📚 A&B #153

The best investing book of 2023, 20 most beautiful libraries, and more.

August 06, 2023

🙏 Support:

This week's newsletter was made possible by Babbel.

Babbel is the new way to learn a foreign language. I’m traveling to Italy and Poland this summer and have used it to brush up on my Italian and Polish. They offer 10+ languages and their bite-sized lessons make it easy to learn a new language.

Click here to try Babbel for 55% off!

👋 Hey everyone,

Here are a few popular posts you may have missed:

📚 Book Summary:

This week's book is “The Uncertainty Solution” by John Jennings.

This is the best investing book I’ve read so far this year. The author is the president of a $15 billion wealth management firm.

Here are 3 lessons from the book:

(Disclaimer: Nothing I ever write is financial advice. Do your own research and talk to a professional.)

📖

1) Why Picking Stocks Is More Luck Than Skill

Buying stocks is easy, but buying the right ones isn’t.

A 2021 report found that 90% of actively managed US funds underperformed the market over the last 20 years.

Another study led by Economics Nobel Prize-winner Eugene Fama analyzed the returns of active managers and found that 97% performed no better (and often worse) than the market.

That means only 3% of them outperformed the market beyond their fees.

Here’s one more stat that will convince you to not buy individual stocks:

All of the wealth created by the stock market from 1926-2016 came from just 4% of all stocks.

And even if you do pick a “winning” stock like Amazon or Google, it’s still going to be a wild ride:

Amazon stock dropped 90% in the tech bubble and had five 25%+ drops over its lifetime.

Similarly, Google dropped 65% during the 2008 financial crisis and had two 20%+ drops over its lifetime.

If these funds with teams of brilliant quants, Ivy League graduates, and Ph.D. geniuses have trouble beating the market, what chance do we have of outperforming the market?

📖

2) The Best Investment Strategy–Pretend You’re Dead

When the brokerage firm Fidelity did an internal review of their client accounts that posted the best returns from 2003-2013, they found that “the best investors were either dead or inactive.”

The people who ‘forgot’ about an old 401(k) or the people who died and the assets weren’t touched performed the best.

The lesson is clear: Set it and forget it.

There’s a viral meme that says “Stocks only go up” but history shows us that’s kind of true.

Since 1871, the stock market has delivered a positive return 100% of the time over a 20-year period and a positive return 89% of the time over a 10-year period.

But the shorter your investing window, the less likely you’re to receive a positive return.

If you invest over a 1-year period, you’ll have a positive return 65% of the time. If you invest over a 3-month period, you’ll have a positive return 63% of the time. And if you invest for 1-day, you’ll have a positive return just 52% of the time.

The shorter your investment window, the less likely you’re to see positive returns.

So the best strategy is to invest like a dead person. That way you won’t be distracted by daily stock market news or influenced to tinker with your portfolio when the market is hot or cold.

📖

3) The Stock Market Is Not The Economy

Here are a few events that happened in 2009:

The financial crisis had just recently occurred
Unemployment hit 8.1% in February
Unemployment climbed to 10% by October and stayed there for a year
The economy contracted was still contracting
There was increased concern that the euro would collapse
Inflation was rising

Yet in the midst of all this bad economic news, the market stabilized in March 2009 and the S&P 500 began to climb. Over the next 11 years, it would rise over 600%.

A similar situation happened during the COVID-19 pandemic.

The stock market dropped 30% in 21 days–the fastest decline ever. For comparison, during the 08’-09’ financial crisis, it took 250 days for the S&P 500 to drop 30%.

Many investors predicted the stock market would tumble even lower, but it didn’t. Instead, it gained over 45% over the next 3 months. This rebound happened while COVID-19 cases and deaths were skyrocketing, the economy was shrinking, and unemployment was spiking.

These examples should teach a lesson for all investors to remember: The stock market is not the economy and economic news does not predict what will happen in the market.

The stock market is a complex adaptive system that none of us can predict. Don’t be surprised if it rebounds when economic news is bad and declines when news is good.

✅ Actionable Advice:

1) Don’t pick individual stocks:

All of the wealth created by the stock market from 1926-2016 came from just 4% of all stocks.
- Even if you’re lucky and pick the “winning” stocks, you have to hold them when they drop by 50%+.

2) Invest like a dead person:

Set up your investment fund, dollar-cost-average into it, and don’t look at it for the next 10-20+ years.
- Since 1871, the stock market has delivered a positive return 100% of the time over a 20-year period and a positive return of 89% of the time over a 10-year period.

3) For more lessons from the book, check out this thread.