The One Game We All Should Play

Jason’s Random Words

On the podcast, Jeff has talked about his evolution over the past four years since he started picking individual stocks a lot. And as much as I think it's helping him have these conversations about his process, and I think it's probably really helpful for a lot of you to listen along (and probably relate with his experiences and emotions) it's also been really good and useful for me, too. Because even as a pretty seasoned investor at this point, it's useful to constantly evaluate what you're doing, question why you're doing it, and consider whether there's a better way. 

In the first five or so years of my investing journey, I built up and then blew up my portfolio multiple times. I was doing a lot of things because that's what I read or was told I should do. Luckily, most of them were the best things for an individual investor to do, like focus on business quality first, aim to hold that quality for many, many years, and invest according to the timeline of your investing goals. 

But like Jeff and basically every other new investor, I didn't really comprehend the reality that there are many "correct" paths to the goal, and a lot of it is finding the right fit. How many stocks am I comfortable with? How large a position is too large? What's a starter position? How much "dry" powder should I have? How often – or infrequently – should I buy? Do I need other assets besides cash and stocks? 

Also like Jeff and basically every new investor, I didn't always find my answer to these questions. I just did what I read was the best thing to do. And if there's one thing I have learned about investing, it's that there's the optimal way to do something, and then there's the optimized way to do it. 

Here are a few examples. According to research, most investors would do better to remain fully invested in stocks, and not keep cash. The historical averages make it clear that stocks just do better, and "dry powder" erodes value more than it juices returns. Other similar research says that dollar cost averaging delivers worse returns than just buying a full position upfront. Research on portfolio composition also indicates that being too concentrated or too diversified can also harm returns. 

The problem is that what is optimal according to the numbers, isn't always optimized for the psychology or financial capacity of the individual. Finding your answers is really important. It's not just a tagline for a certain podcast that's also a handy legal release for the podcasters. 

But that's actually not the main point I wanted to make in my Random Words today. Just a fun, necessary diversion that I wanted to take you down, before highlighting what I think really is the One Thing You Have to Do if you want to truly create wealth for yourself: Hold those winning stocks for as long as you possibly can. 

In late 2012 and through 2013, I laid the foundation for the portfolio I have today. That was when I finally rolled over my old 401K and took a lot of money out of mutual funds and into individual stocks. And since we sold off most of our stocks in a taxable account in 2013 to fund the downpayment on our first house in California (thanks, Netflix!), the "real" starting point for measuring the bulk of my returns is from around this period. 

I decided to take a closer look at all of my stock investments from late 2012 through 2014 that I still hold. In all, I made 28 separate buys during this period, and here's how they break down by returns:

• Negative returns: 0

• Returns 0-233%  (S&P 500 is up ~233% since 2014): 4

• Returns 234%-499%: 13

• Returns 500%-899%: 5

• Returns 900%+: 6

This isn't (entirely) bragging. I've had plenty of losers over the years. I have one that I bought before the period above that I still hold (Clean Energy Fuels from 2012). But by and large, I tend to sell off my losers eventually, only holding the winners for the very long term. 

And these winners have done very well for me. On average, they've earned 493% in gains, more than double the S&P 500's 233% in total returns since 2014. 

Of course, this only tells the winning side of my story. I haven't held the losers, and there have been plenty. But man, the winners really make up for the losers when you let time do the heavy lifting. Think about it this way: If my losers were so bad that they wiped out half my gains, I'd still have outperformed the market. 

Sometimes investing really is something as simple as just holding onto your winning investments as long as you can. Of course, simple isn't the same thing as easy, but as Jeff would put it, if I can do it, so can you. In this (rare) instance, he's right.

Jason

Jeff’s Random Words

Hey friends, I’m taking this week off from the newsletter because I just got home from a (non-investing related) conference. But I want to take a moment to reiterate Jason’s last point above.

If he can do it, so can you.

Catch you next week!

Jeff