Sock It To The Big Man; The "HOW TO" Guide

Over the past year a new generation of investors have emerged. They have been driven by boredom, by stimulus cheques, by the internet and by apps that turn trading into slot machines. These new investors staged quite a spectacle in the last month or so. They bought, en masse, a number of stocks (so called ‘meme stocks’) and drove them up to silly prices.

One in particular that caught everyone’s attention was GameStop. If you aren’t up to speed on it, check out my last blog post

The whole GameStop episode was, supposedly, about the Little Guy socking it to the Big Man.  (Unfortunately because we are talking about trading and Wall Street, it’s mostly about the Little Guy and The Big Man.  There weren’t too many of the female species involved.)

The question is, did it work?  Did the Little Guy sock it to the Big Man?

In a word, no.

Here, Derek Thompson, at The Atlantic, explains it perfectly.

“Trying to punish the rich by buying and selling stocks all day doesn’t make any sense.  We’ve seen over and over and over that most day traders lose money: they routinely get smoked by bigger players.  What’s more, it’s impossible to participate in market dominated by large institutional investors on both side of almost every trade in a way that punishes the financial industry.  Waging war against Big Finance by becoming a day trader is like waging war against the casino industry by becoming a gambling addict.  Even if you’re winning, you’re still participating in a broader casino economy – buying drinks, eating dinner, throwing chips to dealers, filling out tables – that, over time, guarantees that the house keeps winning.”

Wall Street won, if only because Wall Street is the middleman, making money off every trade.  Wall Street will always win at their own game.  And if it looks like they might lose, they will change the rules.*

The bigger problem though, as I see it, is that we have a new generation of investors that are learning all the wrong lessons.  Daniel Crosby, one of my favourites, said in a recent podcast:

“No one is learning the right lessons.  People are either learning that you are going to lose your shirt in the first week or you are going to make 200% returns in the first week.  No one is learning an accurate long-standing, long-term rules-based approach to investing.  People are learning that markets are more volatile than they actually are.  People are leaning that fundamentals don’t matter.  People are learning that investing can be crowd-sourced by a mob.  None of this is the right lesson.  I do worry that half of the people are going to have this ego, built on their early success, that has nothing to do with real skill.  And half of the people are going to be defeated and be unnecessarily down on markets when they probably would have been fine if they had just taken a different tact. “

I am worried about this because many of you have grown up children that might find themselves getting sucked into all this.  A twenty-year old recently died by suicide after mistakenly believing he had lost $750,000 on a risky bet whilst trading on Robinhood.  If any of you, my clients, have children that you are worried about, please know that I am here to help - either by talking to you, or by talking to your child directly.

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Charlie Munger, one of the greatest investors and minds of all time, said this week “I hate this luring of people into engaging in speculative orgies.  Robinhood may call it investing, but that’s all bullshit.  It’s really just wild speculation, like casino gambling or racetrack betting.  There’s a long history of destructive capitalism, these trading orgies whooped up by the people who profit from them.”

Some young people say that Charlie Munger doesn’t get it.  They said the same about Warren Buffett in 1999 when he refused to get dragged into the dotcom bubble.  Charlie Munger and Warren Buffett have been investing for almost 80 years – that’s a combined (almost) 160 years of investing experience.  They have seen boom and bust, over and over again.  RobinHood investors have literally seen nothing.  You know which side I fall on.

So I have some worries, but here’s the great part in all of this. 

Trading #meme stocks on RobinHood is not the way to “sock it to the big man”.  There is a far more elegant and easy way to do it.  And you, as a Liberty Wealth client, are doing it every day, without even knowing it.

We have a huge advantage over anyone operating on Wall Street.  That advantage is our timeframe.

Wall Street investors have timeframes of minutes, days or weeks.  They have performance figures to report.  If performance flags, they lose their fund.

We have timeframes, not just of years, but of decades.  Even if you are in your 70s or 80s, if you want to leave a legacy to your children or grandchildren, you are investing for their timeframe.

What that enables us to do is buy and hold. 

It’s even more glorious and easy than that.

We don’t have to pick any stocks.  Buying and holding index funds over the last decade would have enabled you to beat almost every Wall Street investor at their own game.

As Neil Irwin wrote in the NY Times, “You haven’t needed to burn down the system. All you’ve had to do is take the laziest, simplest approach to stock investing imaginable, and have a little patience.  Any schlub on the street can put money to work harvesting a small share of the earnings of hundreds of leading companies, led by some of the sharpest corporate executives on earth and their millions of employees. You haven’t had to do much of anything!”

If the market is rigged, it’s rigged in our favour.

An index approach to investing, that is, owning a little bit of everything, with no need to know what stock is the next Amazon, has become the ‘smart money’.  It’s outperformed almost every professional investment manager over the past decade.  Here’s some recent data.  Over the past 10 years 85% of large-cap mutual funds in the US underperformed the S&P 500.  Over 15 years 92% underperformed. But any S&P 500 tracker performed bang inline with the index.

Put another way, if you had done nothing but bought and held the S&P 500 index over the past 15 years you would have outperformed 92% of professional investors in the US.  (We go a step further and own a global portfolio to protect us from specific country risk). That is an amazing change of fortunes over the past decade or so.

Granted, you might find that 8% of managers that outperform.  You also might find a needle in a haystack.

Jason Zweig recently said “being a professional portfolio manager who outperforms the benchmark is one of the most competitive and difficult jobs on Earth.  The odds are basically stacked 4 or 5 to 1 against you before you even start.”

The playing field is completely skewed.  If professional investment managers can’t beat the index over the long-term, then the RobinHood investors trading meme stocks truly do not have a chance.

So, here’s the guide.  The “How to Sock It to the Big Man” guide. 

1)      Spend less than you earn

2)      Save the difference

3)      Buy a diversified, low cost portfolio of global equity index funds (aka the great companies of the world)

4)      Be patient

5)      Back to 1) and repeat.

As I always say, simple not easy.

That’s why I’m here.   Please pass this on to whoever needs to hear it.

Georgie

georgie@libertywealth.ky

 *Check out the fascinating story of the short squeeze in Piggly Wiggly nearly 100 years ago.  A businessman named Clarence Saunders took on Wall Street and ended up bankrupt and unemployed when Wall Street changed the rules.  One magazine wrote about Sanders in 1923, “men may come and men may go, but Wall Street goes on forever.”

Georgina Loxton