28 – Cultivate with Buy and Hold

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Episode Overview:

Ken shares with you some of the stock market gaffs that he made in his youth. His inability to time the market resulted in missed opportunities and misfired picks. Ken discusses the lessons of stock volatility he learned. A stock can dramatically spike and correct itself in the course of 10 seconds. Timing the market is quite impossible; monkeys have better performance numbers then experts. Literally. In the wise words of Warren Buffett, the Oracle of Omaha, “Buy and Hold. That’s how you win.” Ignore the headlines, pick a strategy and stick to your guns. Ken explains how this works and how you should always have faith in the market. This podcast episode is merely the personal experiences and opinions of Ken Kaufman and not a guarantee. Ken is not liable for any financial decisions you make as a result of this podcast. It is advised that you consult a certified financial adviser and be aware of the risk involved before entering the Stock Market.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy day to you. This is Ken Kaufman and I’m thrilled you’re here for episode number 28, “Cultivate with Buy and Hold.” This is all part of the series that I’m doing on the roadmap to cultivating your assets. Now, as I get started, let me go back to the very beginning of my career. I was 21 years old, a sophomore in college and I got a part almost full-time job working with Fidelity Investments as a brokerage trader. I saw high volumes of securities being traded every day. I backed up an options desk so I got to understand options and those strategies and how those worked as well. As my education in this area and experience grew and I had securities licenses obviously to be able to do all these different things, I started to think, “Hey, I think I can figure some of this out and start to make some money trading stocks.”

Now, I was a poor college student trying to avoid going into debt, so all of my earnings as an employee were primarily going to cover my room and board and everything that went with that, and then my tuition at least as much as possible. And so I didn’t have a whole lot of money, but I had saved up a little bit. And I’d been reading and studying and following some different companies that were smaller companies where I could buy a 100 shares of their stocks. They’d be called pink sheets or sometimes even penny stocks were trading for a dollar or $2 or $3 or $5 a share. And I had my eye on several and I was watching them and trying to understand what was happening with them technically in terms of their ups and downs, and also had some understanding about their fundamentals from a financial perspective.

And I found one and I said, “Oh, that’s it.” It’s just a little bit overpriced right now. I’m going to put a limit order in that says if the price will drop down to this level, then I will buy a 100 shares. Well, guess what? It never got down to that level. That stock took off and it never came anywhere close to where my limit order was put in at. Big problem and big miss for me, number one. And really what I was trying to do here, is time the market. There’s another stock that I was watching very closely and I felt like, “Oh, this is it.” And I think that’s a fair price. I paid that price and from the day I bought it, it went straight down. It didn’t become worthless, but it lost I think 20% over the next couple of weeks and I ultimately ended up selling out at a little bit of a loss. It wasn’t a full 20%, I can’t remember, it got close to my original purchase price, but after commissions and everything else, I took a loss on that.

I am horrible at timing the market. I’m horrible at even picking specific securities. And I went to college in undergrad, in business, I did my MBA in finance and entrepreneurship. I have been a chief financial officer now for almost two decades where financial analysis and understanding cash flows of businesses and balance sheets and how all these things work, how all that comes together. There’s so much underpinning and underlying what happens to an individual company stock price that it is outside of, I think ultimately anyone’s ability to really predict, especially on a short term basis. And that’s why I’m such a big proponent of index investing where it buys you chunks of the market at a time and gives you exposure to all the ups and downs. And over time we’ve seen it’s proven over and over that that is generally the best way to get the market returns is to buy the market or buy that specific index.

Now, one other experience I want to share that will help lay the groundwork here for this buy and hold concept and why it’s how we should all be thinking long-term from a cultivating our assets perspective. Sometimes people think, well, I know that there’s something great going on with this company. I know that I should invest in this one stock over here and it’s just going to do great. And this would be, you could take this and correlate this to I think that this mutual fund or this index or pick any one of those things where you’d say, “Okay, I think I have some information that tells me that this is the place to be in that there’s gonna be a really big jump or return potential” or if we think it’s going to go down, you can try to short it and make a similar type of a return as to if the stock price were to go up.

I was sitting actually in my MBA class, it was a finance class. And we were talking about how securities are priced, and how analysis is done to understand what the weighted average cost of capital is in a business and how to understand the pricing the securities because you have a risk free rate minus return and betas and all these different things that go into these formulas to try to understand the volatility of the market and understand the pricing of the different securities that are for sale. We’re in this class and the professor to make a point, he pulled up a specific company’s trading activity for the day and you could see second by second what was happening with the stock price. And it was hovering at, I think it was about $30 a share. It’s hovering, hovering, hovering. Well, all of the sudden, a newsperson in the background while we’re watching this started to make an announcement and said, “This company has just received FDA clearance for this drug and it is going to change this and this and solve all of these health problems.” And anyways they went through this whole process of describing all the benefits of this.

Amazing FDA clearance that was now going to pave the road to a 20 to 30 year “cash cow pharmaceutical product” that this company had patents on that was going to really change the health course for a lot of Americans who’d be willing to pay a lot of money for that pharmaceutical and then ultimately for the world. So this news comes out. As soon as the news hits that FDA clearance came, the stock price jumped from 30 up to 40 or somewhere in that range. A few seconds go by, it bounced down to 35, a few more seconds go by, it bounced up to 37 and then it stayed at 37 for the rest of the day and the next days. And then just the regular volatility of the stock started to show up. Within less than 10 seconds, the market had absorbed this new piece of information and the storm that was about 10 seconds of volatility flattened right out and everybody went on with their day.

The markets are so extremely efficient. When it comes to trying to time the market or assume you know something more than the market or you’ve watched the news or you’ve watched one of the financial pundits or talking heads that are saying, this company’s doing this or this interest rate’s going to do that and you should short this and you should buy this and go long on this. You have all types of information that you can absorb. Well, here’s the thing, at the end of the day, trying to pick those things and trying to figure out what’s gonna happen, it’s near impossible. And I’ve talked before about the impossibility statistically and through academic research of active managers who should know what’s going to happen, who actually have no idea what’s going to happen.

I guess I need to share one more thing. Back in the day, back at this early point in my career, I was reading “The Wall Street Journal” every day, very invested in all this content and they had these contests where experts would pick stocks for the next period of time and they would have monkeys pick stocks through this, you know, series. I can’t remember. I don’t know if they threw darts or they picked them out of a hat or something. Most of the time the monkeys won and true, it was a short period of time and so on and so forth. But it just proves the point, timing the market is near impossible.

So I want to now jump to an interview that Warren Buffett did recently. And in this interview he was referencing the very first stock that he bought back in 1942, it’s a long time ago. And for those of you who don’t know Warren Buffett, he’s the CEO of a company called Berkshire Hathaway. Berkshire Hathaway is like a really large private equity company that’s gone and bought majority interest in companies, sometimes switched out management companies, sometimes kept management companies. And ultimately you can buy a share stock in Berkshire Hathaway and it is investing in all these businesses that it’s….it believes in management and that it’s helping grow or it’s replacing management and doing all of those sorts of things.

Warren Buffett is referred to as the Oracle of Omaha. He’s from Omaha, Nebraska and that’s where Berkshire Hathaway’s headquarters are. And Berkshire Hathaway owns a lot of different companies now throughout this country and throughout the world and they’ve been very, very successful. Beat market returns over different periods of time. This is what he said in this interview as the interviewer was talking to him about what advice he has for investors. He says this, when he bought his first stock in April 1942, the U.S. was losing World War II and there was tremendous economic concern at the time. The U.S. economy he says then, it has grown and it will continue to grow. Dating back to 1776, the U.S. economy is worth betting on. Even at this time when he bought that first stock in 1842 it wasn’t, everybody was saying, look, we’re losing the war and the U.S. economy’s going to completely fall apart and all of this negative commentary. His prediction is, is that the U.S. economy will continue to grow. It’s the best thing that anyone could, or I’m sorry, he says, the best thing that anyone could have done back in 1942 when he bought his first stock was to buy an index fund and never look at a headline or piece of news again. Buy and hold, that’s how you win.

Those are his words. That’s from somebody who’s in the top five, if not the top two most respected investors in the world. He says, “Invest, buy and hold and leave it alone.” Now, there’s a challenge here. Investors, especially if you get a little bit of knowledge around the market, investors quickly become overconfident. Buy and hold just seems too simple and you might be very tempted to think about what you can do to beat whatever it is that what you’ve bought is currently accomplishing. You’re thinking, I’m going to sell this and I’m going to buy this or I’m going to do these different things.

You’re going to be tempted to sell based on the news headlines, on political predictions that you may have and so on and so forth, which by the way, you go back and look at Republican and Democratic presidents back over decades and none of them necessarily generate higher or lower returns, when you look at the research and you look at the studies around that. So who you think is going to be president or what you think is going to happen over in this part of the world or what you think is gonna happen with this company or what you’re just hearing on the news. The reality is all of that is noise. Successful investors, generally speaking, are buy and hold. That means they buy…or I should… There’s one step before that. Let me step back. First of all, they come up with their strategy for what they should invest in and what their investment portfolio is gonna look like. And then they stick to the strategy by first buying, and then second, holding. Buying can be hard because you think, “Oh, is it the right time to get in the market?” Guess what? If you have 40 years, it doesn’t matter. Get in the market. And then holding can be really hard because when the market goes down, we’re tempted to sell, we’re protectionary in our very nature. And my next episode’s going to talk about the emotions of investing and how we combat some of those types of things. So that’s just a little bit of a precursor to that.

But the research shows that when you pick your strategy and you stick to the strategy with your buy and hold, in almost every instance, that creates better outcomes than those who are constantly changing or tweaking their investment portfolio. Let’s say. You say, “All right, I’m young, I want to be 90% stock, 10% bond.” And all of a sudden the stock market goes down a little bit and you think, “Oh, I’ve got too much stock.” Really quickly you get tempted to sell some stock and buy more bonds. Well you’re selling low, you’re selling lower than you bought it for. But our emotions drive us toward that thought process. It’s protectionary in nature, not opportunistic in nature. When we look at the stock market and investing in general, we have to be opportunistic in our perspective and how we approach it. Buy and hold, the only time you should change or deviate is just to rebalance, to get back in alignment with your strategy. Any other way of trying to time the market…

In fact, I know someone who they purposefully have put 50% stock, 50% bond with half of their money, so think about it. They have all this money, they took half of it and they have a 50% stock, 50% bond portfolio broken out and it’s working like that and this is a person who’s in retirement. And the other half, they put into a market timing solution where it’s following I think like a 200-day moving average and it’s moving in and out of different positions and guess what? This person acknowledged to me the market timing one, it always performs worse than the 50, 50 portfolio I have over here, but it’s just my security blanket and it helps me feel better going to bed at night knowing that there’s some things that are getting out when the market’s down and I’m not exposed if it goes down anymore and getting back in when it’s low and potentially going up high. He says, “I’m fine with the lower returns. It’s just I need that peace of mind.” This is a person who is also in retirement so he is more concerned about capital preservation than somebody who’s 20 or 25 years old and has a long time horizon on their investment strategy.

So again, the whole point of this is markets are efficient. Timing is generally a loser’s game when compared to a really solid index investing strategy. And at the end of the day, holding is most likely going to be the hardest part, when you see that market go down. Make the strategy, design that strategy and if you need an advisor or somebody to help you with that, definitely bring them in. There are some great advisors out there that can really help you find good low-cost index mutual funds and build a great strategy based on your overall goals, objectives, and risk profile and everything else.

Get that strategy, get that money in the market and keep putting that money in the market as you are saving for your medium and long-term goals. And then don’t forget to hold. If the market goes down, the only activity you should take is if you’ve got more money at the time put more money in and buy because it’s low and it should all still fit within what your overall strategy is. And if you’re feeling stressed because the market goes down and you’re struggling holding, just remind yourself, “Hey, the market is just down temporarily. I’m buying at cheaper prices and I’m going to benefit from this in the long run” if you have the long run. Again, if you have a short time horizon, you’ve got to be really careful. You’re buy and hold strategy should be around much more conservative and capital preserving type of investments.

Again, not that I’m giving investment advice. I’m speaking generally and it would require me to get to know you personally and know everything about your financial situation to even give investment advice. But I can’t even do that because I’m not a licensed or accredited investment advisor. I’ve been out of that business now for over 20 years or over two decades. So get your strategy right, buy and then hold. No tweaking allowed. Hold and hold for the long term. The only tweaking should be the rebalancing that you do. And then if you’re on a glide path toward retirement where you’re slowly adjusting to more conservative investments as you’re getting closer to your retirement date, those should be the only tweaks. It should be within a system and very planned and very guided. So there it is, how to cultivate through the buy and hold mindset.

I want to encourage you to subscribe to the podcast. We have a few more episodes around this cultivate your assets roadmap, and then we’ll do a nice summary at the end. Don’t want to miss any of those episodes. So grateful for your participation in the podcast. Feel free to leave a review. Send me an email, ken@networthhacks.com. Love any feedback or thoughts you have or any questions that you have on any of these topics that you’d like me to address. I’d love answering the listener questions in podcast episodes. Many, many thanks to you for joining today. This is a wrap for episode 28. Happy day.

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About the Podcast

Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.

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