Why are You Looking at Everyone Else?

Focus on your own game

I imagine that for many people it’s been a relatively great year for performance. As I write this, the S&P 500 is up 27%, the Nasdaq is up 24% and most of the largest Total Stock Market funds are up between 20% and 25%¹. It’s been another solid year for index-and-chill.

Ask most rational index investors what annualized return they would be content with over a multi-decade period and many will modestly claim that they’d be content with being on par with the index, so give or take around 8% to 12% (the current 30-year CAGR of the SPY is 11%).

Ask most rational stock-picking investors what annualized return they would be content with over a multi-decade period and most should claim that they’d be content with beating the index. I mean, that’s what all the hard work is for, right? This year it hasn’t been as easy as throwing a dart at the wall to beat the S&P 500, but currently, you’d have had a 39% chance² of doing so with a single stock at the beginning of 2024.

Market Scatter of the S&P 500, via Koyfin

One stock is fine, but create a basket of, say, ten or twenty stocks and that probability declines dramatically. In years when the indices are performing so well, or particular sectors or industries, it can be tempting to look around you and be envious. Other investors will share triple-digit YTD returns and make you feel that your returns, which in any other circumstance may be considered great for a calendar year, feel paltry. I’d bet this comes with no thought to the differing style, concentration, risk appetite, and so on.

An 8% annual return is nothing to be scoffed at. Do this over 30 years and your initial investment will have grown by a multiple of 10 times. Forget the market and what others are doing for a moment. The fact is that the average human being is not earning anywhere close to an 8% return on their savings over such a long period. The average human doesn’t invest, doesn’t understand the power of compounding, nor do they have the mindset that facilitates being upset about an 8% annual return. If you frequent the social sphere of investing, you must remind yourself that it exists in a bubble - a vacuum.

No investor’s journey, or return profile, looks the same. We constantly overestimate how well others are doing. It’s a flaw in our perceptive abilities that has been accentuated through the advent of the internet. Some are willing to take on greater volatility to earn outsized returns. These people ought to be compensated for their risk, but equally suffer the consequences.

Below is a chart that shows three unique return series indexed from 100 over 30 years. They share an identical CAGR of 8%.

Three series showing 8% CAGR over 30 years, via Koyfin

The white line (steady returns) earns a consistent 8% per year. The blue line (low returns with spike) earns a sub-par annual return, culminating in an incredible final year. The red line (volatile returns) has a high variance in annual returns with incredible peaks and gut-clenching drawdowns. These are naturally the extremes of what a typical return profile looks like but are illustrative of why a single year of performance is nothing to get worked up about or place too much emphasis on.

There is merit in the adage that you shouldn’t confuse investing your life savings with a hobby. As an avenue to channel your passions and something which is generally thought of as fun, investing can feel like a hobby during the good times. You wake up, your stocks are up, and your returns are great. One of your companies reports mediocre earnings, the market rewards it with a 5% intraday gain. You are winning, your friends are winning, and the media laps up coverage of investors who are enjoying an anomaly of single-year performance with unorthodox investing styles. Maybe a few “[insert name] is the new Buffett” articles surface.

It doesn’t feel like much of a hobby when this trend reverses. This is why we see such high exit rates from stock picking by individual investors during the downturn. Some of them scolded beyond repair, may never return as their bull market brains are left melting on the sidewalk.

I am a strong advocate of the notion that part of the joy of picking stocks is the challenge and the personal development that comes with it. You learn new skills, meet new people, learn more about the world, learn more about the psychological underpinnings of human behaviour, and learn more about your own mentality. Ardent adversaries of this idea will say that you are kidding yourself. That it’s not worth sacrificing the time and effort if you are not going to beat the index. I think there is no right answer here, but if there was it probably lies somewhere in between both certitudes. In the long run, we are all dead. Life is too short to criticize how others spend their time or rationalize their investment decisions.

I’ll conclude by sharing a passage from Howard Marks which seemed appropriate. Abdullah, the author of Mostly Borrowed Ideas, shared this passage with the apt expression “The person up 100% will not come back next year to tell you they are down 50%”.

“As the memo says, back in 1990, I had two interesting experiences, in short order. A certain value investment firm had a really terrible year. They were heavy in the banks, which were deep value, and the banks did terribly. And so, the head of the firm comes out and he says, “Well, if you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%.” My reaction was, “I don’t care if I’m in the top 5% in any given individual year, and my clients certainly are not willing to have me be in the bottom 5%, and neither am I.

Well, around the same time, I had dinner with one of my clients, Dave VanBenschoten, who ran the pension fund at General Mills. And he told me that he’d been doing it for 14 years, and in the 14 years, the General Mills equities had never been above the 27th percentile of the pension universe or below the 47th percentile. So, 27th to 47th, solidly in the second quartile every year for 14 years in a row. Where did that place them for the whole 14 years? Were they in the 27th or the 47th or maybe average it and maybe the 37th? No, they were in the 4th percentile. So how can a firm that’s never been out of the second quartile be up in the 4th percentile for the whole period? And the answer is, most people eventually shoot themselves in the foot. And, one or more terrible years can ruin a record for the long term”.

- Howard Marks

In the past, Marks has likened retail investing to amateur tennis. Like tennis, people can be successful investors by playing their own version of the game. What makes investing unique is that the court is shared by everyone at the same time. Regardless of which game you play, you are still competing with the professionals, whether you realise it or not. This echoes the writings of Charles Ellis from the 1970s. In 1975, Ellis wrote that “tennis was not one game but two. One game of tennis is played by professionals and a very few gifted amateurs; the other is played by all the rest of us”. He suggests the former play a “winner’s game” where the outcome is decided by the skill of the players while the latter play the “loser’s game” where the outcome is decided by how many unforced errors each player makes.

“Pros win serves, hit aces and score points after long, exciting rallies; successful amateurs on the other hand simply return the ball to their opponent until they almost inevitably make an unforced error.”

- Charles Ellis

There will always be someone doing better than you, getting rich faster, and finding more success. Investing success should be measured in decades and more success would come from taking the time to mind your own business and focus on what lessons you should not be learning as you develop your skillset.

Thanks for reading,

Conor

1. YTD Total Returns of the SPY, ACWI, VTI, and QQQ ETFs, as of November 25th market close.

2. Currently 39.4% of the constituents of the S&P 500 have a return greater than the index in the 2024 year.