Those of you still seeking the magic recipe to spectacular stock market success, boy have you (not!) come to the right place.
Well, come to think of it, maybe you have, if the past is any guide.
As Jimmy Buffett – may I dub him the Oracle of Cayo Hueso? – once said, “indecision may or may not be my problem.” He also, come to think of it, said “the best navigators are not sure where they’re going until they get there, and then they’re still not sure…”
That said, strap in, let’s spin the golden compass, and see where it leads us.
While barkers of get-rich-quick scripts, surefire trading strategies, secret market timing decoders, and oracular forecasting methods abound, there is scant to no hard evidence that any of that works with more than flash-in-the-pan, now you see it, now you don’t, Shazam-style consistency.
Which, of course, is another way of saying you may win a few hands, amigo, but if you stay in that seat long enough, the house gonna take all your money.
For those who can tolerate the get (or stay) rich slow approach, academic research and the historical markets record have some remarkable insights.
The first newsflash is that diversification works to reduce risk and target higher returns. Spreading your bets over many plays increases the odds of getting big winners, and decreases the chances of a few concentrated, bad bets blowing up your chip pile. Twenty positions – stocks, for instance – is widely considered a minimum level of diversity. More is better. Mutual funds ETFs, and other packaged investment products, of course, offer built-in diversification well beyond this level.
Diversifying into different types of markets – asset allocation – magnifies the benefits of diversification. Frequently, different types of markets move in different cycles. For instance, there have been significant stretches where non-US stocks have beaten their domestic cousins, and vice versa. Having a piece of each (and many others) steepens the odds of getting some winners, and avoiding losing the ranch on big losers. Funds – mutual and ETF – offer great ways to get the first kind of diversity when asset allocating.
Beyond, this, there are a number of techniques that have been “proven” to work at somewhat-reliably enhancing investment returns. “Proven”, of course, in the social science world, really just means there is substantial evidence that such a pattern persists. It is never a guarantee, like, for instance, the hard-science proof that an unrestrained object exposed to a gravity field and sufficient distance will go splat on the sidewalk.
Heck, they’re not even proven like the casino math that if you play long enough, the house will always win.
But, still, the evidence is strong enough that the techniques are prudent ways to bet your investment well-being.
So here, dear investors, are the not-so-new investing pearls of the ages. Let he who hath eyes see, and she who hath coin, insert:
1. Over the long term, stocks way outperform bonds. Stocks are more volatile – value bonces more – but clearly more profitable if you can hang on and not have to sell. This is especially important for retirement planning, where poppycock drivel like “you should have 100 minus your age as the percentage invested in stocks” can really mess with your head and screw up your returns.
2. Over the long term, up-and-coming small cap stocks do way better than large caps. Way better. The trick, of course, is to be well enough diversified that the inevitable grease spots don’t absorb up too much of your capital.
3. Value investing – buying good companies at cheap prices – works. The skinflint mentality has paid handsome premiums over the decades. Growth has trounced value in the decade-plus since the Great Recession, it is true, but is this time really different, or is value really due? Data hounds and students of financial history are likely to go a-tenting in the latter camp. If this is right, value could represent an incredibly good buy right now.
4. Profits matter. To channel (and misquote) the young Bill Clinton, “it’s the bottom line, stupid.” Profitable companies make more profitable investments. This is so axiomatic (but other overlooked!) as to avoid further keyboard-pounding here. Just make sure to hew to rule #3, and buy profits cheap!