If the stock and bond only, buy and hold strategy touted by almost every “financial professional”
out there turns out to be wrong… you will be left holding the bag, not them.
It’s so important you understand the flaws with that traditional way of thinking about
investing.
That’s why—even though I feel pretty confident these videos won’t perform particularly
well with the YouTube algorithm—I’m still dedicating the time to create them for you.
To help you better understand my concerns here and ultimately help you become more confident
in your long-term investment strategy.
Let’s go…
– Welcome back to the most dedicated of my subscribers.
You all are wonderful and I sincerely hope these videos are starting you on a path to
true financial confidence and long term success.
Now, in our last video we went through several historical examples where a person living
during that time would have had WAY more data (than we do today about the stock market)
to point to regarding a trend and their future, yet… those trends all changed; history was
made.
You can’t use what’s happened in the past—really, no matter how much data you have—to PROVE
some theory FOREVER into the future.
– In the sixth century BC, Croesus the King
of Lydia was thought to be the richest man in the world.
According to Greek legend, a renowned wise man by the name of Solon visited the Lydian
King.
Croesus sought acknowledgement of his own grandeur by asking Solon to identify the happiest
man he had ever met.
Solon told Croesus of a peasant he had met in Athens who worked hard, raised his family,
was content with all he had, and died happy.
This was not the answer for which Croesus was fishing; he continued to press.
After enough unsatisfactory responses, he finally just asked Solon directly if he were
not the happiest person he had ever met.
In Nassim Nicholas Taleb’s retelling of the legend, Solon responds:
“The observation of the numerous misfortunes that attend all conditions forbids us to grow
insolent upon our present enjoyments, or to admire a man’s happiness that may yet, in
course of time, suffer change.
For the uncertain future has yet to come, with all variety of future; and him only to
whom the divinity has [guaranteed] continued happiness until the end we may call happy.”
After which, Taleb simplifies Solon’s message:
“The modern equivalent has been no less eloquently voiced by the baseball coach Yogi
Berra, who seems to have translated Solon’s outburst from the pure Attic Greek into no
less pure Brooklyn English with ‘it ain’t over until it’s over,’ or, in a less dignified
manner, with ‘it ain’t over until the fat lady sings.’”
Up until that point in time, Croesus’s life, if plotted on the statistician’s trusty
XY-graph (wealth/good fortune/happiness on the y-axis over time on the x-axis) would
have revealed that familiar-by-now upward trend.
Solon, in his wisdom, knew those past data points did not guarantee Croesus’s future.
Sure enough, shortly after this encounter, the King’s luck began to change—his son
was killed in a hunting accident and his empire was conquered by Cyrus the Great of Persia.
– Through his management and growth of Berkshire
Hathaway, Warren Buffett has become the epitome of a savvy investor.
Ten thousand dollars invested with the Oracle of Omaha in 1965 would have grown to more
than $274MM by the end of 2019.
Compare that to the $1.9MM you would have realized from the same investment in the S&P
500 over that same period.
In his 2018 letter to shareholders, Buffett offered a Solon’s Warning of sorts for investors
in Berkshire’s insurance subsidiaries:
“A major catastrophe that will dwarf hurricanes Katrina and Michael will occur—perhaps tomorrow,
perhaps many decades from now.
‘The Big One’ may come from a traditional source, such as a hurricane or earthquake,
or it may be a total surprise involving, say, a cyber attack having disastrous consequences
beyond anything insurers now contemplate.
When such a mega-catastrophe strikes, we will get our share of the losses and they will
be big—very big.”
Buffett is acknowledging the reality that some catastrophe that has never before been
experienced—whether it’s tomorrow or decades from now—will happen.
To that end, Buffett is cautious, holding a large cash reserve and always attempting
to not be overexposed to any one surprise event.
“We use debt sparingly.
Many managers, it should be noted, will disagree with this policy, arguing that significant
debt juices the returns for equity owners.
And these more venturesome CEOs will be right most of the time.
At rare and unpredictable intervals, however, credit vanishes and debt becomes financially
fatal.
A Russian Roulette equation—usually win, occasionally die—may make financial sense
for someone who gets a piece of a company’s upside but does not share in its downside.
But that strategy would be madness for Berkshire.
Rational people don’t risk what they have and need for what they don’t have and don’t
need.”
– For those of you not familiar with Russian
Roulette, it's the game where you have a six-shooter pistol but only one bullet in the chamber.
You spin the cylinder, hold it to your head, and pull the trigger.
There are five chances that nothing will happen.
And one that you end up dead.
In his illuminating book, Fooled by Randomness, Nassim Taleb references a similar sentiment
as Buffett does here.
Taleb adds money to the equation.
If a deep-pocketed—and perverse—thrill-seeker offered you $1MM if you survived after playing
one round, should you do it?
A strict analysis of the potential possibilities reveals that (from a financial perspective,
at least) playing is clearly in your favor.
There’s an 83% chance that you walk away with $1MM free and clear!
Of course, however, in that 1-out-of-6 chance that you do happen to find the bullet in the
barrel, well … you’re dead.
As Buffett said, “a Russian Roulette equation—usually win, occasionally die … would be madness
… Rational people don’t risk what they have and need for what they don’t have and
don’t need.”
With Russian Roulette, you’re aware of the odds: they’re 5 to 1.
Taleb points out, however, that in the world of investments, the odds aren’t known.
Yet, most professionals and academics proceed as if we do know them.
As consumers, we buy into their narrative perhaps because we want it to be easy; we
want it to all make sense.
But in reality, if we’re talking about that mega-catastrophe the likes of which has never
been seen—“The Big One” that Buffett called it—the odds of that happening, versus
a normal day in the market where the action is within a range that you’d expect, are
1-to-1,000s or tens of thousands.
So, as those catastrophic events don’t happen—because they don’t very often—people start to
think that they won’t—that they can’t …
– One of my pet peeves is the way that financial
advisors and pundits (and even financial YouTubers) behave when the market starts to crash.
During chaotic markets, these “experts” flood social media with general statistics,
charts, and graphs of market recoveries from the past.
They say, “You don’t need to worry.
The one thing all these crashes have in common is that the market has always recovered!”
Have you seen those?
Have you heard that?
Every time I see or hear this, I can’t help but imagine that advisor sitting out on his
front porch, relaxing with his wife, watching his kids run around in their front yard.
All of a sudden, two of their children run across the busy street in front of their house
without paying much attention, narrowly avoiding being hit by the zooming traffic.
His wife yells, standing from her chair, ready to nip this dangerous behavior in the bud,
when … the advisor calmly grabs her arm.
He says, “Don’t worry, honey.
They’ll be just fine.
I’ve seen them run across that busy street dozens of times and nothing bad has ever happened!”
– A worse scenario than has happened in the
past is always a possibility.
And…
it’s dangerous to ignore that.
Millions of hard-working couples who had already retired around the year 2000 and again in
2008, who had been following that mainstream advice, were rudely met with this reality
and forced back to work just to get by.
And that’s not even to say that something worse couldn’t happen in the future.
Being better prepared starts with understanding and fully accepting this reality and then
from that solid foundation you can build a much more confident financial future.
So for now, we’re going to keep exploring this buy and hold myth—because it’s one
of the most egregious myths just blindly adhered to even by almost every financial advisor
out there.
I’m the weird one here.
Let me know in the comments though if some of this is starting to click.
I certainly hope it is.
Here’s the next video in this series and here’s the full playlist where I take you
through my favorite myth—Myth 10—from my book Stop Investing Like They Tell You.
I can’t wait to see you there.
I wish you all the best.
Take care!