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I’VE BEEN WRONG many times, as I’ve noted in earlier articles. But the past few months have made me—and maybe you—look like an investment genius.
I’ve had some nice “wins” since March 13, when I started buying the stock market dip. Does that make me brilliant? Of course not. Was I “right”? That depends on how I made my decisions. A quick profit doesn’t necessarily mean I made the right call.
Too often, when we analyze our investment moves, we judge them by whether we made money—and usually our focus is short term. We wanna know if we were “right” right away. But that’s the wrong way to look at it.
As Wall Street Journal investment columnist Jason Zweig reminded readers recently, he touched on this topic in 1999. He was writing then about assessing whether certain investment strategies “worked.”
“More than ever, people think the test of an investment’s validity is whether it ‘worked’.… But investing successfully over the course of a lifetime has nothing to do with being right in the short term.… Imagine that two places are 130 miles apart. If I observe the 65-mph speed limit, I’ll drive this distance in two hours. But if I go 130 mph, I can get there in just one hour. If I try this and survive, am I ‘right’?”
Exactly right. That is to say, no, he would be wrong.
Evaluating an investment over a long period gets closer to answering the right vs. wrong question. But even then, the result doesn’t wholly validate or invalidate the decision.
Eight years ago, was I “wrong” to buy Pepsi and Coca-Cola instead of Apple for my son and daughter, respectively, when I wanted to teach them about investing? It’s hard to say I was “right.” Since the purchases, Apple has returned 375%, versus 153% for my son’s Pepsi and 66% for my daughter’s Coke. Vanguard Group’s S&P 500 index fund returned 177%.
But how was I “wrong”? The Pepsi and Coke investments served their primary purpose: to teach the kids the superior return potential of stocks versus a savings account—and to show them how money can work for them, rather than the other way around. At least Pepsi and Coke have been, ahem, less volatile than Apple.
I had told myself explicitly that I wasn’t trying to beat the market, just trying to buy a couple of companies that two teenagers could understand. As indexers know, there was no way for anyone to predict which of the three stocks would do better. Apple at that point was up about 1,700% from its March 2000 peak, versus about 15% for the Vanguard S&P 500 fund. (Incidentally, when I bought the shares in 2012, the vast majority of analysts recommended Coke over Pepsi.)
The point is, my decision making was sound enough. It was rational and defensible based on my objectives, on what I knew and—in fact—on what was knowable.
Back to this year’s market decline: I bought the dip fairly aggressively in March, in accordance with my plan. Even though I got spooked in April and deviated from my plan by trimming stocks during the rally—score those sells “partially wrong”—the moves I made have netted out fairly well so far.
I bought a small-cap value fund on March 13. In my Mom’s portfolio, I worked with her advisor to sell a muni fund and buy a total world stock fund. Both have performed spectacularly since then.
Was I “right”? Again, that depends. The quick gains don’t make me right. I did know that small-cap value often outperforms coming out of a market bottom. During the dot-com bust 20 years ago, small-cap value started rising shortly after the insanely valued large-cap tech stocks began to crater. But when I bought this year, I had absolutely no way of knowing whether we’d reached bottom or were even close to it.
So what was right about those two decisions? The same thing that would be right if both funds were “losers” right now. They were rational decisions made in accordance with a pre-existing plan to buy dips of a certain magnitude and not to let my allocation to stocks get too low. They also made sense as diversifying moves. Mom’s portfolio—literally one for “widows and orphans”—was heavily skewed toward muni bonds and domestic value stocks.
The bottom line: Don’t judge yourself by how much money you make. Instead, judge whether you tend to make well-reasoned decisions appropriate for your situation and based on known facts, rather than on hunches, hopes or fears—or the fact that your cousin is making a fortune in Apple and can’t stop boasting about it.
William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles include Red Flags, Averting My Gaze and In and Out. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart.
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The poker player Annie Duke has written about this in her book “Thinking in Bets” (I think a Humbedollar contributor wrote about this not too long ago? Maybe it was you?). She writes, “What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of ‘I’m not sure.'”
To answer the question whether an investment was right, I think it’s important to know how the investor will measure its performance before making the investment. Clearly, different investors have different measurements.