters blindly. He bought the stocks he felt good about, based on the story he heard. He traded around one or two stocks at a time. He believed he could time the swings perfectly. He failed to cut his losses so many times — even though he learned that lesson early — because his urge to get back to even was stronger. Yet, he also hated watching a stock rise after he sold. The more desperate he got, the more he traded. Every decision was pure emotion.
He turned $62,000 (plus some savings, funds from a rental property sale, and a cashed-in insurance policy) into $297.78! At the same time, our lone investor watched the Dow nearly double.
- Extremely Bad Decisions – Behavioral Investment
- Some Thoughts on Bear Markets – A Wealth of Common Sense
- 5 Two-by-Two Matrixes That Can Help You Become A Better Investor – ValIdea
- Investing Wisely in an Uncertain World w/ Howard Marks (podcast) – Richer, Wiser, Happier
- The Ancient Guide for Uncertain Times – BBC
- Stanley Druckenmiller, Part 1: The Young Gun Finds His Game – Insecurity Analysis
- The 18 Minutes of Trading Chaos That Broke the Nickel Market – Businessweek
- The Current Thing – Stratechery
- How Companies are Hiding Inflation Without Charging You More – Quartz
- The Future is Vast: Longtermism’s Perspective on Humanity’s Past, Present, and Future – Our World in Data