Wanna Get Rich? Stop Buying Stocks. You'll Probably Live Longer, Too
Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A few years ago I spent 17 days traveling around Europe. It was something that my wife and I had planned to do for years, and was the culmination of lots of effort, and money. And I was stressed for most of the trip because I wasn't able to constantly monitor my portfolio. To say that I was distracted puts it lightly. I think that this will put it in perspective:
When our train pulled into the station in Paris, my first thought wasn't, "Wow! I'm in Paris!" It was, "I wonder how much longer Vivendi will drag down Activision's (NASDAQ: ATVI) stock price? I wonder how far it is to the hotel so I can get online and check?" I was in one of the world's great cities, and my first thought was about a stock price. I had a very unhealthy relationship with my stock portfolio.
Fast-forward several years, to last month, and another extended trip overseas. We were in Mexico, and almost every hour that the market was open found me on a scuba diving boat; needless to say, market access was limited. Add in that the internet at the hotel was less than reliable, and I was only able to connect to the web a few times the entire week.
And today, the stakes are much higher, as I now manage essentially all of my family's investments. Literally every single dollar that my family will count on in retirement, to make a down-payment on a house, and for our (future) children's college tuition, is under my control. And I spent more than a week with essentially no idea what was happening to that money. Was I worried?
Not one bit. And the reason why is simple: I stopped buying stocks.
And you should, too
This sounds like it runs counter to the message that the Motley Fool preaches, but it's actually right at the very core of Foolish investing. The stock market has been the best means to growing wealth for over a century, but investors lose out because they make the same mistake that I was making: confusing buying stocks with investing in businesses.
And this is what I mean when I tell you to stop buying stocks. Let me explain:
A few months after returning from Europe, I came to the realization that the way I was investing was unhealthy and backwards. I would take a look at a five-year chart of the stock price for any company that I was interested in, figuring that if the stock was down, and the company had decent prospects, I was getting a deal. Right? Usually not. I had also adopted a pattern of adding to my losers, figuring, again, that I was getting a better deal. The problem with these two "methods" is that it leaves out some very important considerations:
- Share dilution through share offerings to raise cash, both past and future, can keep a depressed stock down, and a chart doesn't mention this. And if you're chasing a growth stock, this is a real occurrence with real consequences
- The lowest a stock can go to is zero, not the 52-week low
- Losers can keep losing, while winners can keep winning
- There is nothing here about the story- what's the compelling advantage that makes the company a great investment?
So while I thought I was doing my best Warren Buffet and buying good stocks on the cheap, it was a poor imitation of what the Oracle really does: invest in great businesses at good values. His ability to do this so well is one of the reasons that Berkshire Hathaway (NYSE: BRK-B) is one of my top-5 holdings. Not only does Berkshire consistently allocate its capital into investments in world-class public companies like IBM and Coca-Cola, and usually at times when there is significant predictable growth ahead, but every few years the company is able to wholly acquire great businesses with talented leaders. So yes, I still buy stocks, but not in the same way that I used to. And I bet that maybe the way you do, too.
Semantics? Maybe; but there are more important things to do than chase a daily stock price
And many of those things we simply overlook. Maximizing all of the tools at our disposal can make all the difference down the road:
Maximize your employer's 401(k) match
This is free money. If you make $40k per year, and your employer matches 50% of your contribution, up to, say 3% of your salary, that's over $27,000 in free money over 30 years, based on a 3% annual salary increase. And that's assuming you made zero return, literally sticking the money in a mattress. If that money performed at only a 5% annual return, well below the market's historical average, you'd have over $60,000 in free money after 30 years. And all you had to do was let your employer give you free money. And remember, you'd also have $120 grand of your own money set aside as well.
Roll you old 401(k) plans over
If you're no longer getting matching funds, it doesn't make sense to leave the money there. When the mutual funds available probably under-perform a basic index fund like the Rydex S&P Equal Weight ETF (NYSEMKT: RSP), which has historically beaten the SPDR S&P 500 Index (NYSEMKT: SPY), roll it over and invest in an index fund if you're not confident you can pick the best companies. Add in that former employees usually pay higher fees, and it's just common sense to move your money to a self-managed IRA.
Set up a Roth IRA
Not having to pay taxes on that money later will mean that you need less of it, so even if you don't manage to find a "home run" stock, your returns will go farther.
Foolish bottom line
These simple activities end up saving investors more money in lost fees, unnecessary future taxes, and under-performance through better asset allocation, than all of the "hot stock picks" you'll ever find will likely ever make you. At the end of the day, these are things you can actually control, and that's where you need to keep your focus.
And I still own stocks- as a matter of fact, I have shares in over 40 different companies. You should own stocks, too. But your ownership should be a product of researching and understanding the underlying business, and not the share price history and analyst targets. While valuations and charts, with proper context, add important data, they won't tell you anything about the competitive advantage, or opportunity to revolutionize or disrupt an industry, that make a company a good investment. The key to picking winning "stocks" is about finding winning businesses, and then letting those businesses perform over time.
Remember my concern about Vivendi and Activision? As time has passed and I've come to understand just how great a business Activision is, I am no longer concerned about what Vivendi does with its stake because I am happy to be able to own shares of such an exceptional and profitable business; clearly the best operator in its industry, much as Berkshire Hathaway is among the best in the world. And I know that if I own enough great businesses, my stock portfolio will do just fine over time.
And as Morgan Housel recently discussed, it's both unproductive and unhealthy to be so focused on share price movement. As I have become a better student of the businesses that I own, my desire to check my portfolio daily has decreased, even as my rate of return has increased. So my advice to you is to get out there and research the businesses that compel you, and then make a decision if they warrant your investment dollars. Only then does it make sense to look at the stock price and determine if the price is right
Jason Hall owns shares of Rydex Equal Weight S&P Index ETF, SPDR S&P500 Index, Berkshire Hathaway and Activision Blizzard. The Motley Fool recommends Activision Blizzard and Berkshire Hathaway. The Motley Fool owns shares of Activision Blizzard and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!