Good. But Not Great

By Brad Thomason, CPA

 

The US stock market just ended the year with a 13% gain.  That’s pretty strong.  But whenever impressive statistics start bouncing around, it makes sense to remember the context of the rest of the conversation.

If you started your investing career on 1/1/2010, you are off to a very nice start.  But most folks didn’t start that recently.  For investors with holdings that date back to 2008 or earlier, though this year has certainly been a welcome benefit, it unfortunately doesn’t represent progress in the truest sense, merely a recovery of previous losses.  And not even all of them, as measured against the high-water-mark of 2007.

Warren Buffett says the most important thing in investing is to not lose money.  Sure, that’s kinda corny, the sort of thing that it’s easy to smile and roll your eyes at.  Seems too obvious to be worth mentioning.  Except it happens to be true.  And it’s a standard that most investors can’t – or at least don’t – measure up to.

To avoid losing money when investing, in general, you have to do one of two things.  First, you can get out of the way when markets flip over and head the wrong way.  This is the exact opposite of the buy-and-hold mantra you were taught by your grandfather.  But we aren’t living in grandpa’s day anymore, and the results of holding on for the ups and downs demonstrably doesn’t work anymore.  The strategy that worked very well in the 80s and 90s (and may someday work again) hasn’t worked at all in the past dozen years.  Proponents still look at averages that stretch back to the Depression, because they know with a long enough data frame you can hide a lot.  The more recent data however is unequivocal; have a look yourself if you don’t believe me.  Or just look at your brokerage statement.

The other way is to invest in things which have some sort of structural tendency to not devalue.  Our favorite would be tax liens, but there a couple of others out there, too.

Either way, meeting the standard of “don’t lose money” is something you have to pursue as the result of an affirmative decision.  You have to mean to do it, either through asset selection, asset management, or both.

The reason this matters, whether you are on a long horizon or a short one, is that the whole point of investing is to use your capital to do something positive (make more capital, earn an income, etc).  Suffering a big loss that takes a couple of years to come back is still 3 years of zero net movement, no matter how steep the run up of the recovery years.

So it’s good news for everyone that the market did what it did because balances are higher than they were a year ago.  But don’t make the mistake of thinking you made a bunch of money: you simply recovered some of what you’d previously lost.  Good result?  Sure.  But not great.  Great would have been not losing the money (or the 3 years) in the first place.

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