The awful statistics of investing … what you don’t hear about buy-and-hold … how Artificial Intelligence is changing the game … a research video from our corporate partner, TradeSmith
It’s a headscratcher how anyone makes money in the stock market.About a decade ago, the research shop Longboard studied the total lifetime returns for individual U.S. stocks from 1983 through 2006.They found that the worst-performing 6,000 stocks — which represented 75% of the stock-universe in the study — collectively had a total return of … 0%.The best-performing 2,000 stocks — the remaining 25% — accounted for all of the gains.Here’s Longboard on the takeaway:
The conclusion is that if an investor was somehow unlucky enough to miss the 25% most profitable stocks and instead invested in the other 75% his/her total gain from 1983 to 2006 would have been 0%.In other words, a minority of stocks are responsible for the majority of the market’s gains.
It gets worse.The above statistic, that 75% of the stocks had a collective return of 0%, masks a darker financial reality…While it would be unfortunate to sink your money into a stock that generated nothing (0% returns), the unspoken implication there is that you’d at least walk away with your original investment capital.Not so much.The Longboard study found that 18.5% of stocks lost at least 75% of their value.In other words, nearly one in five stocks didn’t just return nothing, they were double-digit losers that destroyed investment capital.Here’s the breakdown:
Other studies have found similar results.Research from economist and academic Hendrik Bessembinder, which looked at equities from 1926 to 2015, concluded that about 60% of stocks were so bad that their performance was worse than one-month U.S. Treasury notes.From Bessembinder:
It is historically the norm in the U.S. and around the world that a few top-performing companies have great influence over how the market does overall.It’s the norm and I expect it to be the case in the future.
While it may be “the norm,” it points toward a sobering takeaway for investors…It’s not easy finding the big winners. And if you don’t find a big winner, getting a 0% return isn’t the worst potential outcome. Instead, significant loss of your hard-earned money is a very real threat — and it happens with greater frequency than most investors realize.
So, then what accounts for the vast investment fortunes that many investors have generated over the years?
Well, for decades, the average investor has had a silver bullet against these less-than-wonderful investment statistics…You find a big, well-run, blue-chip company then hold its stock for decades.Think of your grandfather, investing in IBM, Kodak, or Exxon, and holding it, year-in, year-out.Of course, there are three problems here:First, even blue-chips can implode.We just mentioned Kodak. Though younger investors might not recognize this name, in the 1970s and early 80s, Kodak was as “blue” as they come…until it failed to change with technology and went bankrupt.Second, some investors don’t have decades of time. If you’re in or nearing retirement, you may not have an abundance of years to snowball your wealth.Third, even if there’s no Kodak-style implosion, some well-known, blue-chip stocks suffer decades of underperformance.We just mentioned IBM. The website AverageAnnualRetun.com does a wonderful job of compiling market data. Below, it shows us the results of investing in IBM one decade ago (to be fair, one decade ago as of last Friday).How do you think this perennial blue-chip performed on a “per year average” basis?For context, the long-term average return for the S&P is about 6% – 7%.Got your guess?Over the last decade, IBM’s stock averaged a yearly loss of 0.23%. That turned your $10,000 investment 10 years ago into just $9,772.Here are the details:
Think I’m cherry-picking?Look at one of the most beloved, wealth-generating stocks of all time – Coca Cola.If you’d purchased Coke as a buy-and-hold pillar of your portfolio in 1998, then held for 13 years, what would your price return have been?
Nothing… zilch… squat.
Bottom-line: Investing is hard, and “blue-chip buy-and-hold” doesn’t always save the day.So, what’s the answer?Is it rigorous research? Scouring the market for stocks that appear ready to jump higher, regardless of whether they’re a blue-chip or not?
Sounds good in theory but virtually zero investors do this
In 2018, the Bureau of Labor Statistics surveyed how Americans spend their time. After “sleeping,” and “working,” what was the most time-intensive activity for survey respondents?Watching TV.That clocked in at 2.84 hours per day.And how much time, on average, was allocated to personal financial management?0.03 hours per days…which is less than two minutes.In other words, the average person spends more time preparing their coffee each morning than they do preparing for their financial future.
All of this suggests two things: “timing the market” is necessary to avoid long sideways periods, and the average investor needs help since they’re not putting in the research time themselves
On this note, last week, we profiled the new era into which we’re stepping today…It’s the combination of investing and Artificial Intelligence (AI).This technological next step carries two big hopes: One, it can accurately identify stocks that are moving higher right this moment (unlike the years of underperformance suffered by even the greats like IBM and Coke); two, it can help investors time these investments, to increase the likelihood of maximizing their returns.What you might not know is that the synthesis of AI and investing isn’t new.While the average investor has been watching 2+ hours of TV a day, the big hedge fund players have already been incorporating AI (though today’s technologies dwarf what was “cutting-edge” even a few years ago).For example, here’s The Globe and Mail from back in 2017:
AI…surpasses humans in its powers of prediction. It can determine if one stock or bond is likely to perform better than another based on factors ranging from past returns to weather patterns to who uses a company’s products where and when…Numerous fund companies are already turning to AI in the hope it can deliver better returns than human stock pickers.The systems identify patterns in pricing data, yield curves, how markets execute trades and much more, and then make predictions based on those patterns.Bridgewater Associates, the world’s largest hedge fund, said last year that it will replace many of its managers with machines.
But whereas the average investor had virtually zero access to this type of cutting-edge investment technology back in 2017, we’re now stepping into a new age where investors like you and me have access to AI-fused investing.Better yet, today’s AI is orders of magnitude more advanced than before.
Last week in the Digest, we profiled the debut of an AI-based investment product from our corporate partner, TradeSmith
If you’re not familiar with TradeSmith, they’re an investment quant shop. They’ve spent over $19 million and over 11,000 man-hours developing their market analysis algorithms. They have a staff of 36 people working on developing and maintaining their software and data systems.To explain what their AI tool is, and why TradeSmith developed it, let’s jump to TradeSmith CEO Keith Kaplan.In a recent article, Keith walked through why buy-and-hold is very challenging for investors today. We’ll pick up with him discussing the need for better investment timing:
Given the uncertain, volatile conditions we’ll face in the months to come, the biggest (and perhaps only) profits will go to the folks who know when to buy, when to sell, and how to keep repeating that process.Like lather, rinse, repeat.But if that sounds easier said than done, then it’s time to meet “Project An-E.”Instead of just holding a stock and waiting for things to get better, or sitting on the sidelines because you’re afraid to time an investment, what if you had an AI tool that alerted you to potential optimal times to enter and exit an investment?Well, you don’t have to wonder for very long.With incredible computing power and AI at our fingertips, our team embarked on the most important research project in our company’s history… one that could help you make much bigger stock market returns than you’re making now, while taking less risk.We call this “Project An-E” (pronounced Annie), short for Analytical Engine.An-E doesn’t have biases.It’s designed to create its own optimal parameters based purely on getting a desired result: helping folks make money and avoid taking unnecessary risks.
Keith’s team debuted An-E last week in a presentation that dives into its technology and its results
You can watch a free replay of that research by clicking here.Even if you’re uninterested in using An-E in your own investing, I’d encourage you to watch the video purely to get a sense of where investing is going.The reality is that making money in the stock market is a zero-sum game. For you to create wealth, someone else must lose wealth. That’s because there’s always some other person on the opposite side of your stock market wager.But unlike how it was decades ago, today, that “person” could be a hyper-intelligent computer.We just covered how the average person allocates 0.03 hours per days to personal financial management. Is that enough horsepower to win a zero-sum game against an AI bot?Here’s the Bank of New York Mellon describing what hedge funds are doing today:
Hedge funds’ use of AI is accelerating and reshaping the industry…Given the strategies are the byproduct of super computers crunching billions of data points and learning how to adjust to markets in real-time, explaining how returns are generated is pushing the boundaries of human comprehension.
Check out Keith’s research to better understand this synthesis of AI and investing. And just be aware of the challenges that investors face today – even if you’re picking great companies and have lengthy investment horizons.Have a good evening,Jeff Remsburg
