Allow me to take off my value investor hat for a few minutes, and talk about the kind of investing a whole lot of you should be doing.
Yeah, let’s talk about Couch Potato investing. It’s more boring than actually talking to your date, I know. But the fact is most people just don’t have the expertise or the intestinal fortitude to be successful investors. Instead of being disciplined buyers, they buy shares of things like Coca-Cola or Target, companies with very little in the prospects for growth, plus offer very little value. Or they buy shares of Tesla, convinced it’s going to be the next big thing. Sometimes that turns out well. Most of the time people get slaughtered. Just ask any of Nortel’s former shareholders.
We’ve discussed this so many times I feel like a maroon for continuing to harp on it, but I’ll say it again. Beating the market isn’t that hard. You buy shares of companies that are trading at low price to book and price to earnings ratios. If you do that, it’s not only possible to beat the market over time, it’s almost probable.
I do things a little differently. I try to find the best value stocks, mostly by looking for beaten up small caps that are cheaper than large caps, and companies with very little debt. Turnarounds are always easier when companies don’t have debt to pay off. I buy when they’re depressed, and hold them until they recover. It takes years most of the time, but that’s okay. I’m more than happy to hold for five years when a stock triples in the meantime.
Some of you reading understand exactly what it takes to be a value investor. Go ahead and take the rest of this post off. It’s spring, go sit in the sun. BUT PUT SOME PANTS ON FIRST. Geez. Nobody wants to see that.
In reality, most stock pickers should probably stick to being couch potatoes. Even if they do manage to eke out a small return premium over the market, it doesn’t justify the effort put in. If you have a $20,000 portfolio and you return 8.5% instead of 8%, congratulations, you made an extra $100. And then you spent 100 hours in the year to accomplish that? Only Trent Hamm thinks that’s smart.
But, of course, most active investors would research stocks and keep an eye on their portfolios for free. They like doing it, and really like the potential of finding that diamond in the rough, that potential grand slam. And hey, good for them, with one caveat — as long as returns don’t suffer.
Most people don’t have the knowledge to pick stocks, and have no desire to get it. Right there, we can eliminate about 90% of the population from active investing. Add in another half of the rest that let psychology (and other factors) get the best of them pretty consistently, and you’re looking at 19 out of 20 people who shouldn’t even bother with active investing. Geez, I’m looking at a REALLY small market here.
But I’m missing a variable. There are hundreds of good value investors who maintain blogs. What if active investors find good sources of info and just replicate them? That’s possible, but ultimately pretty unlikely. For every person who follows value investors who beat the market, 200 just turn on CNBC to buy whatever Jim Cramer tells them.
So with that in mind, I hope you all can understand why I think most of you would be better off indexing and dedicating your time to a side hustle, or whatever. Hell, you could even make the argument that I’d be better off indexing, and I write about stocks for a living these days. Couch Potato investing is simple, effective, and takes virtually no time at all.
Then why is there so much stuff out there on it?
If you were a rookie investor, I could explain most everything you’d ever need to know about Couch Potato investing in a 2000 word blog post. The concepts aren’t that hard, which is part of the appeal of it. You’re supposed to get your portfolio set up, and then check on it once a year. People call it a 15 minute portfolio for a reason.
As indexing has gained popularity, so has writing about it. So instead of articles about why stock ‘x’ is a good buy (WHOO REITMANS BUY SOME AND THEN GO INTO THE STORES EVEN IF YOU’RE A DUDE), we get articles about why a couch potato approach is best. And then posts on the details of indexing. And then posts on specific ETFs, maybe comparing Vanguard’s products to the equivalent iShares products, and so on.
Aside: How has Apple not sued iShares?
So what happens? I stumble upon gigantic long articles for major magazines that spend a couple thousand words teaching investors the ins and outs of rebalancing, a concept so easy I didn’t even bother to explain it because I assumed you weren’t all idiots. It boggles my mind how many words have been produced talking about the simplest of concepts. We did it with budgets, and emergency funds, and now we’re doing it with index investing.
People think this is largely harmless, an unfortunate side effect of the internet. Everybody wants everybody else to visit their site, so they produce new content. Once an author covers the basics of whatever topic they choose, they move onto the more complicated stuff.
But by doing that, they take a basic topic and make it more complicated. If the whole appeal of index investing is supposed to be the simplicity, what does needlessly complicating it do for investors like my mother, who has no idea about any of this stuff?
It scares them off.
When a simple concept becomes complicated, most people assume they can’t understand it. This is what’s happening with a lot of investing advice. We’re either too willing to produce enough content to keep the machine rolling, or too eager to show the masses how smart we are. But ultimately, this all hurts the beginning investor, who doesn’t realize that buying a portfolio of ETFs is only marginally more complicated than buying a mutual fund.
Of course, there’s a solution to that too, which is to just pay a financial planner or money coach to tell you exactly what to do. With respect to the people I know who are planners — who do a good job, are smart, and put in an honest effort — it’s really hard to justify paying hundreds of dollars for guidance for a portfolio that’s only in the four or low five figures. And since most planners need to justify their fees, they’re often guilty of the exact same sins. After all, telling people investing is really simple is bad for repeat business.
So what’s the solution? For beginning investors, I’m not sure there is one. There are plenty of articles out there that do a good job of explaining index investing for newbies, but they’re difficult to find among the sea of stuff comparing the tiniest minutiae of the latest ETF offering to its competitors. The reality of the system is that we take simple concepts and analyze the crap out of them. We’ve overcomplicated something that was supposed to be really easy. It’s not about to change.
This is why mutual funds will never go away. They’re simple. You show up, talk to the bank girl for a half hour, and walk out with the confidence in knowing that you’re investing now. And, most importantly, it doesn’t cost an investor anything out of pocket. I know those funds are a bad idea, and could explain why in a simple and concise way. There’s a mountain of information available online that could explain it too, but the beginning investor has no idea where to turn first. So they take the path of least resistance.
But ultimately, we’ve failed the one group of people that we sought to help the most — beginning investors.