investing is the most important thing you can do to reliably build wealth during your life
the problem is you inevitably suck at it you hate wall street but maybe it's time to quit
i love my job you hate your job i love my job you're miserable i love my job i love my job honey
the s p 500 has a historical average return of 10.4 percent over the past hundred years even when
including all the major stock market downturns during that time ten thousand dollars invested
in 1972 would be worth 1.7 million dollars today but look around and you will be hard-pressed to
find anybody that has made themselves wealthy exclusively through diligent investing practices
research done by dalbar inc an investment research firm found that the average equity fund investor
only made an average annualized return of 4.25 over the past 20 years to understand how big of a
difference this truly is the same investor getting those returns would only turn their initial 10 000
investment into 83 000 today over the same 50-year period people are terrible at investing you are
terrible at investing and even finance industry professionals are by and large
terrible at investing the only real solution is to stop trying i need the money
so it's time to learn how money works to find out why you are a terrible investor who is
almost guaranteed to get returns below the simple market average this week's video was sponsored
by brilliant learning new ideas can be tricky and while lectures and books are great resources there
really is no better alternative for being able to try new things for yourself in an immersive way
brilliant makes this possible with their wide range of hand on interactive courses in math
science and computer science i have personally found artificial intelligence and machine learning
to be very fascinating the problem is i don't have the technical knowledge or the know-how to get
into the fine details of either of these fields one of the hardest things to do in business is
to keep up with industry trends and being able to speak intelligently to them is important to keep
up which is why i was so keen on understanding this space fortunately i took brilliant practical
lesson on neural networks and quickly formed a deep understanding of how these amazing systems
work to get started for free visit brilliant.org forward slash how money works or click the link
in the description and the first 200 of you will get 20 off brilliant annual premium subscription
investing is a hyperlogical procedure where the end goal is to turn your initial supply of
money into as much money as possible the trick to doing this is very simple if you put that
money into ventures that become worth a lot of money produce a lot of income or preferably both
you will be investing well most investments don't generate returns in a totally predictable way
shares in a company for example will have some years to see the company pay out big
dividends to investors and other years the company might pay out nothing similarly
there will be some years where the shares in the company are trading at all-time highs and there
will be other times when they are trading down by 50 this is simply what investors call risk
which i am sure i probably don't really need to explain to any of you because you all know what
risk is right well you might know what it is but i guarantee that you are terrible at dealing with
it i [ __ ] you sam will you give me a [ __ ] break excuse me our monkey brains have evolved
over millions of years to avoid risk even if it means foregoing a reward securing yourself a tasty
snack was not worth being eaten by a lion which meant that only the more cowardly monkey survived
the problem is that you need almost the opposite mentality to be a good investor but let's see
how you do assume there are three investors mr lucky mr unfortunate and mr consistent
each of these men are going to put 1 000 a year into their stock portfolios but they are going
to do it in slightly different ways mr lucky lives up to his name and he invests his 1 000
at the absolute bottom of the market every year which means for the remaining days in that year
his investment is only going to go up mr unfortunate does the exact opposite
he also tries to time the market but screws it up royally he invests at the very top of the market
every single year this means that the remaining days in the year his investment can only go down
mr consistent doesn't bother with any of that he just takes his 1 000 and puts into the market on
the first trading day of the year and then forgets about the market for the next 12 months none of
these investors sell any of their shares and they reinvest their dividend straight away back into
their portfolios now who do you think would have the biggest portfolio after 30 years of investing
lock in your answers now i'll give you a hint it's obviously not mr unlucky
although he probably doesn't do as bad as you might expect even with his terrible year-on-year
luck he still comes out well ahead after three decades earning an annualized 8.7 roi which
meant that his 30 000 total investment would be worth seven hundred 137 twenty five dollars the
reasonable choice would be mr lucky after all he picked the best need to invest every single year
he did earn impressive returns of nine point six percent which means his portfolio is now worth 165
552 or almost 30 000 more than mr unfortunate particularly impressive when you remember he
only used 30 000 of his own money to grow this portfolio but what about mr consistent
well he may not have had the market timing skill of mr lucky but he had something else on his side
time in the market you see while mr lucky was waiting around for the very best day to deploy
his capital he was missing out on dividends that could have boosted his total returns by investing
money as soon as he could mr consistent ensured that he got every dividend possible which more
than made up for the total down days he would have to ride out mr consistent made annualized
returns of 10.2 percent giving him a portfolio value of 187 580 after 30 years this thought
experiment was first presented by peter lynch one of the greatest investors of all time and
he used it to demonstrate that time in the market beats timing in the market if you are an absolute
genius that can pick the bottom of the market perfectly dangerous when they invest this word
play the market that's a dangerous term in the age of cryptocurrencies and hype stocks we have
normalized vertical price charts as something you should expect if you are a good investor sorry to
ruin the fun but good investments shouldn't moon overnight and extreme price volatility is really
only the sign of a very unhealthy investment if it can go vertically in the direction you want it
can also go vertically in the direction you don't want established companies with not much room to
grow are also great investments even though their stock price might trade flat over the long term
if a company has grown as much as it can returning money to shareholders is a much better decision
than looking for new ways to spend that money on growth that isn't needed or isn't possible
over 40 percent of the growth from the broad u.s stock market in the past hundred years has come
from dividends all of this demonstrates that just getting into the market even if it's at
the worst possible time isn't going to be that bad in the long run if you hold on to your investments
i should mention that peter lynch probably cherry-picked the years that he ran this
experiment to give himself the outcome that proved his point and that follow-up studies have shown
the more logical result of mr lucky coming out slightly ahead but that's not really the point
anyway the big deal here is that long term these investors all did roughly as well as each other
regardless of short-term gains or losses humans are inherently oversensitive to short-term risks
but under-sensitive to long-term risks it's why we smoke and eat sugary food that we know is going
to eventually kill us but still get scared at flying in a plane that is probably perfectly safe
nervous yes monkey brain is programmed to keep you alive day by day monkey brain don't work very well
conceptualizing risks over decades the biggest long-term risk you have while investing is missing
out on long-term gains and a surefire way to avoid that risk is to invest as early and consistently
as you can but the risk of seeing red numbers on our brokerage account keeps you from doing it
our monkey brains also sabotage our portfolios by encouraging us to participate in herd mentality
in the wild there is safety in numbers if your monkey buddies find a new territory full of
food you would be best off following them if nothing else the lion might eat one of your
buddies instead of you we can see a similar herd mentality all of the time in investment markets
my good friend patrick boyle recently released a video on kathy woods arc invest where he
demonstrates the core problem with the return she generated for her investors ark's innovation fund
is now doing roughly as well as the broad market which by itself is perfectly acceptable the
problem is that in 2021 her fund was up 150 and making headlines throughout the investment world
if you were an investor in kathy from day one you would be doing okay for yourself right now
but most people didn't invest with her on day one most people started investing in her when
she was making headlines about triple digit returns there were a number of market forces
that pushed the value of this index back down all of which patrick explores perfectly in his video
but all that is important for now is that even though the index was still up by a respectable
margin most of kathy's investors had suffered devastating losses right now it is ugly times ugly
and that's when the ugly get going i shouldn't pick on kathy exclusively the same kind of net
loser effect is going on in lots of markets right now if you bought bitcoin when it was worth less
than a dollar you are still doing extremely well for yourself but most people bought bitcoin when
it was worth more than it is now so even though the asset is out millions of percent since
inception most investors are still net losers our monkey brains want us to follow the herd but
in the investment world that just translates to buying assets once hype has pushed their
prices to all-time highs or selling positions after everybody else has crashed the market
i get it it's hard not to follow the herd when investing because finance is a really
complicated subject making decisions yourself is probably going to do more damage than simply
sticking with the pack there are not many people who have consistently outperformed the
market over an extended period of time of those that have a good amount just got really lucky
a lot were insider trading and those that genuinely beat the market with their own skill
were mostly certified geniuses that transform the investment landscape you are watching a
video on the dynamics of human psychology and investing so you are probably smarter than most
but you are not smarter than someone like jim simons and his team of phd analysts the good
news is that you don't need to be the secret to good investing was right there in the thumbnail
stop trying that doesn't mean stop investing but it does mean stop trying so hard you can fit
everything you need to know about personal finance onto a post-it note but that makes it hard to sell
courses investment products self-help books and nft projects to people who think they can outsmart
the market a 2020 report found that 90 of actively managed funds failed to outperform the market over
a 15-year period so if the smartest investors with ivy league degrees fail to do so why do you think
that buying a day trading course will help you i'm sorry you can't i cannot [ __ ] believe this
invest consistently invest broadly and invest for the long term and you are going to do better
than almost everybody else that spends their lives chasing the overhyped flavor of the month
investment that promises its investors rich but only ends up putting them behind now if you want
to learn about a company that has quite literally mastered the long game go and watch my video on
nintendo's incredibly weird 130 year history on my new channel how history works thanks again to
brilliant for making it possible for everybody to keep on learning how money works well that's
fantastic a really smart decision young man we can put that check in a money market mutual fund then
we'll reinvest the earnings into foreign currency accounts with compounding interest and it's gone
uh what