This Retirement Error Trips Up A Lot Of Value Investors – Here’s How To Avoid It
The end of every month is my favourite time because I get to talk to a large and growing number of classic value investors who have signed up for our free Net Net Hunter newsletter. We're a tight knit community of bargain hunters and the discussion is always great.
I recently asked our newsletter subscribers something pretty fundamental and I want to share that question with you as well here. This seems like a silly question but answer it anyways:
Are you somebody who wants to make smart investment decisions?
Well... are you?
Think about that for a moment.
I'm asking you because we're coming out of a pretty crazy year. Actually, 2016 has been exceptional for a number of reasons. We've had Syria break out into a major global conflict with Russia entering the mix, the election of Donald Trump who (love him or hate him) was a real underdog at the start of the year, and the Brits taking back full control of their country by voting to exit the EU.
That's a pretty exceptional cluster of events, wouldn't you agree? And pundits screamed impending doom with each one of them.
It's been exceptional for the markets, as well. We started the year with a terrifying drawdown. The NASDAQ sat at 5,007 on January 1st but tumbled -14.8% in just one month to land at 4,266. Pundits were calling for the next great bear market or the collapse of the American economy.
Investors listened, and dumped their shares or sat frozen on the sidelines, expecting a market meltdown.
Despite this fear, the NASDAQ began an 11 month climb, up +25% from that low point by the end of the year. An investor managing $200k in retirement savings at the start of the year who dumped his holdings on February 11th out of fear permanently lost $29,600 in just one month. That's enough to buy a new car.
But investors who stayed out of the market at that low point lost even more. If your$200k in retirement funds were sitting in cash on February 11th, and you failed to get into the market, you would have lost $53,940 in investment profits that you could have earned by the end of the year. That's a massive loss, more than an average person makes working for an entire year.
As you know, it really pays to make smart investment decisions, which is why I asked you the question above. The lesson here is that nobody knows what the market is going to do and trying to invest according to which way you think the market will go is very painful financially.
A chart I made in 2015 covering recession fears since 2008. The market surged 40% since then.
On June 23rd, BREXIT shook the markets. Brits, against polling predictions, chose to end their marriage to the EU and sought full independence. Again, markets shook and pundits yelled about impending doom. The NASDAQ dropped -6.4% after the vote and those who missed learning February's lesson again missed the NASDAQ's +18.3% recovery. The FTSE 100 climbed +16.2%, well ahead of the -5.2% decline for the British Pound.
Those who invested based on where they thought markets were heading lost close to -$30,000 in foregone profit.
All said and done, investors were out -$83,940 in lost profit after both events... and that's on a fairly tiny $200,000 portfolio. These errors dramatically hurt your retirement.
"The investor's chief problem—and even his worst enemy—is likely to be himself." - Ben Graham
It never pays to try to predict the market. Nobody can do it with any degree of consistency. And, it is very clear that basing your investment decisions on which way the market will move is a very bad retirement strategy.
It's the opposite of a smart investment decision.
But, while it isn't possible to predict the direction of the market, it is very possible to select stocks that have a high probability of exceptional returns.
This is my strategy, and it paid off handsomely in 2016. By the end of the year, my own portfolio returned +17.4%, more than doubling the NASDAQ's +6.8% 2016 return.
My 3 year returns plus a month as reported by Interactive Brokers. 113% total gain, 27.8% CAGR.
Since February 7th, 2014, just over 3 years now, I'm up +113% versus the NASDAQ's shy +50% return. This outperformance will continue for as long as I keep making smart investment decisions.
So, as value investors, where do we go from here?
Are we long term investors or not?
Well... are we?
I think the answer is a resounding YES!
But then, if the goal is long term profits in order to fund a great retirement, buy that expensive car, pay for that dream trip, or help our family when they need it most...
...we need to act like long term investors.
...we need to make smart investment decisions consistent with long term value investing.
And, the best way for small investors like you or me to earn those exceptional long term returns is to maintain a fully stocked portfolio of the best possible net net stocks.
Ben Graham, Walter Schloss, and Warren Buffett all said that this strategy produces market crushing returns, but only if you ignore the market and are prepared to ride out its ups and downs.
“…we found it almost unfailingly dependable and satisfactory in 30-odd years of managing moderate-sized investment funds."
- Ben Graham, 1975
But this sort of investing doesn't mean having to invest in grossly overvalued American markets. The S&P 500 is sitting at a Cyclically Adjusted PE Ratio (CAPE ratio) of 27.9x as of December 14th - a clear sign that you have to be looking at solid First World markets around the world.
"If you search worldwide, you will find more bargains and better bargains than by studying only one nation."
- Sir. John Templeton
You might be surprised by this but I've been buying high quality net net stocks for dirt cheap prices in dirt cheap First World markets around the globe all year. Singapore, for example, is currently dishing up some fantastic bargains and it's no wonder with a CAPE ratio of just 11.4x. The UK, with all this BREXIT and recession worry is also priced fairly cheaply at 14.2x. Both Hong Kong and Australia are also moderately priced, at 15.8x and 16.1x respectively...
Richfield International, one of our big Australian winners this year.
It's worth noting that all of these are strong First World countries with solid shareholder friendly rule of law. They're well respected countries with robust First World economies.
Our big UK winner, PV Crystalox, crushed the market despite BREXIT.
There's no need to cherry pick stock returns here. The bottom line is this:
- The AVERAGE return for high quality net net stocks is more than 25%.
- That's a MINIMUM of 16% MORE than the S&P 500 returns on average.
"My cigar-butt strategy worked very well while I was managing small sums. Many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance."
- Warren Buffett, Berkshire Hathaway’s 2014 Annual Letter
But you don't get those returns by buying just any net net stock. There's a huge difference in return from best to worst net nets. Even Ben Graham was very selective about which net nets he bought... and that's why we put together our Net Net Hunter Shortlist each month.
We spend 20 hours per month compiling the best net net stocks globally into our Shortlist so you don't have to tackle that massive task by yourself. Yes, you could do it yourself, but you save an ENORMOUS amount of time and effort by letting us do it for you...
All of this points towards a major strategic direction that you should take in 2017. The smart course of action, the smart investment decision, is to maintain a fully invested portfolio of exceptional (and exceptionally cheap!) international net net stocks, and a long term perspective.
You are a long term investor, aren't you?
Smart investment decisions are easy to make, and they're even easier if you have somebody helping you.
If you want to avoid poverty in retirement, if you want to buy that summer house, help your family out when they need it, or go on those trips that you've had in the back of your mind... it all takes money.
"…I consider it a foolproof method of systematic investment--once again, not on the basis of individual results but in terms of the expectable group outcome.”- Words from the Master, Ben Graham, 1975
And, unless you have Richard Branson's ability to launch tremendously profitable businesses, you have to invest to make that kind of money. This is why I chose value investing and Ben Graham's net net stock strategy.
2017 is your year. It's the year you finally make the change you need to make to start earning the sort of returns you want.
And, speaking of Sir. Richard Branson...
“Almost all entrepreneurs will acknowledge that success in business comes from timing. So, when you get an opportunity, you've got to go for it wholeheartedly, not wait in the wings for some imaginary perfect time to materialise.”- Sir. Richard Branson, 2016