Time to Stop Playing Games with Your Money
By
Christopher Hancock
September 6, 2006
The human race, to which so many of my readers belong, has
been playing
at children’s games from the beginning, and will probably do
it till the end,
which is a nuisance for the few people who grow up.
—G. K. Chesterton, The Napoleon of Notting Hill
(1904)
Beating the S&P has become like a golfing handicap, a number
that gets bandied about, and maybe embellished a point or two,
to impress any financial “mind” polite enough to listen.
The reason is simple: For most, investing has become a game… a
competition… a proverbial fight to the finish that separates
the winners from the losers.
The goal is simple: beat the S&P. But for many, the attempt is
futile and childish, grossly naďve in its fundamental premise.
Most try, but few succeed.
That certainly didn’t use to be the case. Fifty years ago,
keeping your head above water meant saving a dollar. Now,
squeaking by has become the 13% annual return that nearly
ruined a manager’s financial career by clearing the S&P by a
mere 50 basis points.
When my grandfather bought shares of companies such as General
Electric (NYSE: GE) and Alcoa Aluminum (NYSE: AA), he focused
on safety… His goal was to save a dollar. Growth beyond
dividends, however moderate, was a bonus, a stroke of luck
similar to the feeling of finding a $20 bill in your jeans
pocket.
As
for beating the S&P 500… 50 years ago there was no
S&P 500.
You see my grandfather was a child of a dying generation… A
group of people for whom The Great Depression was much more
than a chapter in the 13th edition of some unmarked
high-school history book.
But there’s a new American generation… an entitlement class of
children playing children’s games… a generation weaned on the
bottle of instant gratification.
They’ve been told to expect more for less… They’ve been
assured that it’s OK to spend more than you make… because in
the end, the government will be there to brace your fall.
Unfortunately, mummy and daddy are broke. So is Uncle Sam. But
the American family keeps spending despite the fact that
consumer savings rates remained negative for the 16th straight
month.
The notion of keeping your financial head above water will
soon require more effort than signing one’s name on the back
of yet another new credit card.
We
fool ourselves into believing the bankers will never call our
bluff much like we all believe we can consistently outpace the
market.
Hardly anyone beats the market for more than a few years, so
why do we waste so much time and money trying? And more
importantly, why do we measure our investing success relative
to what a bunch of strangers are doing? It’s comical when you
stop and think for a second. No one’s gravestone reads, “HE
BEAT THE MARKET!”
But when did sound growth become so bad? When did earning 6%
annually come to be viewed as an investing failure?
Expectations today scorn returns below double digits. Earning
9% won’t cut it if someone else is earning 10%.
That type of thinking negates the very first rule of
investing: “Don’t lose money.”
Take this example.
Let’s say you receive a windfall bonus of $10,000. You want to
invest your newfound wealth in one of two options: a
government bond yielding 5% annually, or the market’s latest
highflying growth stock promising returns of 10% or more for
the next 20 years.
You naturally assume 10% is better than 5%, so you pour your
$10k into the highflier.
Well, as it turns out, you bought your golden stock on a
52-week high. The first year is rough… The stock loses 50% of
its value over the first 12 months. But you hang on and, sure
enough, the stock starts taking off. It grows at a remarkable
10% annual pace.
But even at a growth rate double that of the government
bond’s, it would still take you 17 years to overtake that
bond’s return!
The point: It’s time to separate yourself from the children …
It’s time to grow up.
As
an investor, it’s time to protect your assets so they can grow
as well. Successful investing will require a combination of
patience and moderate expectations.
Stop playing the game and remember rule No. 1: “Don’t lose
money.”
Christopher Hancock
Editor, Private Wealth
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