At the end of this year, we realize you have many things to be doing with family over the Holidays or wrapping up at work, so we won’t take much of your time here. However, always seeking to educate you in preparation for the future, we want to lay out some enticing morsels that will appeal to your speculative taste buds but likely do harm to your portfolio waistline. This article is going to lay out some interesting statistics that you hopefully will find interesting, but certainly should find instructive for your future success.
“In It To Win It” is a concept that means that you can’t win something (succeed at it) unless one is willing to compete or try. Whether that moniker relates to finding new relationships in life or playing a game, the underlying message remains the same; You cannot not win if you don’t first try.
Taking this message to the investing market, many people would like the prescience to pick the right stock (or security, like a bond) at the right time, at the right price. The allure of such insight is fueled by successes of a lucky few that we hear about by the popular press, and we wish we could be them. An example in 2016 would be the semiconductor maker for specialized gaming and video chips called Nvidia (symbol NVDA). Though the year has not yet concluded, the increase in the stock Year-to-Date as of December 23, 2016 was a startling 233%! “This could be you” the media shouts, and to be totally objective, it could be. Should you have wisely bought this stock on December 31, 2015 and held this stock in a concentrated position, your $100,000 beginning of the year investment would not be worth $333,070. However, beyond the fact that this gem little boutique stock currently carries a pricey 72 P/E ratio (should you be technically-minded) it’s not very likely you would have so chosen.
For perspective on these odds consider the results of a study that occurred about mid-summer (June) 2016; At that time, the Standard and Poor’s top performing 10 stocks in 2016 were all NEGATIVE performers in 2015. However, if you somehow selected those 10 stocks at the end of 2015, you would really have been up. Absorb this reality. It will ALWAYS be the truth. If it makes you feel bad, that’s just human nature working on you. We’re not saying it’s greed, it’s just human nature. Nonetheless, let’s dissect that reality a tad.
Given that at any point in time there are 80,000 investment choices in the world, you have to think of these realities;
- You probably don’t have ‘inside knowledge’ on any stock that would give you a convenient advantage over someone else. If you did, you’d probably go to jail for insider trading.
- Say you DID PICK those top performers. This would mean what without foreknowledge, you selected the top 10 stocks out a superset of 500 stocks (the S&P 500 was our option list, not the 80,000 options before you). Still, that would me you would have to be one precocious investor to identity the 2% of the stocks that would do best in 2016 and ignore the other 98%…and overcoming self-doubt because keep in mind your selected 10 did pretty lousy in 2015.
- Then, process this Maestro; if you somehow MISS the top performing 10, or 20 companies, you are facing really tall odds of doing well. Let’s take real data and look at the past 7 years and average the results of each year.
- The top 5 companies in each of these 7 years made up 59.3% off all the gain[i]
- The top 10 companies made up 87.2% of all the gain[ii]
- The top 20 companies made up 116.5% of all the gain[iii]
Please comprehend this last point; If you didn’t select correctly, with perfect hindsight now helping us, and instead most logically missed some or perhaps all of those needle-in-the-haystack 4% of all S&P 500 companies, you would have actually LOST money. You have gone from unparalleled success and media praise to “The Biggest Loser” , and this is not a game you want to be the winner of the show.
I submit to you the irrefutable logic that the ONLY way you don’t miss the top winners to own them all.
You do. You’re in it. You will win it. Case closed.
[i] “Trends In Investing” (Journal of Financial Planning, June 2016)