There are thousands of different strategies out there about how you should approach the stock market. But a lot of the time, the best thing to do is just play dead!
Starting out in the world of investing can be overwhelming, to say the least.
There are so many books, websites, and self-proclaimed investing gurus out there that all want to give you different advice on how to build your portfolio. Everyone has their own method, and of course, they all know that theirs is best.
So what should you do?
Well, you could spend an entire lifetime researching and backtesting different investing methods, but you still won’t find a definitive conclusion. However, I think that an anecdote that investor and author James O’Shaughnessy once told sums it all up perfectly.
In an interview with the Masters in Business show on Bloomberg, O’Shaughnessy recalled how an employee who had recently joined his firm from Fidelity Investments mentioned a study once conducted of their clients’ performance.
This study analysed all of the accounts that were held with Fidelity Investments, and amazingly, found that some of the best performing clients were… dead.
That’s right! These customers had died and their accounts were then frozen while the estate was being resolved.
In a lot of cases, the beneficiary of the will simply just left the stock portfolio as it was, and — in the years that followed — it somehow managed to outperform all of the other investors with the company.
So what gives the dearly departed an upper hand?
Well, to be blunt about it, dead people don’t make the mistakes that the average investor does.
Dead people can’t day trade or buy stocks with borrowed money. They can’t listen to the financial experts who tell you to ‘buy’ one day and ‘sell’ the next. They can’t get stock tips from online forums and invest in businesses they don’t understand. They don’t eat away at their returns by trading too much.
And perhaps most importantly — dead people don’t panic!
They ignore all the noise on Wall Street and don’t sell at the first sign of a downturn. Dead people have their money in the market where it’s left to compound and grow.
Thankfully, you don’t need to shuffle off this mortal coil before you see these type of returns however. There is another option!
The other best performers identified in this study were those who hadn’t died, but had completely forgotten that they owned an account to begin with. These people had opened an account, invested some money, and then left it to grow for years.
I think we can agree that this is a less extreme version and, all things considered, probably one of the best options for you — as long as you eventually remember to collect your returns.
Even Warren Buffett seems to support this approach. In a letter to shareholders back in 1990, Buffett remarked that “lethargy bordering on sloth remains the cornerstone of our investment style.”
So be lazy? Sounds good to me!
But why don’t all investors do this?
Firstly, none of the financial media you consume ever talks about this approach. Have you ever turned on CNBC to hear a financial consultant say, “You don’t need us guys. Just invest now and forget about it.”
If that’s how you achieve market-beating returns, and everyone knows this, who’s going to pay a financial advisor? Who’s going to watch the business channels, or read the Wall Street Journal?
Secondly, I suspect that most people can’t believe that it’s just that simple.
We’ve been told for years that Wall Street is complicated. We’ve been made to believe that all those six-figure salaries are justified because only the high performers can handle this stuff.
But the great secret of Wall Street is that it’s not complicated.
Peter Lynch, one the best investors of our time, said that:
“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”
I agree with him. You can absolutely do better than all the experts. All you need to do is invest in great companies and let them grow. Forget about them if you have to!
In short, when you see bears — in the market or otherwise — just play dead.
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Emmet is the CEO and co-founder of Rubicoin, a company that teaches you how to become a better investor.